Question

Walmart corp. has just distributed 3$ dividend to the shareholders. Market experts beleive that the company will grow by 10% in one year and then shrink by 5% for two consecutive years. After that, experts beleive that the company will be growing consistently by 5%. Based on these expectations, what should be the current value of a Walmart stock? (Required return = 13%)

Answer 1

Year 1 dividend = 3 (1 + 10%) = 3.3

Year 2 dividend = 3.3 (1 - 5%) = 3.135

Year 3 dividend = 3.135 (1 - 5%) = 2.97825

Year 4 dividend = 2.97825 (1 + 5%) = 3.127163

Value at year 3 = D4 / required rate - growth rate

Value at year 3 = 3.127163 / 0.13 - 0.05

Value at year 3 = 3.127163 / 0.08

Value at year 3 = 39.089538

Current value = Present value of cash flows

Current value = 3.3 / (1 + 0.13)^1 + 3.135 / (1 + 0.13)^2 + 2.97825 / (1 + 0.13)^3 + 39.089538 / (1 + 0.13)^3

Current value = $34.53