BUS327 Investments
Walmart 2010
Write Up Suggestions For Case Report Submission
Case studies are in interesting learning tool connecting theory with practical application.
Solutions are often never the obvious. This case is more straight forward. Your role here is to
assist Sabrina Gupta, an investment advisor, in assessing the valuation of Wal-Mart stock.
SHOULD SHE RECOMMEND THE PURCHASE OF THE STOCK?
Your report should be broken down into the following sections:
I. Executive summary
a. What is you assessment of valuation and what is you recommendation?
b. Highlight the key reason(s) for you conclusion.
c. Which valuation approach do you think gives you the most confidence in your
assessment?
II. First focus on the calculation of the discount rate using the CAPM approach.
a. The case gives you data for the variable in the CAPM model.
i. What is the rationale for your conclusion on each of the variables?
1. Risk free rate why that number and what if it is higher or lower.
How much does that matter.
2. Market risk Premium again explain why and assess if the
variance matters?
3. Beta again explain why and assess if the variance matters?
ii. The Valuation Multiples reading will be very helpful to you here.
III. Now turn to the Gordon Growth Model The perpetual dividends approach.
a. Use the GGM excel model to facilitate you calculations and to make comparisons
in the output as you compare and contrast. Find a professional way to share
your data on this work.
i. What Is the anticipated Dividend?
ii. Apply the CAPM calculation for K here.
iii. What will you assume as the perpetual growth rate. What if you solved
for the perpetual growth rate using todays price? Do you agree with the
implied growth rate?
iv.
IV. Another approach is to estimate dividends for a few years into the future
and then assume that the stock can be sold at the end of that time. The case
provides some assumptions here.
2
i. Assume a future price as guided by the case.
ii. Assume your discount rate is the same as in your CAPM
iii. How valid or not is this approach? Explain.
iv.
V. Lastly, using the 3-stage DDM approach, justify your changes, if any, to what was
provided in the case.
a. Key inputs:
i. Cost of equity
ii. Growth years
iii. Transition years
iv. Initial growth in EPS
v. Payout at maturity
vi. Current year dividend
vii. Current year EPS
A key to understanding valuation is to appreciate how the various models and tools work. Each
are mostly based on the time value of money but are driven by a near term assessment of the
most likely cash flow from the investment (dividends + capital appreciation); an assessment of
sustainable growth; and lastly, a presumed discount rate based on the unique risk profile of
that investment.
Remember what we talked about in class. Valuation measurement is part art and part science.
Value is driven mostly by 2 main factors: growth and the discount rate. These factors are built
on expectations and expectations can change very quickly based on economic (macro) factors
and firm specific factors. Just remember that nothing ever stays the same and nothing lasts
forever.