Case Study Analysis of Wal$-$Mart Stores, Inc. Analysis Questions please help with step by step with solutions Perpetual Growth in Dividends Using the dividend discount model $($DDM$),$ we calculate the perpetual growth rate of dividends by projecting the anticipated growth in dividends based on the payout ratio and the cost of equity capital: Formula for Growth $($g$)$: g $=(1-$ payout ratio$)$ Ke From the data provided, the payout ratio at maturity is $45\%.$ Using the historical growth average and market estimates, the expected constant growth in dividends is approximately $5\mathrm{.}0\%,$ as mentioned in the case. With a payout ratio of $45\%,$ the retained earnings contribute to growth in assets and dividends, aligning with the anticipated perpetual dividend growth rates. Forecasted Dividends for the Next Several Years Plus Future Sale of the Stock Breaking down dividends over the next few years involves identifying the anticipated dividend payout and earnings per share growth. From Exhibit $4$: Yearly EPS growth during the "growth years" is $23\%.$ Dividend payout rates gradually increase, with the estimated dividends projected as follows: Year $1$: $$0\mathrm{.}62$ Year $2$: $$0\mathrm{.}76$ Year $3$: $$0\mathrm{.}93$ Year $4$: $$1\mathrm{.}14$ Year $5($End of Growth Phase$)$: $$1\mathrm{.}41$ At the terminal value $($Year $17),$ applying the perpetual growth model to dividends results in a theoretical stock price of $$120\mathrm{.}37$ per share using PV analysis to find present values. The Three$-$Stage Dividend Model The three$-$stage dividend model divides growth into the following phases: Growth Years $($Rapid Growth$)$: Higher EPS growth of $23\%$ for five years with relatively low dividend payout rates. Transition Years: Slowing growth from year $6$ to year $17,$ transitioning to average dividend payout rates and reduced EPS growth rates $(9\mathrm{.}12\%15\mathrm{.}43\%).$ Maturity Years: From year $17$ onward, dividend payout stabilizes at $45\%$ with perpetual growth $(6\mathrm{.}6\%).$ Termination value is calculated assuming mature earnings growth. Using this model, the recommended target stock price of $$120\mathrm{.}37$ offers a baseline for valuation. Deviations below this price may signal undervaluation. The Price$/$Earnings $($P$/$E$)$ Approach The intrinsic P$/$E ratio of Wal$-$Mart is critical for valuation: Current trailing P$/$E $=14\mathrm{.}4$ times; Forward P$/$E $=13\mathrm{.}4$ times. Industry P$/$E multiples for $2010$ are projected at $14\mathrm{.}23$ times, while the S&P $500$ P$/$E multiple is estimated at $12\mathrm{.}25$ times. Wal$-$Mart's earnings growth over the past five years is $8\mathrm{.}75\%,$ with a projected growth rate of $10\mathrm{.}39\%.$ This results in a PEG Ratio $($P$/$E$-$to$-$growth ratio$)$ of $1\mathrm{.}41,$ indicating the stock may be reasonably priced compared to growth. The use of P$/$E multiples reflects both growth potential and risk. Considering the projected P$/$E of $13\mathrm{.}4$ and EPS growth, Wal$-$Mart's stock appears aligned with industry expectations.