Project WalMart Paper - Walmart has a very uncertain price...

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Walmart has a very uncertain price range at the moment. In order to understand why this is so, one must understand what was done in order to deduce this. We first began with estimating a more current risk free rate. The best way to do this was to find the geometric average of the U.S T-bills over the past 13 years, doing this left us with a risk free rate of 3.76%, slightly larger than that found in the example in class. After finding that, we decided to estimate a more recent return on the market. Unfortunately there is no column on the value line that states what the current return on market is, so we opted to take the geometric average of the past 5 years on Walmart's returns. The interesting thing we discovered was that the average of these returns was 20%, which was pretty much equal to the returns Walmart has had over the past year. This shows that Walmart hasn't been fluctuating much return-wise however and still offers a very stable and strong return for an investor's dollar We next went on to find the expected return of Walmart, and after doing so we managed to find out the sustainable growth rate. With this information we were able to make our first intrinsic value analysis via the Gordon Model. What we discovered was somewhat shocking to us, not only is the Walmart stock currently undervalued, but its only about 61% of what it should be valued. Right now the current Walmart stock value is $48.79 per share, however, according to our calculations it should be more around $79.67 per share. This vast price difference had us wondering why the price of Walmart is so undervalued according to the Gordon model. And while we cant offer a definite answer, we have a theory; our belief is that the reason it is so undervalued according to the Gordon model could be because the dividends that Walmart distributes are very inconsistent from one year to the next. We thought that the reason the stock price was so undervalued may not be that it actually is overvalued, but was simply a limitation of the Gordon model's abilities to accurately value a stock. We will learn later on however, that it was not only the Gordon model that suffers from this phenomenon. After finishing up with the constant perpetual growth Gordon model, we opted to calculate the
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This note was uploaded on 09/08/2010 for the course BUS 172A at San Jose State University .

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Project WalMart Paper - Walmart has a very uncertain price...

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