WAL-MART BUSINESS VALUATION

SEPTEMBER 2011

Table of Contents

1. Introduction.........................................................................................................................................1

2. Forecasting the financial statements....................................................................................................1

3. Computation of beta, cost of equity, cost of debt and weighted Average Cost of Capital (WACC)....2

3.1. Beta estimation............................................................................................................................2

3.2. Cost of equity (required rate of return)........................................................................................2

3.3. Cost of debt..................................................................................................................................3

3.4. WACC.........................................................................................................................................3

4. Common business valuation methods..................................................................................................3

4.1. Discounted cash flows method....................................................................................................3

4.2. Dividend growth (Gordon model)................................................................................................6

4.3. EPS model (Market Multiple analysis)........................................................................................7

4.4. Earning model..............................................................................................................................7

4.5. Book value method......................................................................................................................8

4.6. Risk Management Committee......................................................................................................8

5. RISK MEASURES..............................................................................................................................9

5.1. Sensitivity Analysis.....................................................................................................................9

5.2. Scenario Analysis........................................................................................................................9

5.3. Monte Carlo Simulation...............................................................................................................9

6. ESTIMATING RISK FACTORS......................................................................................................12

7. EXHIBITS.........................................................................................................................................15

8. REFERENCE....................................................................................................................................29

1. Introduction

The stakeholders and potential investors of the company need to know the value of company for different

purposes including mergers and acquisitions, sale of securities, tax assessment, wills and estates, divorce

settlements, business analysis, and basic bookkeeping and accounting. It is important to note that the value of the

companies fluctuates over time. Thus, valuations are required in order for investors invest in a certain stock as of

a specific date e.g., the end of the accounting quarter or year. (http://en.wikipedia.org/wiki/Valuation (finance),

viewed on July 17, 2011)

The basis for valuing a company is the financial statements. The financial statements are prepared based either on

GAAP or IFRS. The financial statement of the public companies are audited by auditors and also overseen by the

concerned government office. Thus, the financial information contained in the financial statements is more

credible than those for the private company.

The value of the company and expected return has an impact on the price of the share of a company. The return is

directly associated with the risk and has positive correlation.

There are various methods of valuation of a company. In this paper, we have undertaken valuation of Wal-Mart

Inc. These are discussed in the following sections.

Executive Summary

Wal-Mart Inc. has been in the business of merchandise sales for more than half a century. It has been

performing well through these time and is getting even bigger through expansion. In order to determine

the value of its shares, the group has utilized the known valuation methods like discounted cash flow

method, dividend growth (Gordon model) and Market Multiple analysis (EPS model), Earning method and

Book value methods. We also have calculated the beta (risk) of the company by employing a regression

analysis. The company’s potential risks have been identified which include: general economic factors, both

domestically and internationally, may adversely affect financial performance; impediment to expansion in the

United States, including conversions of discount stores into supercenters and opening other store formats; strong

competition from other retailers and wholesale club operators; risks associated with the suppliers and the safety of

those products could adversely affect its financial performance; and others.

The following are the main points identified in this valuation paper.

Wal-Mart’s share price as at July 15,2011 was $53.63 while the share value based on DCF was $51.41

and Gordon model was $58.42

Average sales growth of Wal-Mart’s was 7.01%,

The required rate of return was determined as 5%, this has been used in determination value of

stock

The weighted average cost of capital was computed as 4%

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Growth in earnings from 2008 to 2017 in average is 7%.

Strategic Fundamental Analysis of Wal-Mart Inc.

Wal-Mart is established in 1962 and by now, it operates 8,000 stores across three business segments of retail

stores worldwide that offer a wide array of general merchandise including groceries, apparel, electronics, and

small appliances. In addition, the company is the world's largest retailer and grocery chain by sales and just over

half of the company's sales comes from grocery items. Over half of the company's stores are located in the United

States, with the majority of international stores located in Central and South America and China.

(http://www.wikinvest.com/stock/Wal-Mart_(WMT)#Company_Overview)

Wal-Mart is one of the biggest discount market in the US, and it is listed in the New York Stock Exchange

(NYSE) with code WMT. The company’s total sales were growing from $308,945 mill. in 2006 to $405,046 mill.

in 2010 but at a decreasing rate. The dividend was increasing from $0.60 to $1.09 in the respective periods.

2. Forecasting the financial statements

According to Ehrhardt and Brigham (2009,p.477), continuation of past sales growth should consider national,

global economies, the firm’s and its competitors’ new products, planned advertising program and soon.

Ehrhardt and Brigham (2009) stated the two methods of forecasting as follows:

2.1. Additional funds needed (AFN) method

Expected growth in sales will bring growth in assets, liabilities, addition to retained earnings. The computation of

AFN is determined by adding all required new assets and then subtracts both spontaneous funds and addition to

retained earnings. The problem with the method is the assumption that the key ratio remains constant to their base

year levels.

2.2. Forecasting the financial statements method

This method involves the following steps:

a) Forecast the operating items: sales, operating expenses, operating assets, spontaneous liabilities;

b) Forecast items that depend on the firm’s choice of financial policies;

c) Forecast interest expenses and preferred dividends;

d) Use the forecasted interest expenses and preferred dividends to complete the income statements;

e) Determine the total common dividend payments;

f) Issue or repurchase stock.

In forecasting the financial statements of Wal-Mart Inc., we used the following guideline;

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a) Sales: we consider the sales from 2006 through 2010 and the compounded growth of sales is 7.01% as

shown below (the amounts are in millions):

$308,945*(1+r)4=$405,046; r = 7.01%

When we consider the average for 2006 through 2010, the percentage growth becomes 7.08% as shown

below:

2006 2007 2008 2009 2010  Average

$308,945 $344,759 $373,821 $401,087 $405,046  

  12% 8% 7% 1% 7.08%

Thus, we determine to use compound growth rate which appears to be more realistic.

b) The growth in operating costs, operating assets, operating spontaneous liabilities is related to sales and the

assumption is the relation of these items to sales in 2010 will hold for the next seven years.

c) Depreciation and amortization are related to the fixed percentage of the net plant, equipment and

property under capital leases;

d) Long term loan, Preferred stock and Common equity: the percentage of total investor supplied capital is

the basis to forecast the financial statement for the next seven years.

Based on the above discussion, the forecasted balance sheet and income statements for seven years are shown

in exhibit # 1.

3. Computation of beta, cost of equity, cost of debt and weighted Average Cost of Capital (WACC)

3.1. Beta estimation

We consider data of 60 months for Wal-mart and S&P 500 to estimate beta. Based on the regression analysis, the

calculated beta is 0.353; which is lower than 1 i.e. below the market’s beta. The working is shown under exhibit

#2.

3.2. Cost of equity (required rate of return)

We used the capital asset pricing model in estimating the cost of equity. The model involves risk free rate of

return, beta (section 3.1 above), and the risk premium. We used 10 year US coupon of 3.125% ruling on July 15,

2011 for risk free rate of return. (http://www.bloomberg.com/markets/) The risk premium, which is the difference

between the market rate of return and risk free rate of return, is also adopted from the internet that it is 0.055.

Thus, the cost of equity will be: 3.125%+0.353*0.055= 5%

3.3. Cost of debt

The cost of debt is the rate at which the holders earn interest. Based on the historical data, the average cost of

debt was 5.21% as shown below (the values are in millions):

  2008 2009 2010 Average

Long-term debt 37,197 37,281  

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Long-term obligations under capital leases   3,515 3,516  

  40,712 40,797  

         

Interest:        

Debt 1,896 1,787   Capital leases 288 278  

  2,184 2,065  

         

Interest rate 5.36% 5.06% 5.21%

However, the corporate bond yield as quoted at www.finance.yahoo.com as of July 15, 2011 was 5.022%. We

used the latter rate for our analysis as it appears to be more realistic. The net of tax rate for the cost of debt will

be 3.36% ((5.022*(1-33%)).

3.4. WACC

Computation of WACC involves the cost of equity, cost of preference shares and cost of debt. In the case of Wal-

Mart, there was no preference share and thus, we only consider cost of debt and cost of equity for the computation

of WACC. In addition, capital structure and taxes are also important variables to be considered in the

computation. The capital structure is 57% of debt and 43% of equity. Effective tax rate is 33%. (source to be

included)

Thus, the computation of WACC is as shown below:

WACC= rf +β(rm), where rf is the risk free rate; β is beta; rm is risk premium

WACC= (4%*0.57)+(5%*0.43)=4%

4. Common business valuation methods

4.1. Discounted cash flows method

This method estimates the value of a company based on the future cash flows estimated to be generated from

operation and are discounted at the WACC to the present. According to Berkus (2002), this method is important

when the buyer intends to finance the purchase using the revenue from the purchased company itself. The

following assumptions govern the application of this valuation method.

As postedd on Gale Encyclopedia of Small Business: Discounted Cash Flow, Ronald W. Hilton, author of

Managerial Accounting, described that there are two primary methods of discounted cash flow analysis: Net-

present-value method (NPV) and internal-rate-of-return (IRR) method. Principal assumptions of these methods

are as follows:

All cash flows are treated as though they occur at the end of the year.

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DCF methods treat cash flows associated with investment projects as though they were known with

certainty, whereas risk adjustments can be made in an NPV analysis to account in part for cash flow

uncertainties.

Both methods assume that all cash inflows are reinvested in other projects that earn monies for the

company.

DCF analysis assumes a perfect capital market. ( http://www.answers.com/topic/discounted-cash-flow

viewed on 27 July 2011).

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  2009 2010 2011 2012 2013 2014 2015 2016 2017

EBIT 22,729.00 23,539.00 24,605.77 26,330.64 28,176.41 30,151.57 32,265.21 34,527.00 36,947.34

TAX RATE 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33 0.33

NOPAT 15,228.43 15,771.13 16,485.87 17,641.53 18,878.19 20,201.56 21,617.69 23,133.09 24,754.72

                   Operating current assets 48,949.00 48,331.00 51,719.00 55,344.51 59,224.15 83,370.77 102,868.41 114,209.25 125,329.81 Operating current liabilities 48,550.00 49,800.00 52,271.98 55,062.68 60,061.25 65,302.04 69,879.72 69,440.28 60,486.25 Net operating working capital 399.00 (1,469.00) (552.98) 281.83 (837.10) 18,068.73 32,988.69 44,768.97 64,843.56

Net fixed assets 95,653.00 102,307.00 104,571.74 106,995.25 109,588.65 112,363.84 115,333.55 118,511.46 121,912.14

Operating capital 96,052.00 100,838.00 104,018.76 107,277.08 108,751.55 130,432.57 148,322.24 163,280.43 186,755.70 Net investment in capital   4,786.00 3,180.76 3,258.32 1,474.47 21,681.02 17,889.67 14,958.19 23,475.27

Free Cash Flow   10,985.13 13,305.11 14,383.21 17,403.72 (1,479.46) 3,728.02 8,174.90 1,279.45 Discounting factor at WACC OF 4%   1.00 0.96 0.92 0.89 0.85 0.82 0.79 0.76   2017 FCF will continue in perpetuity               33,265.66 33,265.66 Discounted FCF 2010-2017 10,985.13 12,793.37 13,298.08 15,471.85 (1,264.65) 3,064.16 6,460.74 26,251.44 87,060.12 Value of operating assets 10,985.13 12,793.37 13,298.08 15,471.85 (1,264.65) 3,064.16 6,460.74 59,517.10 120,325.78 Value of non-operating assets                 74,306.00

                194,631.78

Number of shares                 3,786.00

value per share                 51.41

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4.2. Dividend growth (Gordon model)

This method estimates the value of the company based on the future of stream of dividend to be paid out to the shareholders for indefinite period

of time. Based on the available information, dividend could increase every year at different rate and could also be assumed to increase at a

constant rate after a certain period. The future cash flow is then discounted at required rate of return. . It is believed that the discounted dividend

method is more precise than other methods as it is based on expected cash flows.

Assumptions employed by the Gordon valuation model:

Gordon Model is believed to be appropriate for mature companies with stable history of growth. As discussed in the foregoing

paragraph, Wal-Mart was established in 1962 and getting strong since then and it has relatively a constant growth history and has been

in business for so long with successful history and this can justify that it could be classified as the mature companies.

Growth in dividend occurs as a result of growth in earning per share,

Dividend is expected to grow for forever at constant rate, which is 2% in our case

2010 2011 2012 2013 2014 2015 2016 2017

Dividend paid (exhibit 6) 4,217.00 4,464.94 4,934.96 5,411.67 5,780.92 6,165.40 6,782.51 7,240.81Discounting factor at required rate of return of 5% (Section 3.1) 1.00 0.95 0.91 0.86 0.82 0.78 0.75 0.71Present value of dividend 2010-2017 4,217.00 4,252.32 4,476.15 4,674.81 4,755.98 4,830.76 5,061.22 5,145.91 37,414.14Present value of dividend commencing 2018 in perpetuity (growth expected at 2%)               183,760.36 183,760.36

 Total value of the company                 221,174.50

Number of shares                 3,786.00

Value per share                 58.42

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4.3. EPS model (Market Multiple analysis)

The Price/Earnings ratio computes stock’s value by dividing price per share by earning per share.

This method indicates how much investor is willing to pay per dollar of the profit

2010   2009  

  High Low High Low

1st Quarter 54.57 46.25 59.04 47.84

2nd Quarter 51.75 47.35 59.95 55.05

3rd Quarter 52.56 48.73 63.85 47.40

4th Quarter 55.20 49.52 59.23 46.92

  53.52 47.96 60.52 49.30

Probability 0.50 0.50 0.50 0.50

Average price 50.74 54.91

         

Price per share 50.74      

Basic earnings per share 3.71      

Current year earning 14,882.94      

Value per share in cents 203,552.28      

Number of shares 3,786.00      

value per share 53.76      4.4. Earning model

Earnings are net incomes available for common shareholders. Earnings are important

to investors because they give an indication of the company's expected future dividends and

its potential for growth and capital appreciation. Earning for Wal-Mart Inc. is calculated as follows

in order to determine the value of the stock of the company using the below model.

(http://www.investorwords.com/1618/earnings.html)

Earning in 2011     14,882.94

WACC (as above)     0.04

Retained earning (as above)     10,402.58

Return on equity     0.05

Growth in earning (2008-2017)     0.07

       

Value of the company      

Current earnings as a perpetuity with 100% payout     372,073.49

Page 8 of 26

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Growth in earnings     (77,263.20)

Total value of the company     294,810.28

Number of shares     3,786.00

Value per share     77.87

4.5. Book value method

The book value of a company’s stock is simply the stockholders' equity per common share of stock,

which is equal to the net asset value, which is equal to total assets minus intangible assets, such as

goodwill, minus total liabilities minus equity related prior claims, which includes preferred stock

and cumulative dividends in arrears, divided by the number of outstanding common shares.

(http://thismatter.com/money/stocks/valuation/book-liquidation-value-q-ratio.htm viewed on 28

July 2011.)

Net Asset Value for Common Stock = Total Assets - Intangible Assets - Total Liabilities - Equity

with Prior Claims = Stockholders' Equity

Accordingly, the book value per share of Wal-Mart Inc. is shown in the table below.

 

   

Stock holders equity $72,999.00

Number of shares 3786

Value per share $19.28

4.6. Risk Management Committee

Wal-Mart created a five-step process designed around four basic questions: What are the risks?

What are we going to do about these risks? How will we measure whether we are having a positive

or negative impact on the risks? How will we demonstrate shareholder value?

(http://www.rmmag.com/Magazine/PrintTemplate.cfm?AID=2209, viewed July 17, 2011). The

five step processes are discussed below:

Step One – Risk Identification. In this step, a risk map evaluates risks on an XY-axis, with the X-

axis representing probability and the Y-axis representing impact. This helps to prioritize what are

seen as Wal-Mart’s biggest risks.

Step Two – Risk Mitigation. This step involves another facilitated workshop, where the three to

five most important risks are further defined.

Step Three: Action Planning. In this phase, the project teams meet and create simple project plans

Page 9 of 26

that identify who will do what by when. The teams then spend several months implementing their

project plans.

Step Four: Performance Metrics.

Step Five: Shareholder Value/Return on Investment. In order to make sure that the action plans and

results end up increasing shareholder value and return on investment, the main goal of this step is to

evaluate whether or not the project was able to increase sales or lower expenses.

5. RISK FACTORS

The risks described below could materially and adversely affect the business, results of operations,

financial condition and liquidity of the company. These risks are not the only risks that the

company faces. According to the filing of 10-k, some of the risk factors are the following:

(http://www.wikinvest.com/stock/Wal-Mart_(WMT)/Filing/10-K/2010/F1938644)

5.1. General economic factors, both domestically and internationally, may adversely affect

financial performance:

The overall economic slowdown results in the decreases in consumer disposable income

which could adversely affect consumer demand for the products and services.

5.2. Impediment to expansion in the United States, including conversions of discount

stores into supercenters and opening other store formats

Failure to execute retail concepts

Local land use and other regulations restricting the construction of buildings;

Increased real estate, construction and development costs could limit its growth

opportunities and its ability to convert its discount stores into supercenters.

If consumers in the markets into which it expands are not receptive to its retail concepts.

5.3. Failure to attract and retain qualified associates, changes in laws and other labor

issues could adversely affect its financial performance.

If unable to locate or attract or to retain qualified personnel,

If the costs of labor or related costs increase significantly or if new or revised labor laws,

rules or regulations are adopted, the financial performance could be affected adversely.

5.4. Strong competition from other retailers and wholesale club operators

5.5. Risks associated with the suppliers and the safety of those products could adversely

affect its financial performance.

The challenge of finding qualified suppliers

Political and economic instability in the countries in which foreign suppliers are located,

Page 10 of 26

the financial instability of suppliers,

suppliers’ failure to meet the supplier standards,

labor problems experienced by their suppliers, the availability of raw materials to suppliers,

merchandise quality issues,

currency exchange rates, transport availability and cost, transport security, inflation, and

other factors relating to the suppliers and the countries in which they are located are beyond

their control.

the United States’ foreign trade policies, tariffs and other impositions on imported goods,

trade sanctions imposed on certain countries, the limitation on the importation of certain

types of goods or of goods containing certain materials from other countries

5.6. Natural disasters and geo-political events could adversely affect their financial

performance.

The occurrence of one or more natural disasters, such as hurricanes, cyclones, typhoons, tropical

storms, floods, earthquakes, tsunamis, weather conditions such as major or extended winter storms,

droughts and tornados, whether as a result of climate change or otherwise, severe changes in

climate and geo-political events, such as civil unrest or terrorist attacks in a country in which they

operate or in which their suppliers are located could adversely affect the operations and financial

performance.

5.7. Legal proceedings that may adversely affect the results of operations, financial

condition and liquidity.

They are involved in a number of legal proceedings, which include consumer, employment, tort and

other litigation. Certain of these lawsuits, if decided adversely to them or settled by Wal-Mart, may

result in liability material to its results of operations, financial condition and liquidity.

5.8. If it does not maintain the security of customer-related information, it could damage

its reputation with customers, incur substantial additional costs and become subject to

litigation.

5.9. It relies extensively on computer systems to process transactions, summarize results

and manage our business. Disruptions in both its primary and secondary (back-up)

systems could harm its ability to run the business.

5.10. It may not timely identify or effectively respond to consumer trends, which could

negatively affect its relationship with its customers, the demand for its products and

services, and its market share.

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6. RISK MEASURES

According to Ehrhardt and Brigham (2010) risk is defined as the chance that some unfavorable

events will occur. The following are approaches to consider the effect of the occurrence of the

unfavorable events in our decision process:

6.1. Sensitivity Analysis

It is a what if analysis that enables the reviewer of a model to determine which parameters are the

key drivers/inputs to a model’s result. Sensitivity analysis measures the percentage change in NPV

that results from a given percentage in an input variable when other inputs are held constant.

(Ehrhardt & Brigham, p.436)

For the purpose of this analysis, we need to show how the value of the company changes with

changes in the growth of sales and earnings.

6.2. Scenario Analysis

In scenario analysis we will try to know what would happen to the project’s NPV if several of the

inputs turn out to be better or worse than expected. Scenario analysis allows us to assign

probabilities to the base (or most likely) case, the best case, and the worst case; then we can find the

expected value of the project’s NPV, along with its standard deviation and coefficient of variation,

to get a better idea of the project’s risk. (Ehrhardt & Brigham, p.439)

This method brings in the probabilities changes in the key variables, and it allows us to change

more than one variable at a time.

6.3. Monte Carlo Simulation

It ties together sensitivities, probability distributions, and correlations among the input variables. It

is a problem solving technique used to approximate the probability of certain outcomes by running

multiple trial runs, called simulations, using random variables. In a simulation analysis, a

probability distribution is assigned to each input.

We have performed the same type of simulation for Wal-Mart Inc. in order to determine the risk of

its stock.

In the case of Wal-Mart, we forecast financial statements for the forthcoming seven years.

Estimating the growth rate of sales is central for the rest of balance sheet and income statements

accounts with the exception of depreciation, interest expenses and taxes. In the previous

discussion, the compounded growth rate of sales was 7.01% but as future is full of uncertainty,

there would be a chance that the sales grows at a percentage other than discussed above. Thus, we

consider two more options i.e. growth at 6.25% (based on five years sales data

Page 12 of 26

(http://www.advfn.com/p.php?pid=financials&symbol=NYSE%3AWMT viewed on July

10,2011)and 7.08%(average growth of years from 2006 through 2010). We further considered that

the probability that sales grows at 6.25%, 7.01% and 7.08% are 50%, 40% and 10% respectively.

The free cash flow calculated based on the above growth varies and accordingly, the value of the

company is shown as follows:

Value of operating assets $141,832

Value of non-operating assets             74,398.00

              216,230.26

Number of shares $3,786

value per share             $57.11See Exhibit 7

The value per share, without considering different alternatives for sales, was $51.41 as compared to

the above value of $57.11.

The risk is $55,982.62 and Coefficient of Variation (CV) is .39 which showed as the

relationship between free cash flow and the value of the company is below average.

Similarly, if we consider different growth rate in earning for 2011 to 2017 and again different

growth rate in perpetuity, the value of the company will vary. Assume the following:

Growth in earning

2011-2017

probability 2018 in perpetuity probability

9% 45% 6% 35%

4% 45%

3% 20%

7% (base-compounded rate) 30% 6%

5% 25% 4% 35%

3% 45%

2% 20%

The total value and value per share based on the above scenario is as shown below

Total value     233,617.89

Number of shares     3,786.00

value per share     73.28

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The risk is $192,709.8 and Coefficient of Variation (CV) is 0 .82 which showed as there is

strong relationship between earning and value of the company.

After having the possible chance of growth in sales, we assigned the following probability to each

event;

A decrease in the growth of sales to 6.25% results a slight decreases in the intrinsic value of the

company as shown below:

Intrinsic value at Growth rate of

7.01% in sales

Intrinsic value at

Growth rate of 6.25%

in sales

FCF 33.83 38.36

DDM 58.42 55.98

EARNING MODEL 77.87 73.28

P/E model 53.76 53.35

Book value methods 19.28 19.28

The risk and return on equity at different growth rate of sales is as shown below

Growth in sales 6.25% 7.01%

Required rate of return ( as above) 5% 5%

Average return on equity of 8 years (2009-2017) 16.68% 16.90%

Standard deviation 0.947 0.964

When the return on equity is greater than the required rate of return, the demand for the price of the

stock will increase. According to Ehrhardt and Brigham (2010, p. ), the investors action therefore

tend to drive the expected return toward the required return. When the rate of return on equity

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Growth in sales Probability

Five years growth 5.28% 45% 2.38%

Five years compounded growth 7.01% 35% 2.45%

Five years average growth 7.08% 20% 1.42%

6.25%

increases, the risk will also increase and the price of the stock will be pushed upward until the

market equilibrium brings the stock price and intrinsic value of the stock on the same point.

CONCLUSION

The group has undertaken the stock valuation of Wal-Mart Inc. as discussed in the previous parts.

The valuation is done for almost all the known valuation methods. This was done because we

believe that performing the valuation with all the available methods will reduce the fear of the

investor to decide to buy, sell or to do nothing with the stock under discussion.

However, among the popular methods of valuation, discounted cash flow method, dividend growth

(Gordon model) and Market Multiple analysis (EPS model), are the ones. Hence, even if we

performed valuations using various models, we used the aforementioned methods to compare the

stock price of Wal-Mart on NYSE and with the result of the valuation.

Accordingly, based on the discounted cash flow method value per share is $51.41 and the closing

stock price on the NYSE

was $53.63 as of July 15, 2011 which shows that the stock price was overvalued by $2.22.

Based on the Gorden model (dividend growth model), the value per share is $58.42 and the closing

stock price on the NYSE

was $53.63 as of July 15, 2011 which shows that the stock price was undervalued by $4.79 and

investors will purchase the stock to get the advantage.

Based on the Market Multiple analysis (EPS model), the value per share is $53.76 and the closing

stock price on the NYSE

was $53.63 as of July 15, 2011 which shows that the stock price was undervalued by $0.13.

From the above points, we can see that the different valuation methods can produce different results

and hence for the marginal investor, it would be better off to calculate the average of the valuations

results and compare that with the stock price.

With this understanding, the average value per share for the mentioned three methods will be

$54.53 and for the marginal investor, since the beta coefficient as calculated earlier is 0.353 which

is below the market beta of 1.0, Wal-Mart’s stock is less riskier and hence the investor will buy the

stock.

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7. EXHIBITS

Exhibit 1: income statement

(Amounts in millions except per share data) 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017Revenues: Net sales $373,821 $401,087 $405,046 433,439.72 463,823.85 496,337.90 531,131.19 568,363.48 608,205.76 650,840.99Membership and other income 3,202 3,287 3,168 3,551.63 3,800.60 4,067.02 4,352.12 4,657.20 4,983.67 5,333.03 377,023 404,374 408,214 436,991.35 467,624.45 500,404.92 535,483.31 573,020.69 613,189.44 656,174.01Costs and expenses:Cost of sales 284,137 304,056 304,657 328,015.97 351,009.89 375,615.68 401,946.34 430,122.78 460,274.39 492,539.62Depreciation and amortization 6,317 6,739 7,157 7795.8 8342.28 8927.08 9552.87 10222.52 10939.12 11705.95Operating, selling, general and administrative expenses except depr 64,617 70,781 72,450 76,313.85 81,663.45 87,388.06 93,513.96 100,069.29 107,084.15 114,590.75Operating income 21,952 22,798 23,950 24,865.73 26,608.83 28,474.10 30,470.13 32,606.10 34,891.78 37,337.70Interest: Debt 1,863 1,896 1,787 1,987.29 1,350.39 802.29 907.73 1,073.94 235.83 339.10 Capital leases 240 288 278 301.39 322.52 345.13 369.32 395.21 422.92 452.56 Interest income -309 -284 -181 (286.29) (306.36) (327.84) (350.82) (375.41) (401.73) (429.89)

Interest, net 1,794 1,900 1,884 2,002.40 1,366.55 819.58 926.24 1,093.75 257.02 361.77Income from continuing operations before income taxes 20,158 20,898 22,066 22,863.34 25,242.28 27,654.52 29,543.90 31,512.35 34,634.76 36,975.93Provision for income taxes: Current 6,897 6,564 7,643 7,407.72 8,178.50 8,960.06 9,572.22 10,210.00 11,221.66 11,980.20

Deferred -8 581 -504 26.42 28.27 30.25 32.37 34.64 37.07 39.67 6,889 7,145 7,139 7,434.14 8,206.77 8,990.32 9,604.60 10,244.65 11,258.73 12,019.87Income from continuing operations 13,269 13,753 14,927 15,429.20 17,035.51 18,664.20 19,939.30 21,267.71 23,376.03 24,956.06Income (loss) from discontinued operations, net of tax -132 146 -79 (26.60) (28.47) (30.47) (32.60) (34.89) (37.33) (39.95)Consolidated net income 13,137 13,899 14,848 15,402.59 17,007.04 18,633.73 19,906.70 21,232.82 23,338.70 24,916.11Less consolidated net income attributable to noncontrolling interest -406 -499 -513 (519.65) (556.08) (595.06) (636.78) (681.42) (729.18) (780.30)Consolidated net income attributable to Walmart 12,731 13,400 14,335 14,882.94 16,450.96 18,038.67 19,269.92 20,551.40 22,609.51 24,135.81

Retained earnings 10,402.58 11,498.57 12,608.32 13,468.91 14,364.62 15,803.15 16,869.97

ACTUAL FORECAST

Page 17 of 33

Exhibit 2: Balance sheet

Amounts in millions except per share data 2009 2010 2011 2012 2013 2014 2015 2016 2017 FACTORASSETSCurrent assets: Cash and cash equivalents $7,275 $7,907 8461.28 9054.42 9689.13 30363.34 46145.16 53509.71 60375.22 0.019521Receivables, net 3,905 4,144 4434.49 4745.35 5078 5433.97 5814.89 6222.51 6658.71 0.010231Inventories 34,511 33,160 35484.52 37971.98 40633.82 43482.25 46530.35 49792.13 53282.56 0.081867Prepaid expenses and other 3,063 2,980 3188.9 3412.44 3651.65 3907.63 4181.56 4474.68 4788.36 $0.01Current assets of discontinued operations 195 140 149.81 160.32 171.55 183.58 196.45 210.22 224.96 0.000346Total current assets 48,949 48,331 51719 55344.51 59224.15 83370.77 102868.41 114209.25 125329.81Property and equipment: Land 19,852 22,591 24174.63 25869.27 27682.71 29623.26 31699.86 33922.01 36299.95 0.055774Buildings and improvements 73,810 77,452 82881.39 88691.37 94908.64 101561.73 108681.21 116299.76 124452.37 0.191218Fixtures and equipment 29,851 35,450 37935.05 40594.29 43439.95 46485.09 49743.7 53230.73 56962.2 0.087521Transportation equipment 2,307 2,355 2520.09 2696.74 2885.79 3088.08 3304.55 3536.2 3784.09 0.005814Property and equipment 125,820 137,848 147511.14 157851.68 168917.08 180758.17 193429.31 206988.71 221498.62 0.340327 Less accumulated depreciation -32,964 -38,304 -45791.86 -53804.62 -62379.07 -71554.59 -81373.32 -91880.34 -103123.9Property and equipment, net 92,856 99,544 101,719 104,047 106,538 109,204 112,056 115,108 118,375 0.24576 Property under capital leases: Property under capital leases 5,341 5,669 6066.4 6491.65 6946.72 7433.68 7954.78 8512.41 9109.13 0.013996Less accumulated amortization -2,544 -2,906 -3213.94 -3543.46 -3896.08 -4273.42 -4677.22 -5109.32 -5571.71 -0.00717Property under capital leases, net 2,797 2,763 2852.46 2948.19 3050.64 3160.26 3277.56 3403.09 3537.42 0.006821Goodwill 15,260 16,126 17256.43 18466.11 19760.58 21145.8 22628.12 24214.35 25911.78 0.039813Other assets and deferred charges 3,567 3,942 4218.33 4514.04 4830.47 5169.09 5531.44 5919.2 6334.13 0.009732Total assets $163,429 $170,706 $177,766 $185,320 $193,404 $222,050 $246,362 $262,854 $279,488LIABILITIES AND EQUITYCurrent liabilities: Short-term borrowings $1,506 $523 559.66 598.89 640.88 685.8 733.88 785.32 840.37 0.001291 Accounts payable 28,849 30,451 31566.62 32905.87 36351.24 39929.97 42729.06 45724.37 48929.65 0.075179Accrued liabilities 18,112 18,734 20047.25 21452.57 22956.39 24565.63 26287.68 22792.45 10568.4 0.046252Accrued income taxes 677 1,365 1,129.72 1,900.50 2,682.06 3,294.22 3,932.00 4,943.66 5,702.20 0.00337Long-term debt due within one year 5,848 4,050 4549.91 4865.71 1151 8292.71 9976.99 20391.37 26022.67 0.009999Obligations under capital leases due within one year 315 346 370.25 396.21 423.98 453.7 485.51 519.54 555.96 0.000854Current liabilities of discontinued operations 83 92 98.45 105.35 112.74 120.64 129.1 138.14 147.83 0.000227Total current liabilities 55,390 55,561 58,322 62,225 64,318 77,343 84,274 95,295 92,767 0.137172 Long-term debt 31,349 33,231 26,519 18,020 10,706 12,113 14,331 3,147 4,525 0.082043Long-term obligations under capital leases 3,200 3,170 3392.22 3630.01 3884.48 4156.78 4448.17 4759.98 5093.66 0.007826Deferred income taxes and other 6,014 5,508 5894.11 6307.29 6749.43 7222.56 7728.87 8270.66 8850.43 0.013598Redeemable noncontrolling interest 397 307 307 307 307 307 307 307 307 0.000758Commitments and contingenciesEquity:

Preferred stock ($0.10 par value;100 shares authorized, none issued) 0 0 0Common stock ($0.10 par value;11,000 shares authorized, 3,786 and 3,925 issued and outstanding at January 31, 2010 and January 31, 2009, respectively) 393 378 378 378 378 378 378 378 378

Capital in excess of par value 3,920 3,803 3803 3803 3803 3803 3803 3803 3803Retained earnings 63,660 66,638 77,040.58 88,539.15 101,147.47 114,616.38 128,981.00 144,784.15 161,654.12 Accumulated other comprehensive loss -2,688 -70 -70 -70 -70 -70 -70 -70 -70Total Walmart shareholders’ equity 65,285 70,749 81,152 92,650 105,258 118,727 133,092 148,895 165,765Noncontrolling interest 1,794 2,180 2,180 2,180 2,180 2,180 2,180 2,180 2,180Total equity $67,079 $72,929 83,332 94,830 107,438 120,907 135,272 151,075 167,945Total liabilities and equity $163,429 $170,706 177,766 185,320 193,404 222,049 246,361 262,855 279,488

Page 18 of 33

Exhibit # 3 relationship between sales and cost of sales

Variables Entered/Removed(b)

Model

Variables

Entered

Variables

Removed Method

1 SALES(a) . Enter

a All requested variables entered.

b Dependent Variable: COS

Model Summary

Model R R Square

Adjusted

R Square

Std. Error of

the Estimate

1 1.000(a) 1.000 1.000 $810.87830

a Predictors: (Constant), SALES

ANOVA(b)

Model

Sum of

Squares df Mean Square F Sig.

1 Regression 14576786

076.1501

1457678607

6.150

22169.22

0.000(a)

Residual 5260188.

9958 657523.624

Total 14582046

265.1459

a Predictors: (Constant), SALES

b Dependent Variable: COS

Coefficients(a)

Model

Unstandardized

Coefficients

Standardized

Coefficients t Sig.

B Std. Error Beta B Std. Error

1 (Constant) 620.055 2307.137 .269 .795

SALES .755 .005 1.000 148.893 .000

a Dependent Variable: COS

Page 20 of 33

Exhibit # 4 relationship between sales and operating expenses

Variables Entered/Removed(b)

Model

Variables

Entered

Variables

Removed Method

1 SALES(a) . Enter

a All requested variables entered.

b Dependent Variable: OE

Model Summary

Model R R Square

Adjusted

R Square

Std. Error of

the Estimate

1 .998(a) .997 .996 $582.46809

a Predictors: (Constant), SALES

ANOVA(b)

Model

Sum of

Squares df Mean Square F Sig.

1 Regression 80330066

7.7921

803300667.7

922367.739 .000(a)

Residual 2714152.

5638 339269.070

Total 80601482

0.3559

a Predictors: (Constant), SALES

b Dependent Variable: OE

Coefficients(a)

Model

Unstandardized

Coefficients

Standardized

Coefficients t Sig.

B Std. Error Beta B Std. Error

1 (Constant) -559.771 1657.257 -.338 .744

SALES .177 .004 .998 48.659 .000

a Dependent Variable: OE

Page 21 of 33

Coefficients(a)

Model

Unstandardized

Coefficients

Standardized

Coefficients t Sig.

B Std. Error Beta B Std. Error

1 (Constant) -559.771 1657.257 -.338 .744

SALES .177 .004 .998 48.659 .000

a Dependent Variable: OE

Page 22 of 33

Exhibit # 5: MONTHLY RETURN OF

WALMART AND SP500

Variables Entered/Removed(b)

Model

Variables

Entered

Variables

Removed Method

1 SP500(a) . Enter

a All requested variables entered.

b Dependent Variable: WALMART

Model Summary

Model R R Square

Adjusted

R Square

Std. Error of

the Estimate

1 .353(a) .124 .109 $4.47559

a Predictors: (Constant), SP500

ANOVA(b)

Model

Sum of

Squares df Mean Square F Sig.

1 Regression 165.174 1 165.174 8.246 .006(a)

Residual 1161.793 58 20.031

Total 1326.967 59

a Predictors: (Constant), SP500

b Dependent Variable: WALMART

Coefficients(a)

Model

Unstandardized

Coefficients

Standardized

Coefficients t Sig.

B Std. Error Beta B Std. Error

1 (Constant) .214 .578 .370 .713

SP500 .324 .113 .353 2.872 .006

a Dependent Variable: WALMART

Page 23 of 33

Exhibit # 6: ANALYSIS OF RISK BASED ON THE STOCK PRICE OF WAL-MART AND S&P 500

Regression

Variables Entered/Removed(b)

Model

Variables

Entered

Variables

Removed Method

1 SP500ADJ

CLOSEPR

ICE(a)

. Enter

a All requested variables entered.

b Dependent Variable: WALMARTADJCLOSEPRIC

Model Summary

Model R R Square

Adjusted

R Square

Std. Error of

the Estimate

1 .934(a) .872 .872 7.21023

a Predictors: (Constant), SP500ADJCLOSEPRICE

ANOVA(b)

Model Sum of Squares df Mean Square F Sig.

1 Regression 162704.436 1 162704.436 3129.691 .000(a)

Residual 23862.205 459 51.987

Total 186566.641 460

a Predictors: (Constant), SP500ADJCLOSEPRICE

b Dependent Variable: WALMARTADJCLOSEPRIC

Coefficients(a)

Model

Unstandardized

Coefficients

Standardized

Coefficients t Sig.

B Std. Error Beta B Std. Error

1 (Constant) -5.231 .529 -9.880 .000

SP500ADJCLOSEPRI

CE.039 .001 .934 55.944 .000

a Dependent Variable: WALMARTADJCLOSEPRIC

Page 24 of 26

Exhibit 7: COMPUTATION OF DIVIDEND AND RETAINED EARNINGS

  2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Earnings

12,73

1

13,40

0

14,33

5

14,88

3

16,45

1

18,03

9

19,27

0

20,55

1

22,61

0

24,13

6

Dividend 3586 3746 4217 4,465 4,935 5,412 5,781 6,165 6,783 7,241

Retained

earning 8985 9183

10,11

8 10418 11516 12627 13489 14386 15827 16895

Exhibit 8: COMPUTATION OF RETENTION PERCENTAGE

  2008 2009 2010

Earnings 12,731 13,400 14,335

Dividend 3586 3746 4217

retained earning 8985 9183 10,118

       

Retention percentage 71% 69% 71%  

AVERAGE       70%

Exhibit 9: The working for capital structure is as follows

  2009 2010

Total current liabilities 55390 55561

Long-term debt 31,349 33,231

Long-term obligations under capital leases 3,200 3,170

Redeemable non controlling interest 397 307

Total debt 90,336 92,269

Total equity $67,079 $72,929

Total debt and equity 157,415 165,198

Total debt to total of debt and equity 0.57 0.56

Average of the two years   0.57

Page 25 of 26

Exhibit 10: The computation of effective tax rate is as follows:

2008 2009 2010

Averag

e

Income from continuing operations before income taxes 20,158 20,898 22,066

Tax expenses 6,889 7,145 7,139

Tax rate 0.34 0.34 0.32 0.33

Page 26 of 26

Exhibit 11: Scenario Analysis: sales growth

Scenario Analysis: sales growth

Prob: 2010 2011 2012 2013 2014 2015 2016 2017 WACC NPV Deviation Sqrd dev Sqrd*probPredicted Free Cash Flows for Alternative Scenarios

50% 10,985.13 14,212.22 15,238.15 18,195.62 (762.72) 4,356.11 8,699.52 175,143.94 0.04 197,813.87 55,981.61 3,133,940,907.28 1,566,970,453.64

7.01% 40% 10,985.13 13,305.11 14,383.21 17,403.72 (1,479.46) 3,728.02 8,174.90 33,265.66 0.04 86,087.85 (55,744.41) 3,107,439,499.95 1,242,975,799.98

10% 10,985.13 13,221.54 14,303.78 17,329.43 (1,547.58) 3,667.37 8,123.08 32,190.37 0.04 84,901.85 (56,930.41) 3,241,071,812.93 324,107,181.29Expected NPV = 141,832.26 Variance = 3,134,053,434.92

Standard Deviation (SD) = 55,982.62 σ = 55,982.62Coefficient of Variation (CV) = Std. Dev./Expected NPV = 0.39

1

Exhibit 12: Decision tree with multiple decision points

Decision Tree with Multiple Decision Points WACC = 4.0%

k 5.0%

retention % 70.0%

2012 2013 2014 2015 2016 2017 WACC = #REF! Product: NPV Calculating σ step-by-step

2010 Prob. Earning earning earning earning earning earning earning Prob. earning NPV NPV Joint Prob x Joint Prob Deviation Sqrd dev Sqrd*prob

0.35 27,777.24 (486,101.65) -$247,784 16% (39,025.95) (272,643.84) 74,334,663,794.86 11,707,709,547.69

45% 15,625.15 17,031.41 18,564.24 20,235.02 22,056.17 24,041.23 26,204.94 0.45 27,253.14 476,929.92 $484,041 20% 98,018.31 (135,599.58) 18,387,246,002.09 3,723,417,315.42

0.20 26,991.09 157,448.02 $241,261 9% 21,713.50 (211,904.40) 44,903,473,493.42 4,041,312,614.41

$14,335 30% 14,767.70 16,205.19 17,733.38 18,798.84 19,894.28 21,744.12 23,037.79 24,420.06 213,675.53 $274,436 30% 82,330.67 (151,287.22) 22,887,823,996.32 6,866,347,198.90

0.35 20,977.62 367,108.28 $383,252 9% 33,534.52 (200,083.37) 40,033,355,862.35 3,502,918,637.96

25% 15,051.75 15,804.34 16,594.55 17,424.28 18,295.50 19,210.27 20,170.78 0.45 20,775.91 181,789.20 $242,424 11% 27,272.74 (206,345.15) 42,578,320,460.80 4,790,061,051.84

0.20 20,574.20 120,016.17 $195,482 5% 9,774.10 (223,843.79) 50,106,044,309.48 2,505,302,215.47

Expected NPV = 233,617.89

Standard Deviation (SD) = 192,709.80 Sum = variance 37,137,068,581.69

Coefficient of Variation (CV) = Std Dev/Expected NPV = 0.82 Sq root of Var = σ 192,709.80

Time Periods, Earnings, Probabilities, and Decision Points

2011 2018 in perpetutiy

1

2

2

Page 27 of 26

Exhibit 13: Scenario analysis: Change in dividend payout percentage

Dividend pay out % Prob 2010 2011 2012 2013 2014 2015 2016 2017 2017 WACC NPV Deviation Sqrd dev Sqrd*prob

BEST 0.4 0.3 5,622.67 5,907.60 6,481.58 7,093.83 7,519.79 7,957.70 8,697.49 9,215.72 949,219.54 0.04 $766,153.75 172,384.59 29,716,448,264.13 8,914,934,479.24

BASE 0.3 0.5 4,217.00 4,430.70 4,861.19 5,320.38 5,639.84 5,968.28 6,523.12 6,911.79 711,914.65 0.04 $574,615.31 -19,153.84 366,869,731.66 183,434,865.83

WORST 0.2 0.2 2,811.33 2,953.80 3,240.79 3,546.92 3,759.90 3,978.85 4,348.75 4,607.86 474,609.77 0.04 $383,076.88 -210,692.28 44,391,237,530.36 8,878,247,506.07

Expected NPV = $593,769.16Standard Deviation (SD) = 134076.91 Sum = variance 17,976,616,851.14

Coefficient of Variation (CV) = Std. Dev./Expected NPV = $0.23 Sq root of Var = σ 134,076.91

Page 28 of 26

8. REFERENCE

Ehrhardt. M.C. and Brigham. E.F. 2011, 2009. ‘Corporate Finance: A Focused Approach’, 4th ed.,

Ohio: South-Western Cengage Learning.

http://en.wikipedia.org/wiki/Valuation (finance), viewed on July 17, 2011)

http://www.bloomberg.com/markets/

www.finance.yahoo.com viewed on July 15, 2011

http://www.answers.com/topic/discounted-cash-flow viewed on 27 July 2011).

http://www.investorwords.com/1618/earnings.html

http://thismatter.com/money/stocks/valuation/book-liquidation-value-q-ratio.htm

http://www.rmmag.com/Magazine/PrintTemplate.cfm?AID=2209(http://www.advfn.com/p.php?

pid=financials&symbol=NYSE%3AWMT

Page 29 of 26