Wal-Mart Stores, Inc. (Walmart) is the largest retailing firm in the world. Building on a base of discount stores, Walmart has expanded into warehouse clubs and Supercenters, which sell traditional discount store items and grocery products.

Exhibits 10.11, 10.12, and 10.13 present the financial statements of Walmart for 2006–2008. Exhibits 4.50–4.52 also present summary financial statements for Walmart, and Exhibit 4.53 presents selected financial statement ratios for Years 2006–2008. (Note: A few of the amounts presented in Chapter 4 for Walmart differ slightly from the amounts provided here because, for purposes of computing financial analysis ratios, the Chapter 4 data have been adjusted slightly to remove the effects of nonrecurring items such as discontinued operations.)

Required

a. If you have programmed your spreadsheet correctly, the projected amount of cash grows steadily from Year +1 to Year +5 and the projected cash balance at the end of Year +5 is a whopping $33,511 million (allow for rounding), which is more than 12.5 percent of total assets. Identify one problem that so much cash could create for the financial management of Walmart.

b. Assume that Walmart will augment its dividend policy by paying out 30 percent of lagged net income plus the amount of excess cash each year (if any). Assume that during Year +1 to Year +5, Walmart will maintain a constant cash balance of $7,275 million (the ending cash balance in 2008). Revise your forecast model spreadsheets to change the financial flexibility account from cash to dividends. Determine the total amount of dividends that Walmart could pay each year under this scenario.

Identify one potential benefit that increased dividends could create for the financial management of Walmart.

c. Calculate and compare the return on common equity for Walmart using the forecast amounts determined in Parts a and c for Year +1 to Year +5. Why are the two sets of returns different? Which results will Walmart’s common shareholders prefer? Why?