In Problem 10.16, we projected financial statements for Wal-Mart Stores, Inc. (Walmart) for Years +1 through +5.

Question:

In Problem 10.16, we projected 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
a. At the end of 2008, Walmart had $42,218 million in outstanding interest-bearing short-term and long-term debt on the and no preferred stock. Assume that the 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 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 for Walmart for Years +1 through +5 based on the projected Project the continuing free cash flows for all debt and equity in Year +6. Use the projected for Year +6 from Part c to derive the projected for all debt and equity in Year +6.
d. Using the weighted average from Part g as a compute the sum of the present value of free cash flows for all debt and equity for Walmart for Years +1 through +5.
e. Using the weighted average from Part g as a 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 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 (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.

Financial Statements
Financial statements are the standardized formats to present the financial information related to a business or an organization for its users. Financial statements contain the historical information as well as current period’s financial... Stakeholders
A person, group or organization that has interest or concern in an organization. Stakeholders can affect or be affected by the organization's actions, objectives and policies. Some examples of key stakeholders are creditors, directors, employees,... Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Free Cash Flow
Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the...