Research Project 2

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Jan 9, 2024

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Research Project 2 Jeffrey Dozier Franklin University FINA-301-Q2WW: Principles of Finance Instructor: Keith Zolkowski October 27, 2023
2 Research Project 2 This research project will focus on Walmart and applying stock value techniques covered in the textbook. Walmart is a renowned distributor of many products, including groceries, and has become a one-stop shop for consumers. They have even branched out into the mobile and online pick-up sector of business. They are of a different caliber than Amazon but have succeeded with the process thus far. According to Mergent Online (2019), Walmart’s current stock price closed at $161.77 and is close to the three-year high of $165.25 set in September 2023. We will compare this to the constant growth model, but first, we will understand what and how this is calculated. Using this model gives us an intrinsic value of the company, makes it easier to compare similar companies of different sizes, and does not account for market conditions, making the calculation easy. The biggest drawback is that it does not account for brand loyalty, customer retention, and intangible assets (Hayes, 2023). This can cause the values to be drastically different. Using the following data provided by Mergent Online (2019): dividends per share TTM $2.28, CAGR 1.9%, and given the assumption of a 10.5% discount rate, we can determine the estimated value of a share of stock for Walmart using the formula below (Ross et al., 2021). P 0 = D 1 R g P 0 = $ 2.28 ( .105 .019 ) = $26.51 Symbo l Meaning Given Data P(0) Estimated Value of Shares Solved For D(0) Previous Payment of Dividends $2.28 D(1) Next Payment of Dividends Unknown R Discount Rate 10.50% g Growth Rate 1.90% All data retrieved from Mergent Online (2019).
3 As you can see, the current price of $161.77 and $26.51 are entirely different. This can be evaluated as Walmart is significantly overvalued; however, as stated previously, this calculation does not include market factors. I would not rely on this for investment decisions, but it can be used to compare similar companies, like Target. Some changes that can be made to close the difference to the actual market value are increasing the growth rate (9.1%), decreasing the discount rate (3.3%), changing the dividend per share (13.91), or a mixture of them. In summary, increase the numerator or decrease the denominator. The broker summary shows seven buy, five hold, and two sell recommendations. I will compare these to the future estimated stock value and give my personal suggestions. Using the estimation data provided by Mergent (2019) for 2024 (P1), 2025 (P2), and 2026 (P3), we can determine what the stock price should be in the future. The formula for this and the results are below (Ross et al., 2019). P t = PE ratio EPS P 2024 = $ 23.28 6.45 P 2025 = $ 23.28 7.06 P 2026 = $ 23.28 7.78 Past 3 years Past 1 year Past 3 months Close $161.77 $161.77 $161.77 Results High $165.25 $165.25 $165.25 P(2024) $150.16 Low $118.29 $136.97 $155.69 P(2025) $164.36 Average $143.59 $150.90 $160.57 P(2026) $181.12 All data retrieved from Mergent Online (2019). Symbol Meaning Given Data P(t) Price at given time Solved For PE ratio Benchmark Ratio $23.28 EPS Earnings per Share 2024E: 6.45 2025E: 7.06 2026E: 7.78
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4 Based on the next few years, the current price, and the history shown above, I would not recommend investing in Walmart at the current time. The main reason is that the return on investment could take two or more years, and many other companies could profit faster. Since the stock is slightly overvalued, waiting until the price drops would be best. You could “buy and forget” if you have time since growth is possible beyond one year. However, my thoughts are to find something else with a better forecast of returns.
5 References Mergent Online. (2019). Walmart . Franklin.edu. https://www-mergentonline- com.links.franklin.edu/companydetail.php?compnumber=8865&pagetype=synopsis# Ross, S. A., Westerfield, R., & Jordan, B. D. (2021). Fundamentals of corporate finance (13th ed.). McGraw-Hill Education. Hayes, A. (2023, June 13). Gordon Growth Model (GGM) Defined: Example and Formula. Investopedia. https://www.investopedia.com/terms/g/gordongrowthmodel.asp