To test the assumption of a discount rate of 7% as given in the outline of the case, we calculated the required rate of return for the Wal-Mart stock using CAPM . Using rWalMart = Rf + βWalMart [E(RM) – RF], we find the required rate of return to be 7.01% and in line with the information given in the case outline. Perpetual dividend growth model:
The standard method of calculating a stock price using the perpetual dividend growth model is done by assessing a company’s dividend one year into the future adding the future expected growth rate. The formula is written as: P0 = D1/(Ke − g), where Ke is the investor required return, D1 is next year’s dividend and g is the expected …show more content…
Price/Earnings multiple approach:
The debate on whether to use trailing or projected price/earnings multiple is ongoing. We have found evidence in literature that there is no clear preference on which method to use as both have advantages and disadvantages . We have no strong view or preference generally speaking, but in the case of Wal-Mart we believe there is a case for use trialing data rather than projected data. For reference we have calculated both using P0 = EPS * P/E .
We see the range of estimates is very wide,