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

Last Dividend, D0 = $3.00

Growth rate for year 1 is 10%, for year 2 is 5%, for year 3 is 0% and a constant growth rate (g) of 5% thereafter

D1 = $3.0000 * 1.10 = $3.3000
D2 = $3.3000 * 1.05 = $3.4650
D3 = $3.4650 * 1.00 = $3.4650
D4 = $3.4650 * 1.05 = $3.63825

Required Return, rs = 13%

P3 = D4 / (rs - g)
P3 = $3.63825 / (0.13 - 0.05)
P3 = $3.63825 / 0.08
P3 = $45.478125

P0 = $3.30/1.13 + $3.465/1.13^2 + $3.465/1.13^3 + $45.478125/1.13^3
P0 = $39.55

Therefore, current value of a Walmart stock is $39.55