BACC 681_W11

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Apr 3, 2024

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Title: Valuation of Walmart Common Stock using Dividends Valuation Model Introduction This assignment aims to use the Dividends Valuation Model to estimate the reasonable range of share values for Walmart's common stock based on the projected financial statements from Integrative Case 10.1. The Dividends Valuation Model calculates the present value of projected dividends and the present value of the continuing value of the company, helping us estimate the fair value of Walmart's common stock. Additionally, we will compare the current share price to the estimated range to provide an investment recommendation. Required Rate of Return on Common Equity Capital Using the Capital Asset Pricing Model (CAPM), the required rate of return on common equity capital for Walmart is calculated as follows: E[RWMT] = E[RF] + βWMT × E[RM – RF] = 0.030 + (1.0 × 0.06) = 0.090 or 9.0% Weighted Average Cost of Capital (WACC) The WACC for Walmart, using the provided capital structure weights and cost of debt and equity, is computed as follows: RA = [wD × RD × (1 – tax rate)] + [wP × RP] + [wNCI × RNCI] + [wE × RE] = [.178 × 0.050 × (1 – .320)] + [.012 × .126] + [.811 × .090] = 0.08047 or 8.047% Projected Dividends for Common Shareholders

Using the clean surplus accounting approach, we derive the projected dividends for Walmart for Years +1 through +5 based on the projected comprehensive income and shareholders’ equity amounts. The projected dividend amounts are as follows (amounts in millions):  Year +1: $15,064.1  Year +2: $16,726.5  Year +3: $17,568.5  Year +4: $18,405.3  Year +5: $19,248.9 Reasonable Range of Share Values The Dividends Valuation Model estimates the fair value of Walmart's common stock based on the discounted cash flows of projected dividends and the continuing value. The estimated share values for Years +1 through +5 are as follows:  Year +1: $73.11  Year +2: $74.40  Year +3: $76.71  Year +4: $78.12  Year +5: $79.59 Hence, we expect a reasonable range of share values for Walmart common stock to be approximately $73.11 to $79.59. Current Share Price and Investment Recommendation

The current share price for Walmart is $67.50, which is below the lower end of the estimated range. According to the Dividends Valuation Model, the stock is undervalued, suggesting potential upside in the future. Investment Recommendation: Based on the analysis, it is recommended to consider buying Walmart's common stock at the current price of $67.50 per share. The Dividends Valuation Model indicates that the stock is undervalued, which may present an attractive investment opportunity. However, it is essential to conduct further due diligence, consider market conditions, and evaluate other factors before making any investment decisions. Conclusion In conclusion, using the Dividends Valuation Model, we estimated a reasonable range of share values for Walmart common stock based on the projected financial statements. The current share price of $67.50 indicates that the stock is undervalued, providing a potential investment opportunity for investors. However, prudent investors should consider additional factors and conduct thorough research before making investment decisions. References Wahlen, J. M., Baginski, S. P., & Bradshaw, M. T. (2020). Financial Reporting, Financial Statement Analysis, and Valuation (9th ed.). Cengage Learning.

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