Exploring Investments: Valuing Wal-Mart

The P/E Approach

You will need to go to the Value Line Investment Survey Web site to apply the P/E approach. Assume Wal-Mart achieves the EPS that Value Line is currently projecting for the 2009-2011 period. Further assume that by that time Wal-Mart stock will be selling at a P/E equal to its median P/E shown on the Value Line report.

(a) At what price would Wal-Mart sell for during the 2009-2011 period?
(b) At what price would the stock sell if the P/E was 25 percent above the median P/E?
(c) Suppose you want to earn a 15 percent return on an investment in Wal-Mart stock. Would you buy it for the current price shown on the Value Line report if you felt you could sell it in five years for the price calculated in (a) and you expected to receive an average annual dividend of 70 cents per share? Explain. Show the variables you entered in your calculator to arrive at a decision

The Dividends and Earnings Approach (Present Value Approach)

Use the capital asset pricing model (pages 199-200 of your text) to determine the required return that an investor might seek on an investment in Wal-Mart. For the risk free rate, use the current rate on three month (91 day) Treasury bills reported at the Bloomberg Web site. Assume the return expected on the market is 10 percent. The beta for Wal-Mart can be obtained from the Value Line report.
Apply the dividends and earnings approach using the required rate of return you calculated in #1; assume the dividend you will receive from Wal-Mart over each of the next five years will be 70 cents, and the price at which you think you will be able to sell the stock is the high Value Line is projecting over the 2009-20011 period.
Based on your result in #2, would you buy Wal-Mart stock if it was priced at the current price shown on the Value Line report? Why or why not?

The Dividend Valuation Model

To determine the variables to be used in the dividend valuation model, follow these steps:

Use the dividend that Value Line thinks Wal-Mart will declare for next year as the numerator. The figure can be found on the "Dividends Declared Per Share" line in the statistical array on the report.
For the required rate of return, use the rate computed using the capital asset pricing model in #1 under "The Dividends and Earnings Approach (Present Value Approach)."
Compute the rate at which dividends have grown over the 15 year period from 1990 to 2005 (See the Value Line report for the 1990 and 2005 figures; look on the "Dividends Declared per Share" line). Assume dividends over the long run will grow at one-fifth of this rate.

Use the dividend valuation model to value Wal-Mart. Based on your result, would you buy Wal-Mart at the current price shown on the Value Line report? Explain.