Valuation Assignment 3; Case 1 HBS

Corporate Valuation and Market Multiples

Group: ______ Team #: ______

NAMES: _________________
_____________ ____________
_______________________

(Nov 17 2013)
Using the information provided in the HBS Case 1, this file (Assume this analysis is
being done on Jan 31, 2005), the EXHIBITS handout and the Valuation material
presented in class, you are requested to complete the following exercises.
Please identify 4 other retail corporations and document the process as to why
you believe each would be suitable for a Comparables analysis with Walmart:

_____________________(accounting year end: _________________

Why:_______________________________________________________________

_____________________(accounting year end: _________________

Why:_______________________________________________________________

_____________________(accounting year end: _________________

Why:_______________________________________________________________

_____________________(accounting year end: _________________

Why:_______________________________________________________________

____________________
__________________________________________________
__________________________________________________
Calculate Walmart 2005 Enterprise Value

Show computations:

Enterprise Value to Revenues (Sales): ______________________________

Enterprise Value to EBIT:
_____________________________________
Enterprise Value to EBITDA: _____________________________________
Price per Share vs EBIT:
_____________________________________
Price per Share vs EBITDA: _____________________________________

Calculate for Walmart 2005 (as of Jan 31, 2005 financial statements)

Corporate Tax Rate __________________________________________

____________________________________________________________
CAPM = Riskfree+ (Expectedmarket return - Riskfree ) _____
Riskfree 2.53% Jan 31 2005; Expected Market Return 5.60% S&P; = 0.59

_______________________________________________________________
Dividend Payout and Reinvestment Ratios ___________________________
________________________________________________________________

Forecast for 2006, please fill in your forecast for the following:
Sales:
__________________
Net Income: __________________
Dividends:
__________________
Dividend Payout Ratio: __________________
Plowback (reinvestment) Ratio: ___________
ROA:
__________________
ROE:
__________________

Using the relevant information from the above calculations and exhibits
provided, Please complete the following:
Required Return, Expected Return
Growth (2006 from 2005)
Dividend for 2006 (Forecast)
Plowback for 2006 (Forecast)

k = ____________
g = ____________
D1 = ____________
b = ____________

Price Today P0 _____

as calculated by =
Calculated

D1____
( k - g)

Expected return % = ____________% based on the following formula:

Expected (Div in 1 yr) + [ Expected price in 1yr - Price Today]
Price Today

Constant Growth DDM (Dividend Discount Model) using k and g as

computed above, complete the following
Intrinsic Value Today V0 = ________ based on the following discount formula:
V0 ____ = D0(1+g)
(1+k)

+ D0(1+g)2
(1+k) 2

+ D0(1+g)3
(1+k) 3

Intrinsic Value Today V0 = ________ based on the following discount formula:

V0 ____ =

D1___
(kg)
Assuming the following dividends since 2005 and Expected Return k as calculated
above
2010
2009
2008
2007
2006 Fcast
What would be the required Terminal Value Pn _______ such that the

Intrinsic Value at V0 would equal the Closing Stock Price on Jan 31, 2005
V0 ____ = Div1 + Div2 + + Divn + Pn
Today

(1+ k )

(1 +k )2

(1 +k )n
2

Forecasting Revenue (Net Sales), Net Income, Dividends

Using Compound Growth, you are requested to forecast the 2006
Net Sales,
Using the average relationship between Net Sales and Net Income,
you are requested to forecast the 2006 Net Income,
Using the historical Dividend growth rate and Dividend payout
relationship with Net Income, your are requested to forecast the
2006 Dividend,
Fcast 2006
______________
______________

2005
Forecast 2006
Dividened _______
EPS ________
Net Inc __________

SHOW YOUR ASSUMPTIONS & COMPUTATIONS:

2004

2003

Example & GUIDELINES FOR FORECASTING:

Analyzing Change, Growth Rates, Forecasting & Time Value of Money
Using the following financial information, please prepare your analysis of the CAGR
for Net Revenues from 2005 to 2009, using both mathematical formulas that were
presented in class, and prepare both your Net Revenue and Net Earnings Forecasts
for 2010 F
Calculating Change: (Current Year-Prior Year)/Prior Year
CAGR
+5.36%
2010 F

3.687%

+16.939%

+8.60%

+0.7291%

F 42,550

F 3,348
Net Margin Arith Avg: 7.87% Avg of +7.5%
+ +6.9% + +7.6% + +9.28% + +8.05%
_________________________________________________________________________________________
CAGR Calculation: 40,386 1/4 -1 = 1.2320691/4 - 1 = 5.3559% CAGR Compound Average Growth Rate
_________________ 32,779___________________________________________________________________
Alternative Geometric Mean Calculation:(1 +(-0.0387)) x (1+0.16939) x (1+0.0860) x (1+ 0.007291) 1/4 -1
(0.9631)x(1.16939) x (1.0860) x (1.007291) 1/4 -1 = (1.232014)1/4 -1=1.05355 -1 = 5.355% Compound Growth
_________________________________________________________________________________________
2005: 32,779
Profit Margin Forecast
x 5.355%____________________________________________________Using Avg Profit Margin
34,534
______ x 5.355%______________________________________Revenue: F 42,550 x 7.87 Avg = F 3,348 Net
36,383
______ x 5.355%_____________________________________________________________________________
38,332
_____ x 5.355%_____________________________________________________________________________
2009: 40,385 x 105.36% = 42,550 Revenue Forecast for 2010
_________________________________________________________________________________________

As instructed above, You needed to show both CAGR (short formula) and Geometric Mean
for Revenue (5.36%), You then need to calculate % of Net Earnings/Revenue for each of the
years and calculate the Arithmetic Average of the Net Earnings Margin (7.87%)

% Change from Year to Year: Current Year-Prior Year

Prior Year
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Prices Wal-Mart Stores Inc. (WMT) -NYSE

Date Unadjusted Closing Share Price

Jan 31, 2005

52.40

Cost of Goods Sold

GROSS MARGIN
Net Sales
Cost of Goods Sold
Gross Profit

$285,222
$219,793
$ 65,429

$ 65,429

Gross Profit Margin: Net Sales-Gross Profit $285,222 -219,793 =22.9%

%
Net Sales
$285,222
23%
Calculating Corporate Tax Rate:
Income before Taxes:
16,105
Provision for Income Taxes: 5,589
Net Income
10,267

Total Liab & Sh Eq= 120,223

Less Sh Eq
49,396
Total Liab
70,827

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Free Cash Flow Firm (FCFF) versus Free Cash Flow Equity (FCFE)

Cash Flow available to all providers of Capital

Cash Flow available to suppliers of capital after ALL
Operating Expenses (including taxes) have been paid and
Operating Investments have been made.
From Net Income available to Shareholders
PLUS Net NON Cash Charges
PLUS Interest Expense x (1-tax rate)
LESS Investment in Fixed Capital
LESS Investment in Working Capital
(Working Capital=Current Assets-Current Liabilities)
Free Cash Flow to the Firm From Cash Flow Operations =
CASH Flow Operations
PLUS Interest Expense x (1-tax rate)
LESS Investment in Fixed Capital

FCFF =NI +NCC +[Int x (1-tax rate)]FCInv

WCInv
Interest (After Tax) is added back to NI because it is a Cash Flow that has been
Generated and Paid to Contributors of Capital. Thus, this cash should be part of
what we are defining as Free Cash Flow Firm

Where:
NI = Net Income
NCC = Non-cash Charges (depreciation and amortization)
Int = Interest Expense
FCInv = Fixed Capital Investment (total capital expenditures)
WCInv = Working Capital Investments

FCFFirm = CFO + [Int x (1-tax rate)] FCInv

Interest (After Tax) is added back to NI because it is a Cash Flow that has been Generated
and Paid to Contributors of Capital.
Thus, this cash should be part of what we are defining as Free Cash Flow Firm

Where:
CFO = Cash Flow from Operations
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Int = Interest Expense

FCInv = Fixed Capital Investment (total capital expenditures)
Capital Investment is generally defined as the Capital needed to sustain
growth rates and generally is defined to cover PPE (Plant Property &
Equipment). However, sometimes because of the difficulty in identifying
just these Capital Expenditures, all Capital Expenditures including
Acquisitions are included.

versus Free Cash Flow Equity (FCFE)

Cash Flow to Equity Holders (Common Shareholders) ONLY:
FCFE is the amount the company can afford to pay to
shareholders as dividends,
Earnings are more volatile than Dividends
FCFEquity is FCFFirm reduced by Interest Paid to Debt
Holders PLUS any Net Increase in Borrowing.
Free Cash Flow Equity:
Free Cash Flow Firm
LESS Interest Expense x(1-tax rate)
PLUS New Debt Borrowing
LESS Debt Repayments

Free Cash Flow to Equity (FCFE), the cash available

to stockholders can be derived from FCFF.
FCFE equals FCFF minus the after-tax interest plus any
cash from taking on debt (Net Borrowing).
The formula equals:
FCFE = FCFF - [Int x (1-tax rate)] + Net Borrowing
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