Course- Investments ( Textbook- Bodie, Z., Kane, A., & Marcus, A. J. (2018). Inv
ID: 2334675 • Letter: C
Question
Course- Investments ( Textbook-
Bodie, Z., Kane, A., & Marcus, A. J. (2018). Investments(11th ed). New York, NY: McGraw-Hill Education.
ISBN: 978-1-259-27717-7)
Write a one page memo with your effort at valuation of the company Walmart (value the stock):
Use at least two valuation methods to quantify the firm’s estimated stock value. You may
use any of the methods described in Chapter 18 of the textbook (DCF, DDM,
Comparables (PE ratios, EV/EBITDA, PEG).
Point out key assumptions used in your valuations.
Point out factors that may affect the accuracy of your valuations.
The stated one-page maximum applies to text. Supporting material (figures, calculations,
etc.) may be attached as appendices.
Explanation / Answer
Valuation is a process of finding out true worth of any business. Valuation of a company is a comples task as the life of the company is infinite. Valuation is a most complex term used in finance as it changes from person to person, from time to time and from place to place. There are various methods of valuation of business such as Diviend Yield Valuation Method, Earning Yield Method, Valuation as per Future Maintainable Profit, etc.
The basic purpose of any enterprise is to earn profits in order to sustain itself and promote growth. Management across the world endeavor in this aspect be it be a sole proprietorship concern or a multinational giant having its foothold across geographies. Company Valuation can be traced back to centuries ago when the United East India Company was the first corporation to be valued and as IPO was launched.
It is obvious that the more an enterprise grows, the more the number of stakeholders it adds in its progress to growth. Presentation of annual financial statements in the annual body meeting, publishing quaterly results for the street all these became the staple diet for stakeholders whow sow the seeds of capital in the enterprise and in turn wait for the enterprise to multiply its progressive potentials.
Two Methods of Company Valuation:
1. Dividend Yield Valuation Model: Dividend Yield = Dividend Per Share / Market Price Share
2. Discounted Cash Flow Approach: Under this approach, we calculate value of business by discounting future cash flows. Free Cash flows means those cash flows which are free from all restrictions. In this method, we project future revenues, expenditures and capital requirements and then find the discount rate to be used for valuing company.
Assumptions: 1. We have to assume some discount rate to discount the cash flows.
2. Growth rate in future has to be assumed.
3. Company will go on forever.
Suppose if the assumption changes, then the value of the company will change automatically. So while doing valuation we also do sensitivity analysis i.e. we take optimistic and pesimmistic assumption if they occur, then what will be the value of the company.