From our humble beginnings as a small discount retailer in Rogers, Ark., Walmart has opened thousands of stores in the U.S. and expanded internationally. Through innovation, we're creating a seamless...

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From our humble beginnings as a small discount retailer in Rogers, Ark., Walmart has opened thousands of stores in the U.S. and expanded internationally. Through innovation, we're creating a seamless experience to let customers shop anytime and anywhere online, through mobile devices and in stores. We are creating opportunities and bringing value to customers and communities around the globe. Walmart operates approximately 11,400 stores under 55 banners in 26 countries and eCommerce websites. We employ over 2.2 million associates around the world — nearly 1.5 million in the U.S. alone.


You are asked to determine the most accurate valuation of Walmart (the company) based on Free Cash Flow to the Firm (FCFF) projections in an Excel analysis, over the next five book years and present your findings in a written valuation report (5-7 written pages only).


Key evaluation metrics:



  • Explanation of historicFCFF calculations and your
    cash flow assumptionsunderlying your forecast for each of the five future book years. Be specific as to which items on the financial statements you considered. (15 points)


  • Long run growth rate estimation: how you performed the estimation; how you cross-checked your results using alternative(s). How you reached a final decision on what to use in performing the valuation. (10 points)


  • Beta Estimation: how you performed the estimation; how you cross-checked your results using alternative sources or methods. How you reached a final decision on what to use in performing the valuation. (10 points)


  • WACC Estimation:how you performed the estimation (the subcomponents); how you cross-checked your results. How you reached a final decision on what to use in performing the valuation. (15 points)

  • Putting the numbers together,following the correct finance process, to arrive at a single ‘valuation’ number(a single amount in US Dollar). Illustrating your sound process followed is more important than a specific number. I.e. while the end result of the correct finance process will be a single (defendable) number, alternative numbers, within a range will be 100% correct. (20 points)

  • Perform asensitivity analysis:How sensitive is your valuation to the following three variables that you used in the free cash flow based valuation: 1. The long run growth rate; 2. The WACC; and 3. Underlying cash flow forecast for the five future book years. What is the impact of changing each of the three assumptions. Example: if you used a WACC of 10 percent, what would be your valuation if you would have used a WACC of 11% instead? (10 points)


  • Market comparison:Perform a market-based valuation analysis where you compare the company’s valuation on the stock market to the result of your FCFF based valuation. I.e. derive alternative Dollar valuations for the company as implied by key ratios. What conclusions do you draw on the difference between the free cash flow based valuation and market-based valuation? (10 points)


  • Integrationof the above elements of your report into a coherent unit (including presentation and appropriate referencing) – defending and underscoring your valuation of J&J. (10 points)


Deadline for the submission of written valuation report and accompanying Excel analysis (in the drop box on Blackboard) is March 28th at 23h59.




Additional clarifications to note:




  • Only your written valuation report will be considered to establish a grade (and only one student per report). I.e. you must summarize or insert into the text of your written report (or as an appendix to the same), all relevant information (in the form of e.g. tables or ‘screenshots’). The Excel analysis you submit serves only as proof in the event of an exam board procedure.

  • A good written report will relate the ‘numbers’ (and ultimately your valuation number) to the company’s story, strategy and prospects going forward.

Answered 6 days AfterMar 04, 2021

Answer To: From our humble beginnings as a small discount retailer in Rogers, Ark., Walmart has opened...

Himanshu answered on Mar 10 2021
138 Votes
Introduction
Walmart Inc. is an American international retailer with a network of hypermarkets, discount department stores and convenience stores in the United States, headquartered in Bentonville, Arkansas. The corporation was established by Sam Walton in 1962 and incorporated on 31 October 1969. Walmart's retail activities are organised into three business portions Walmart U.S., Walmart International and Sam's Club. The company sells its merchandise in a variety of shopping locations, including: groceries, supermarkets, warehouse sales, cash & carry, home decor, niche hardware, hotels, clothing shops, drug stores, and grocery stores, as well as digital distribution. Walmart has more than 11,700 locations and represents around 270 million people. Its market model is primarily focused on "being efficient in respect of variety, distinguishing from the way customers reach it, pioneering in aspects of price and providing an unforgettable service with the motive of Every Day Low Prices.
Walmart 5-year stock return analysis, figure has shown below
Valuation
Valuation is an analytical procedure for assessing the current (or projected) value of an asset or a corporation. An analyst examines the management of the firm, the composition of the financial base, the likelihood of potential profits, and the fair worth of its assets among other variables.
The Standard Free Cash Flow (FCF) Method is equivalent to Cash from Operations minus Capital Expenditures. FCF reflects the quantity of funds provided by the firm after paying for the reinvestment of non-current capital investments by the corporation. Free cash flow (FCF) is the cash allocated to the organization to compensate creditors or pay dividends and interest to owners. However, as an additional research method, the FCF can expose fundamental issues before they emerge on the income statement.
FCF = Earnings before Interest and taxes – Net Plant, Property and Equipment – Net working capital.
In the Valuation method, we included a variety of essential statistics to get a rational assessment of the organization. Statistics are shown below:
Steady growth rate
Growth rates contribute to the rise in proportion of a given parameter over a particular time frame. Expected forward-looking or trailing growth rates are two different types of growth rates considered for forecasting. We adopted the US GDP growth rate as a steady growth rate to enable the scenario achievable. We may also consider average proportions of what has happened before, but incorporating every feasible concern we have chosen the rate of GDP growth. According to the valuation, Walmart seems perfectly priced. Implied share price of the corporation is $138 which is currently traded as $129 slightly under-priced. Since we took all the actual number (not including any imaginary or ambiguous figure in the methodology) for estimation after examining the corporation's historical details and previously kept financial records (Data Commons)
Beta is an indicator of the uncertainty of the stock in contrast to the broader market. If the stock swings less than the index, the beta of the stock would be less than 1.0. High-beta securities are expected to be more -risky but have higher yield ability, low-beta stocks face less risk but therefore lower yields. We collected data from the previous year for the calculation of Walmart beta. Walmart has beta of 0.48 which suggest lower volatility in relation to the market (S&P 500 index)
We utilized the Slope formula in excel to obtain the beta, and we verified it by linear regression. Market's annual return was 36.1 per cent, while Walmart's yield was 21.4 per cent, which simply shows the attributes of low beta, Walmart produced lower returns. Volatility of the stock as measured was 1.96 percent.
Capital Assets Pricing Model
The Capital Asset Pricing Model (CAPM) describes the connection between market volatility and the expected gain on equity in individual shares. CAPM is widely applied in financing for the assessment of speculative shares and for the creation of expected yields on equity relative to the valuation of those properties and the pay-out ratio. The procedure for estimating the estimated return of the investment on the basis of its vulnerability is as follows:
Expected Return = 10-year treasury bond + Beta (Expected return – Risk Free Rate)
Market Risk Premium (potential yield of the market – 10-year treasury bond)
Risk Free rate of United states is 1.55 percent (Y Charts)
Volatility surcharge In the United States is presently valued at 5.6 per cent, but in the CAPM model we chose 19.87 per cent (since we calculated market premium reported in earlier year's data) Walmart's cost of capital for the period 2020-2021 was evaluated at 11.26% (Statista)
​
WACC Estimation
Companies frequently manage their capital with the money they collect from a variety of sources. They include collecting money by registering their shares on the equity exchange (equity) or selling interest-paid instruments by securing (debt). But these investment arrives at an expense, and the cost of each type varies from instrument to instrument. WACC is the aggregate post cost of a company's various sources of money, including ordinary shares preference bonds, shares, and all other lengthy debts. In particular, WACC is the annual amount that the company expects to spend to finance its investments.
Computation method of WACC, we used the previous year's financial year 2021 for the estimate of WACC. The cost of the Walmart debt was 3.46 per cent during the year, the effective tax rate was 33.35 per cent. Cost of equity (process seen above) was 11.26%. As per the observation, Walmart's financial structure was studied, total debt was approximately $45 billion and total equity was approximately $364 billion. With the aid of this evidence, WACC was calculated to be 10.41 per cent.
Sensitivity analysis
WACC
According to the Sensitivity Study, if WACC rises the share price of Walmart falls (negative correlation) If WACC boosts by 4 per cent in the near future, the share price of Walmart will fall by half.
Growth Rate
As per the sensitivity analysis, we have found that company's growth rate has direct impact on the performance of the company stocks which suggest If growth rate of the company rises the company's share price also improves. If the growth rate rises to 5% in the immediate future, the stock price of the Walmart would be double in price.
Outcome of Key financial ratio 2021,
Liquidity ratio of the Walmart seems average as current ratio of the Walmart is equal to 1 which suggest companies’ can meet their short-term debt but ideal ratio is 2 as investors always looks for the company which has current assets twice as current liabilities. Solvency ratio of the Walmart, Walmart debt to asset ratio was 0.66 which suggest most of the company assets are financed through debt. Profitability ratio of the Walmart was 2.42%. The effectiveness percentage is commonly intended to analyse how well a company manages its financial assets internally. The efficiency ratio can be calculated to assess the turnover of receivables, the repayment of debts, the quantity and usage of equity and the specific utilisation current assets and equipment. Asset’s turnover of the Walmart is 2.21 which represent that company is generating $2.21 sales for every $1 in total assets. As far as the key financial ratio is concerned, we can infer that Walmart has a strong financial stability that will lift the share price as Fundamental of the company looks very attractive which will benefit the long-term investors. Walmart has a very globally competitive business structure that can contribute to successful business accomplishment.
References
“United States of America - Place Explorer - Data Commons.” Data Commons, 2021, datacommons.org/place/country/USA?utm_medium=explore&mprop=amount&popt=EconomicActivity&cpv=activitySource%2CGrossDomesticProduction&hl=en.
Statista. “Average Market Risk Premium in the U.S. 2011-2020.” Statista, 9 Dec. 2020, www.statista.com/statistics/664840/average-market-risk-premium-usa/#:%7E:text=The%20average%20market%20risk%20premium,and%205.7%20percent%20since%202011.
10 Year Treasury Rate, 2021, ycharts.com/indicators/10_year_treasury_rate#:~:text=10%20Year%20Treasury%20Rate%20is%20at%201.55%25%2C%20compared%20to%201.59,long%20term%20average%20of%204.37%25.
Historical...
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