(Wal Mart Stores; perpetuity growth model derivation of results in Chapter 5.) Refer to the discussion on page 226 in Chapter 5. There, in estimating the value of a share of common stock of Wal-Mart Stores, we computed the present value of excess cash flows at the end of Year 14 (= beginning of Year 15) to be $203.6 billion. This exercise requires you to confirm that computation.

To compute the amount for the years after Year 19. note we assume that the excess cash flows are $5,962 billion at the end of Year 9 and grow at the rate of 10 percent per year thereafter. That means the cash flows for the end of Year 20 are $6,558 (= 1.10 x $5,962) billion.

You can use the perpetuity growth model to verify that the present value at the end of Year 19 of that growing stream of payments is $327.9 billion. That is. if a payment (in this case $6,558 billion), grows at rate g (in this case. 10 percent) per period forever, the discount rate is r (in this case, 12 percent) per period, and the first payment flows at the end of the first period, then the present value of that stream is $327.9 [= $6.558/(r - g) = $6,558/(0.12 - 0.10)] million. Then, we discount that amount to the end of Year 14 to derive $186.1 billion. Analysts describe the $186.1 million valuation in such computations as the terminal value.

(We do not expect that Wal-Mart*s excess cash flows could increase forever at 10 percent per year. After a century or so, such a firm would be larger than the rest of the entire U.S. economy, combined. We use such computations to estimate values. When the discount rate (here 12 percent per year) exceeds the growth rate (here 10 percent per year) by a substantial amount (here only 2 percentage points), the present value of payments far in the future, say more than 40 years out, is negligible.)

a. Reproduce the numbers in Column (6) on page 226 using the data from Column (5) and the appropriate present value computations.

b. Re-do the valuation changing the growth rate from Year 19 from 10 percent to 9 percent.

c. Re-do the valuation changing the growth rate from Year 19 from 10 percent to 5 percent.

d. Comment on the sensitivity of this valuation modeling tool to the effect of assumed growth rates on terminal values.