# Question

In Problem 10.16, we projected financial statements for Wal-Mart Stores, Inc. (Walmart) for Years +1 through +5. The data in Exhibits 12.16–12.18 include the actual amounts for 2008 and the projected amounts for Year +1 to Year +5 for the income statements, balance sheets, and statements of cash flows for Walmart (in millions).

The market equity beta for Walmart at the end of Year 4 was 0.80. Assume that the risk-free interest rate was 3.5 percent and the market risk premium was 5.0 percent. Walmart had 3,925 million shares outstanding at the end of 2008. At the end of 2008, Walmart’s share price was $46.06.

Required

Computing Walmart’s Share Value Using Free Cash Flows to All Debt and Equity Stakeholders

a. At the end of 2008, Walmart had $42,218 million in outstanding interest-bearing short-term and long-term debt on the balance sheet and no preferred stock. Assume that the balance sheet value of Walmart’s debt is approximately equal to the market value of the debt. During 2008, Walmart’s income statement included interest expense of $2,184 million. During 2008, Walmart faced an average interest expense of roughly 5.0 percent. Assume that at the start of Year +1, Walmart will continue to incur interest expense of 5.0 percent on debt capital and that Walmart’s average tax rate will be 34.2 percent. Compute the weighted average cost of capital for Walmart as of the start of Year +1.

b. Beginning with projected net cash flows from operations, derive the projected free cash flows for all debt and equity stakeholders for Walmart for Years +1 through +5 based on the projected financial statements.

c. Project the continuing free cash flows for all debt and equity stakeholders in Year +6. Use the projected financial statements for Year +6 from Part c to derive the projected free cash flow for all debt and equity stakeholders in Year +6.

d. Using the weighted average cost of capital from Part g as a discount rate, compute the sum of the present value of free cash flows for all debt and equity stakeholders for Walmart for Years +1 through +5.

e. Using the weighted average cost of capital from Part g as a discount rate and the long-run growth rate from Part c, compute the continuing value of Walmart as of the start of Year +6 based on Walmart’s continuing free cash flows for all debt and equity stakeholders in Year +6 and beyond. After computing continuing value as of the start of Year +6, discount it to present value as of the start of Year +1.

f. Compute the value of a share of Walmart common stock.

(1) Compute the total value of Walmart’s net operating assets using the total sum of the present value of free cash flows for all debt and equity stakeholders (from Parts j and k).

(2) Subtract the value of outstanding debt to obtain the value of equity.

(3) Adjust the present value of equity using the midyear discounting adjustment factor.

(4) Compute the per-share value estimate of Walmart’s common equity shares.

The market equity beta for Walmart at the end of Year 4 was 0.80. Assume that the risk-free interest rate was 3.5 percent and the market risk premium was 5.0 percent. Walmart had 3,925 million shares outstanding at the end of 2008. At the end of 2008, Walmart’s share price was $46.06.

Required

Computing Walmart’s Share Value Using Free Cash Flows to All Debt and Equity Stakeholders

a. At the end of 2008, Walmart had $42,218 million in outstanding interest-bearing short-term and long-term debt on the balance sheet and no preferred stock. Assume that the balance sheet value of Walmart’s debt is approximately equal to the market value of the debt. During 2008, Walmart’s income statement included interest expense of $2,184 million. During 2008, Walmart faced an average interest expense of roughly 5.0 percent. Assume that at the start of Year +1, Walmart will continue to incur interest expense of 5.0 percent on debt capital and that Walmart’s average tax rate will be 34.2 percent. Compute the weighted average cost of capital for Walmart as of the start of Year +1.

b. Beginning with projected net cash flows from operations, derive the projected free cash flows for all debt and equity stakeholders for Walmart for Years +1 through +5 based on the projected financial statements.

c. Project the continuing free cash flows for all debt and equity stakeholders in Year +6. Use the projected financial statements for Year +6 from Part c to derive the projected free cash flow for all debt and equity stakeholders in Year +6.

d. Using the weighted average cost of capital from Part g as a discount rate, compute the sum of the present value of free cash flows for all debt and equity stakeholders for Walmart for Years +1 through +5.

e. Using the weighted average cost of capital from Part g as a discount rate and the long-run growth rate from Part c, compute the continuing value of Walmart as of the start of Year +6 based on Walmart’s continuing free cash flows for all debt and equity stakeholders in Year +6 and beyond. After computing continuing value as of the start of Year +6, discount it to present value as of the start of Year +1.

f. Compute the value of a share of Walmart common stock.

(1) Compute the total value of Walmart’s net operating assets using the total sum of the present value of free cash flows for all debt and equity stakeholders (from Parts j and k).

(2) Subtract the value of outstanding debt to obtain the value of equity.

(3) Adjust the present value of equity using the midyear discounting adjustment factor.

(4) Compute the per-share value estimate of Walmart’s common equity shares.

## Answer to relevant Questions

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