Valuing Wal Mart Stock Case Solution

The closing market value of a Wal-Mart stock is $53.48, which is the current market price, as well. A consensus by analysts has anticipated that the market value of Wal-Mart will be $60.50 per share as on February 2010. The estimated price by analysts has been reviewed under various Dividend Discount Models such as; Dividend Perpetuity Model, Three Stage Model and P/E Multiple Model. 

2. Dividend Perpetuity Model

According to Dividend Perpetuity Model, the price of stock is calculated by discounting all expected future cash flows to the present value. The discounted rate is applied by obtaining the cost of capital of the firm or an investor’s required rate of return. Under this model, the share price is valued by estimating dividends in perpetuity. To calculate all the future dividends, a growth rate is used. In the most basic form of this model, a constant growth rate is applied. Also the price of stock is considered to be P0. Using this model, the price of Wal-Mart’s share is calculated at $19.37 with a growth rate of 5% and discount rate of 12%. The value given by Dividend Perpetuity Model is highly unrealistic. This model assumes certain implications, which are not applicable in real market. The assumptions are:

• Dividend growth rate will be constant forever which is not possible

• This model is not applicable to companies which do not pay any dividend at all

• Dividend per share cannot grow at a higher rate than Ke

• This model completely fails to take into account the risk factor

Moreover, the future dividend per share for next ten years was calculated assuming a constant growth rate of 5%. Forecasted dividend per share at constant growth remotely showed the dividend growth rate of past years.

3. Three Stage Approach to Stock Pricing

While using three stages approach of dividend discount model, the future growth in further divided into three different time horizons. These time horizons are:

1. Growth years, during which the company earns abnormal levels of profitability

2. Transition years, during this time period the profitability percentage of the company is slowly decreasing toward the average profitability percentage of the industry

3. Maturity years, during this time period, the profitability percentage of the company is considered to be equal to the profitability percentage of the industry. The company is earning normal levels of earnings.

The three stage approaches to dividend model has showed realistic price valuation of the Wal-Mart stock. It is given in exhibit 4 that, under this model, the theoretical value of Wal-Mart stock is $120.37. This theoretical valuation of future Wal-Mart stock was confirmed under certain assumptions incorporated. The assumptions taken were as following:

• There will be a constant payout of 45%