Financial Outcomes Paper

Capital Valuation Paper University of Phoenix FIN / 419 – Finance for Decision Making November 3, 2009 Capital Valuation Paper Companies are evaluated to determine if they are risky to invest in. There are many tools that are used to conduct this evaluation. Part of determining Wal-mart’s financial health is to analyze their debt position. This is done by indicating the amount of other people’s money being used to generate profits. Long-term debts are also a factor of Wal-mart’s financial health. Long-term debt commits a company to a stream of contractual payments over a long period of time. For instance, the more debt Wa-lmart has, the greater the risk it is to pay back its contractual debt payments and perhaps becoming bankrupt. Shareholders often pay vey close attention to the company’s ability to payback their debt. The more debt a company uses creates greater financial leverage (Gitman, 2006). The debt ratio demonstrates the proportion of total assets that the company has financed by creditors. According to Wal-mart’s annual balance sheet for the ending period of January 31, 2009 their total debt is $98,144,000, total assets $163,429,000(Yahoo, 2009). The equation for debt ratio is: Debt ratio = Total Liabilities Total Assets The debt ratio for Walmart is $98,144,000 $163,429,000= 0. 60 = 60% This means that Walmart has financed more than half of its assets with debt. This is a high ratio, thus Walmart’s degree or indebtedness as well as its financial leverage is greater. Another debt ratio is the Times interest earned ratio which is earnings before interest and taxes / interest. The times interest earned ratio for Wal-Mart is $18,435,000 / $1,900,000 = 9. 7. This looks good for Wal-Mart because a times interest earned ratio of 3 is decent and 5 is good. In an effort to determine the real value of Wal-Mart common stock, multiple evaluation tools can be used. Comparison of Price-To-Book and Price-To-Earnings ratios give insight to the value of the stock price compared to reported earnings and reported asset values (book values). By comparing the corporation’s ratios to those of the industry average and other competitors, an understanding of appropriate ratios can be determined. In the case of Wal-Mart, the following spreadsheet shows a comparison to Costco, Target, and the industry average. Compiled from Yahoo! Finance 11/2/09 From the data above, Wal-Mart’s Price to book ratio is well above that of Costco and Target. This difference shows an Wal-Mart’s common stock price is covering more debt per share than that of its competitors. A Price-To-Book ratio is not the most accurate representation of an organization, since the book values are only accounting for physical assets, and not the added value of knowledge or perceived value. Therefore a comparison of Price-To-Earnings ratios should be evaluated. The industry average of Price-To-Book ratio is at 15. 45. A ratio of 15. 45 is considered to mean that the industry or company’s current stock price is expected to give returns over the next 15. 45 years. Costco and Target both have ratios well above the industry average, while Wal-Mart’s Price-To-Book ratio falls below the industry average. Wal-Mart, valued at 14. 74 years is considered more risky than its competitors. Wal-Mart’s current common stock price should fall below that of its competitors based on these ratios. However, Wal-Mart’s stock price is actually between that of Costco’s $57. 75 per share and Target’s $49. 34 per share at $50. 28 per share. Based on this evaluation alone, Wal-Mart’s stock price is either over-priced or Target’s stock price is under-priced. To better understand the proper conclusion, Wal-Mart’s intrinsic value should be evaluated. The intrinsic value is what investors consider the company to be worth. By evaluating the expected dividends compared to the rate of return and the expected value a year out, an appropriate present value stock price can be determined. For Wal-Mart, the expected dividends are $1. 09 per share with an expected rate of return at 21%, and an expected stock value of $60. 67, Wal-Mart’s intrinsic value is $51. 04. Based on the intrinsic value of Wal-Mart’s common stock price, the corporation’s common stocks are under-evaluated by 1. 49% or $0. 76 per share. More evaluations need to be made before concluding the proper stock price for Wal-Mart, Inc. Market Price of Common Stock | | | | | |Fiscal Year Ended January 31 | | | | | | | | | | | | | | |  |  |2009 |2008 | | |1st Quarter |$59. 04 |$47. 84 |$50. 42 |$45. 6 | | |2nd Quarter |59. 95 |55. 05 |51. 44 |45. 73 | | |3rd Quarter |63. 85 |47. 4 |48. 42 |42. 09 | | |4th Quarter |59. 23 |46. 92 |51. 3 |42. 5 | Fiscal year ended January 31, Shareholders As of March 27, 2009, there were 298,263 holders of record of Wal-Mart’s common stock. Common stock is a security that represents one’s equity ownership within a corporation. This provides the holder with voting rights and entitles them to share any company success through capital depreciation and/ or dividends (InvestorWords, 2009). Wal-Mart has 298,263 holders of common stock and the price on the stock is currently at $49. 75 per share; $14,838,584. 25 invested within the company (Money Central, 2009). Capital valuation models are used to place a value on a particular stock. One such model that can be used is the dividend discount model (DDM). This procedure will value the stock price by using predicted dividends and will discount them back to the present value. The idea behind this is that if the value one obtains by using the dividend discount model (DDM) is higher than what share are currently trading for, then the conclusion would be that the stock is undervalued. The dividend discount model (DDM) equation is as follows: Po = DIV1 + P1/ (1 + ?? ) (Investopedia, 2009). By inputting Wal-Mart’s information into the equation, $0. 95 + $49. 75/ (1 + 0. 10) = $46. 09, the current standing on the stock is considered overvalued. Also, we can look at the dividend discounted growth model to determine the stock’s selling price. This mathematical formula is used to spot company’s who are undervalued by the stock market, but have the potential for high returns. The formula is as follows: Po = DIV1 + P1/(1 + r)2 (Business Dictionary, 2009). After inputting Wal-Mart’s information, $0. 95 + $49. 75/ (1 + 0. 10)2 = $41. 90, one verifies that Wal-Mart’s stock is overvalued. An understanding to Wal-Mart’s stock value can be accomplished by comparing the findings from debt analysis to the stock evaluation findings. It was determined by calculating the debt ratio for Wal-Mart that a significant amount of Wal-Mart’s profits are generated through other people’s money. This looks bad for the company because creditors look at this as a negative thing and the company it becomes a higher risk to invest in this company. The times interest ratio for Wal-Mart looks really good at 9. 5. After carefully analyzing the debt for Wal-Mart, it is determined that this company could be a little risky to invest in at the moment. The stock evaluation has a more mixed look for Wal-Mart. By comparing Wal-Mart’s price-to-book ratio with industry averages and competitors in the industry, Wal-Mart is lower then both the industry and its competitors. The intrinsic value of Wal-Mart’s stock is $51. 04. The dividend discount model shows that Wal-Mart’s price per share for its stock should be at $46. 09. Yahoo Finance currently lists the price of Wal-Mart stock at 50. 28 per share. Overall, the stock evaluation shows that Wal-Mart’s stock should be slightly lower then what it is. When comparing the debt analysis with the stock evaluation, it looks like Wal-Mart’s stock is overvalued. The dividend discount growth model also looks negative for the company. This model values the stock at $41. 0 per share. A debt analysis was conducted, a stock evaluation was completed, and the findings of both the debt analysis and the stock evaluation were evaluated to provide a comparative analysis. The debt analysis for Wal-Mart showed that it has a debt ratio of 60% and a times interest earned ratio of 9. 5. The stock evaluation illustrated a price-to-book ratio lower then competitors and the industry averages, a slightly higher intrinsic value for Wal-Mart at $51. 04, and a dividend discount model that shows its stock to be $46. 09. The overall comparative analysis shows Wal-Mart’s stock to be overpriced. The conclusion shows a negative outcome for Wal-Mart and its stock most likely will fall in the next few weeks. References Business Dictionary. (2009). Dividend discount model. Retrieved on November 1, 1009 from: https://www. businessdictionary. com/definition/dividend-discount- model. html. Investopedia. (2009). Dividend discount model – DDM. Retrieved on November 1, 2009 from: https://www. investopedia. com/terms/d/ddm. asp. InvestorWords. (2009). Common stock. Retrieved on November 1, 2009 from: https://www. investorwords. com/986/common_stock. html Money Central. (2009). WMT quote. Retrieved on November 1, 2009 from: https://moneycentral. msn. com/detail/stock_quote? Symbol=WMT. Walmart. (2009). 2009 Annual report. Retrieved on November 1, 2009 from: https://walmartstores. com/sites/AnnualReport/2009/. Yahoo! Finance. (2009). WMT: Competitors for Wal-Mart Stores. Retrieved from https://finance. yahoo. com/q/co? s=WMT Yahoo! Finance. (2009). WMT: Key statstics for Wal-Mart Stores. Retrieved from https://finance. yahoo. com/q/ks? s=WMT

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