I NEED HELP WITH QUESTIONS 5-7

Practical Application 2, Cost of Capital and Raising Capital at Walmart

Walmart, Americas largest retailer had the markets second largest debt issuance in the U.S. in 2019, selling $16 billion in 30 year bonds. The funds were to help finance the purchase of Flipkart, Indias largest online seller. Thanks to Walmarts high credit rating, the bonds were classified by Moodys (one of the top bond rating agencies) as Aa2, or very highly rated. The bond sale was managed by a syndicate of investment banks, including Barclays Plc, Citigroup Inc., JPMorgan Chase & Co., Bank of America Corp., HSBC Holdings Plc and Wells Fargo & Co.

In this problem, you will be provided with publicly available data on Walmart and other economic data. Certain assumptions have been made about flotation costs in order to expand the analysis. Using the given data and assumptions, answer each of the questions below. If you prefer to do the analysis in Excel, that is fine. You will need to submit your Excel file along with this word file. Both files must have your last name included in the file names (several students incorrectly submitted only the original file, with no work shown). I strongly suggest you download this file and make a copy with your name and PA2 file name. Your Excel file must be clear and easy to follow (also with your name and PA2 in the file name). Final answers must be clearly labeled, and all backup work shown. All solutions must be in the correct order.

Data for Walmart as of April 2019

Market Price	$103.18
# Shares (mm, or millions)	2,897
Long term debt ($mm from balance sheet)	$45,396
Tax rate (T)	25%
Walmart beta ()	0.66
Current risk free rate (rf)	2.59%
Estimated market risk premium	6.00%
Estimated underwriter spread	1.0%
Estimated additional flotation costs	0.5%
Estimated total flotation cost (as a % of debt face value)	1.50%

WalMart data to use	2015	2016	2017	2018	2019
Dividend payout ratio (dividends paid out as a % of net income)	38.02%	42.89%	45.59%	62.04%	91.68%
Net income ($ millions)	$16363	$14694	$13643	$9862	6670
Common equity $ (millions, book value)	$85937	$83611	$80535	$80822	79634
ROE (net income/common equity or NI/CE)	19.04%	17.57%	16.94%	12.20%	8.38%
	2015	2016	2017	2018	2019
Dividend history ($/share)	$1.91	$1.96	$2.00	$2.04	$2.08
		2020	2021	2022	2023
Dividend estimates ($/share)		$2.14	$2.05	$2.40	$2.48

Basic starting point data:

1)	Value of equity (market capitalization)	28912.46
2)	Value of long term debt (use book value)	$43,396
3)	Weight of equity	86.8%
4)	Weight of debt	13.2%

Show your inputs and/or calculations below (add space as necessary, make it very clear how you arrived at your final answers above)

1. 103.18x2897=28912.46 ( market price x # of shares )
2. Answer was given
3. 298912.46/(45396+29891.46) = .868 Value of equity/(value of debt + value of equity)
4. 45396/(45396+298912.46)=0.132 Value of debt( value of debt + value of equity)

Calculate the cost of equity:

The cost of equity can be calculated with the dividend discount model or using CAPM.

We will start with the dividend discount model: r = D1/P0 + g We have D1 (2020 expected dividend) and P0 (current stock price), it is g that must be calculated.

The growth rate (assumed constant) for dividends can be calculated two different ways, 1) Calculate g using historic or projected trends in dividends per share or 2) Calculating g from ROE and reinvestment in the firm: g = ROE * (1-payout ratio). Read the following questions and clearly answer the question as asked, using the appropriate estimation method for the growth rate.

5. What is the 3 year growth rate (2020-2023) of expected dividends?

Calculate and describe how you arrived at your answer (what were the inputs).

6. What is the 4 year growth rate (2015-2019) of actual dividends?

Calculate and describe how you arrived at your answer (what were the inputs).

7. DISCUSS: Do either of these values seem appropriate? If so, which one and why?