Question

The average price-dividend ratio of firms that run grocery stores is 40, based on the current price and the dividend just paid. I believe that this is the appropriate P/D ratio for Walmart (WMT). WMT's earnings, just announced, are $4 per share, and it reinvests 60% of earnings. What should the price of a share in WMT be? (A) $64 (B) $80 (C) $96 (D) $160

Answer 1

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Correct Answer: Option (A) $ 64

Working:

Parameters provided in the question,

Price / Dividend ration = 40

Walmart earnings per share = $ 4

Walmart retention ratio of earnings = 60 %

Now,

Dividend paid per share = (1- retention ratio ) X Earnings per share

Dividend paid per share = (1-0.6) X 4 = 0.4 X 4

Thus dividend per share = 1.6

Now finding the price per share of Walmart using P/D ratio

Let the price of Walmart share be P-WMT

Price/dividend ratio = P-WMT / Dividend per share

=> 40 = P-WMT / 1.6

=> P-WMT = 40 X 1.6 = $ 64

Thus price per share of Walmart is $ 64