Introduction

This case requires the valuation of Walmart stock as of February 2010 based on company and market data up to 2010. Determination of the stock value will aid in the decision to recommend Walmart stock as an investment to clients. The valuation of stock is based on estimations of various parameters using various prediction models. Several models are available to aid in estimating stock prices and they are utilized herein. The dividend discount model, future dividends and a terminal value, the three-stage approach and use of P/E ratios are all utilized in this analysis to best determine a buy/hold/sell recommendation for clients.

Dividends in Perpetuity

The Dividend Discount Model (DDM) is one way to assess the worth of Walmart’s stock price. This model assumes that the current value of Walmart’s stock is the present value of future expected dividends, discounted by the investor’s expected rate of return. A perpetuity is an annuity that has no end, or in other words, a stream of cash payments that continue for an indefinite period of time as seen in Exhibit 1, Figure 1.
The perpetuity relationship is stock price is equal to expected dividends divided by the investor’s required rate of return minus the perpetual dividend growth rate as illustrated in Exhibit 1, Equation 1.

The input variables needed to calculate the current value of a firm’s stock price are dividend growth, expected dividend, and the investor’s required rate of return. One respected analyst issued a forecast of constant perpetual dividend growth of 5.0 percent. The consensus annual Walmart dividend amount for the next fiscal year is $1.21. The final variable needed is the investor’s required rate of return. The Capital Asset Pricing Model is useful in determining this value. It evaluates the expected return on risk-free investments like government