Valuing Walmart Harvard Case Solution & Analysis

Valuing Walmart Case Study Analysis

P/E Multiples model

The intrinsic value of Walmart’s hares using P/E multiple approach is estimated at $35.23 which is calculated using the firm’s forward P/E ratio of 17 times. The forward P/E ratio is considered more relevant and fair for valuation purposes as compared to using trailing or historical P/E multiple. As the analysts considered forward looking multiple as an appropriate measure of estimating intrinsic value of shares, the next years’ earnings of the firm’s i.e. after incorporating the annual earnings growth of 13.7% was used. (See Appendix 3)The forward P/E multiple of 14.6 times was calculated by dividing the current share price of $46 with the next year’s EPS. (Corporate finance Institute, 2020)

Recommendation

The share price of the business’s shares appears to be overvalued currently as the share price calculated using DDM- Multi stage approach with perpetual growth rate and Terminal value was estimated at $38.63, which is lower as compared to current share price of $45.5. Moreover, the share price calculated using forward P/E ratio was estimated at $35.23, these both valuation methods and approaches are considered to be fair, real and appropriate as they consider the time value of money and the required rate of investor’s return. On the other hand, the share price calculated under the DDM constant growth rate was based on current dividend and failed to incorporate the time value of money.

From Quantitative perspective, the clients will be advised to sell the shares as the firm’s share price is overvalued and the firm does not pay adequate or sufficient dividends to its investors as compared to the price of the firm’s shares as the dividend yield in 2005 was only 1.14%. It cannot be recommended to the current owners of the shares as the return or margin achieved is not sufficient to overcome the risk associated with the forward P/E multiple.

However, the cons associated with the valuation models laid out above should also be considered as the DDM valuation method is based on the assumption that dividends will be paid therefore, the method will not be useful if company does not pay dividends. Moreover, the forward P/E ratio uses, the earning per share (EPS) is based on accounting conventions related to calculation of earnings which is based on various assumptions, interpretations and might be intentionally manipulated by management . This means that the quality of the P/E ratio and the results of the valuation method dependson the quality and reliability of the underlying earnings number.

Repurchase Shares

It will be recommended to the business to repurchase the shares at a price of $35.23 calculatedusing forward P/E ratio as it appears to be reliable and fair. Moreover, purchasing shares form public at a lower price will decrease the outstanding number of the shares for the company and will increase the EPS and elevate the market value of the shares. On the other hand, repurchasing shares form the firm will increase the dividend per share of the company as earnings will be paid out to few investors and the dividend yield will also be increased as the dividend per share will be higher. Repurchasing the shares at a low price will require low profits and will ensure adequate a cash flows are retained. Moreover, repurchasing the shares will enable the organization to increase its share price and improve its financial stability and performance. (Investopedia, 2020)

It will be recommended to the business to repurchase 500 shares at a price of $35 as repurchasing 500 shares will put low pressures on the cash flows and profits of the company.Whereas, repurchasing large amount of shares will require heft capital and might damage the profitability and cash flow position of the company. The number of shares has been estimated assuming the earnings will be $13853 in 2010 i.e. after incorporating the growth rate of 13.7%. Moreover, the calculation is based on the assumptions that organization’s financial goals or targets will be to increase the EPS to $3.68 and dividend per share to $1 as the current dividend is very low, which is the main factor behind the low investor’s confidence on the business shares. Therefore in order to achieve an EPS of 3.68 and dividend per share of $1, the organization will need to repurchase 500 shares which decrease the number of outstanding shares to 3759 from 4259. (See Appendix 5)............................

 

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