Question
what about calculating g from ROE and reinvestment in the firm, where g = ROE*(1-payout ratio)? You have net income and book value of equity
what about calculating g from ROE and reinvestment in the firm, where g = ROE*(1-payout ratio)? You have net income and book value of equity trends, from this, I calculated ROE (NI/Book value of common equity) and that is provided in the table above. The firms dividend payout ratio trends are also provided above.
- What are the difficulties in estimating the "constant" growth rate for Walmart using the firm's ROE and payout ratio? [g = ROE*(1-payout ratio] Please help with the discussion of specific input values and issues here.......
- Using the CAPM equation for the required cost of capital, r = rf + (market risk premium), what is the required cost of equity (re)?
Calculate and describe how you arrived at your answer (what were the inputs).
Data for Walmart as of April 2019
| Market Price | $103.18 |
| # Shares (mm, or millions) | 2,897 |
| Long term debt ($mm from balance sheet) | $45,396 |
| Tax rate (T) | 25% |
| Walmart beta () | 0.66 |
| Current risk free rate (rf) | 2.59% |
| Estimated market risk premium | 6.00% |
| Estimated underwriter spread | 1.0% |
| Estimated additional flotation costs | 0.5% |
| Estimated total flotation cost (as a % of debt face value) | 1.50% |
| WalMart data to use | 2015 | 2016 | 2017 | 2018 | 2019 |
| Dividend payout ratio (dividends paid out as a % of net income) | 38.02% | 42.89% | 45.59% | 62.04% | 91.68% |
| Net income ($ millions) | $16363 | $14694 | $13643 | $9862 | 6670 |
| Common equity $ (millions, book value) | $85937 | $83611 | $80535 | $80822 | 79634 |
| ROE (net income/common equity or NI/CE) | 19.04% | 17.57% | 16.94% | 12.20% | 8.38% |
| 2015 | 2016 | 2017 | 2018 | 2019 | |
| Dividend history ($/share) | $1.91 | $1.96 | $2.00 | $2.04 | $2.08 |
|
| 2020 | 2021 | 2022 | 2023 | |
| Dividend estimates ($/share) |
| $2.14 | $2.05 | $2.40 | $2.48 |
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