Holly, Thiru, Tomass, Vanessa

Company overview

Walmart opened its first store in 1962 by its founder Sam
Walton and is now the largest retailer in the US.
It is a chain of retail stores offering a range of different
products such as groceries, pharmaceuticals, health and beauty
and general merchandise.
It is a public company however its still a family run business as
the Walton family own over 50% of the company



Total stores 11,003
USA 4,868
International 6,135
Walmart operates in
26 countries outside
of US. Its
international arm is
the fastest growing
part of the business.
Company overview
Past Company Performance
Year Revenue EBIT Net Income EPS Tax Rate
Jan-09 404,254.00 22,767.00 13,381.00 3.39 34%
Jan-10 408,085.00 24,002.00 14,370.00 3.71 34%
Jan-11 421,849.00 25,542.00 16,389.00 4.47 32%
Jan-12 446,509.00 26,491.00 15,699.00 4.52 32%
Jan-13 468,651.00 27,725.00 16,999.00 5.02 33%
Jan-14 476,294.00 26,872.00 16,022.00 4.88 31%

Growth Rate 3.33% 3.37% 3.67% 7.56%
The past revenues show that Walmart has positive earnings and show an
increasing trend over the past 6 years, with a revenue growth rate of 3.33%

The growth rate is calculated using the compound annual growth rate (CAGR)
Past Company Performance
360,000.00
380,000.00
400,000.00
420,000.00
440,000.00
460,000.00
480,000.00
500,000.00
Walmart Revenue $m
Walmart Revenue $m
The revenue values show that
Walmart has been a stable company.
This positive revenue growth is likely
to continue in the foreseeable future
because Walmart is the market leader
and this is unlikely to change in the
next few years.
Approach to valuation
The method used to value Walmart is the discounted cash flow
method, with the cash flows being defined as free cash flows.
Value of Walmart = PV(free cash flows)


Walmart share price as at 3 July 2014
Source: Marketwatch
WACC
Calculation of firms cost of capital with proportional
weighting
Defined as: WACC = E/V * R
E

+ D/V * R
D
* (1-T
C
)
Shows interest needed to be paid pr. financed dollar and thus
also the overall required return for the firm
This is the rate used for discounting the free cash flows
Debt and equity ratios
E/V = 0.83 D/V = 0.17

D = Book value of debt
= 49,441

E = Market value of shareholders equity
= 75.69*3,230
= 244,479

V = D + E
= 293,920
1. Cost of equity = E(r) = r
f
+ (r
m
r
f
)
= 0.04 + 0.37 (0.11 0.04) = 6.6%
Risk free rate = r
f
= 4%
Source: 3,5-3,6% using 20 year T-Bill
Expected market return = E(r) = 11%
Source: Average return on stock market
Beta of the security = 0.37
Source: Yahoo Finance key statistics



Calculating WACC components
Cost of equity
Calculating WACC components
Cost of debt
2. Cost of debt = interest expense / total debt
= 5%





3. Corporate tax rate = earnings before tax / income taxes
= 32.87%

Jan-14
Debt interest expense 2072.00
Long-term debt 41771.00
Cost of debt 0.05
Jan-14
Earnings before tax 24,656.0
Income Taxes 8,105.0
Tax Rate 0.32872
Calculating Walmart WACC
WACC = E/V * R
E

+ D/V * R
D
* (1-T
C
)
= 0.83*0.066 + 0.17*0.05 (1-0.3287)
= 0.0605
= 6.05%


How to compute free cash flows
Free cash flow:
Cash flows which are produced by operations
Available for distribution to capital providers without impacting
sustainability of business & growth
To obtain free cash flows, two adjustments are made to the net
operating cash flows
1. Reinvestment into the business (long-term assets)
2. Payments to capital providers (interest payments)


Free cash flows
Operating cash flows
Operating activities 12 months ended
In Millions, USD Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09
Net income
16,551.0 17,704.0 16,408.0 15,959.0 14,962.0 13,734.0
Adjustments to reconcile net
income to OCF

Depreciation and amortization
8,870.0 8,478.0 8,106.0 7,641.0 7,157.0 6,739.0
Deferred income taxes
-279.0 -133.0 1,050.0 651.0 -504.0 581.0
Other
938.0 602.0 468.0 1,087.0 318.0 752.0
Changes in operating assets
and liabilities:

Accounts receivable
-566.0 -614.0 -796.0 -733.0 -297.0 -101.0
Inventories
-1,667.0 -2,759.0 -3,727.0 -3,086.0 2,213.0 -184.0
Accounts payable
531.0 1,061.0 2,687.0 2,557.0 1,052.0 -410.0
Accrued liabilities
103.0 271.0 -935.0 -433.0 1,348.0 2,036.0
Accrued income taxes
-1,224.0 981.0 994.0 0.0 0.0 0.0
Net cash provided by
operating activities
23,257.0 25,591.0 24,255.0 23,643.0 26,249.0 23,147.0
Source: Walmart 2014 Annual Report and Walmart 2011 Annual Report
Investing activities Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09 Average
Payments for property
and equipment
-13,115.0 -12,898.0 -13,510.0 -12,699.0 -12,184.0 -11,499.0 -12,650.8
Proceeds from disposal
of property and
equipment
727.0 532.0 580.0 489.0 1,002.0 714.0 674.0
Proceeds from disposal
of certain international
operations, net
0.0 0.0 0.0 0.0 0.0 838.0 139.7
Investments and business
acquisitions, net of cash
acquired
-15.0 -316.0 -3,548.0 -202.0 0.0 -1,576.0 -942.8
Other investing activities 105.0 71.0 -131.0 219.0 -438.0 781.0 101.2
Net cash provided by
investing activities
-12,298.0 -12,611.0 -16,609.0 -12,193.0 -11,620.0 -10,742.0 -12,678.8
Source: Walmart 2014 Annual Report and Walmart 2011 Annual Report
Free cash flows
Investing cash flows
Investing activities Average Explanation
Payments for property and
equipment
-12,650.8 Payments for property and equipment are related to business
investment.
Proceeds from disposal of
property and equipment
674.0 Proceeds from disposal of property and equipment are positive
cash inflows. They will be net against payments for long-term
assets.
Proceeds from disposal of
international operations,
net
139.7 Proceeds from disposal of international operations only occurred
once in the last 6 years, in 2009. It is uncertain when such an
inflow will occur again in the future. However the average amount
over the past 6 years is immaterial. Therefore the cash inflow will
be net against expenditure on long-term assets.
Investments and business
acquisitions, net
-942.8 Payments for investments and business acquisitions are related to
business investment.
Other investing activities

101.2 It is uncertain whether other investing activities concern business
reinvestment activities. However as they are not material values
(average: 101.2/12,678.8 = 0.008) it will assumed that they relate
to capital expenditure.
Net cash provided by
investing activities
-12,678.8 An average of the reinvestment costs over the last 6 years will be
used to smoothen out fluctuations. This gives an adjustment of -
12,678.8 to the operating cash flows.

1. Adjustment
Reinvestment in business
Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09
Debt interest expense 2,072.0 1,977.0 2,034.0 1,928.0 1,787.0 1,896.0
Capital lease obligations 263.0 272.0 286.0 277.0 278.0 288.0
Total interest expense 2,335.0 2,249.0 2,320.0 2,205.0 2,065.0 2,184.0
Interest income -119.0 -186.0 -161.0 -201.0 -181.0 -284.0
Net interest expense 2,216.0 2,063.0 2,159.0 2,004.0 1,884.0 1,900.0
Earnings before tax 24,656.0 25,662.0 24,332.0 23,538.0 22,118.0 20,867.0
Income taxes 8,105.0 7,958.0 7,924.0 7,579.0 7,156.0 7,133.0
Tax rate 0.3 0.3 0.3 0.3 0.3 0.3
After-tax interest expense 1,487.5 1,423.2 1,455.9 1,358.7 1,274.5 1,250.5
Example: calculation of Jan-14 tax rate
Tax rate = 8,105/24,656
= 0.3287

Example: calculation of Jan-14 after-tax interest expense
After-tax interest expense = 2,216*(1-0.3)
= 1,487.5
Source: Walmart 2014 Annual Report and Walmart 2011 Annual Report
2. Adjustment
Payment to capital providers
Calculation of free cash flows Jan-14 Jan-13 Jan-12 Jan-11 Jan-10 Jan-09
Operating CF: as reported 23,257.0 25,591.0 24,255.0 23,643.0 26,249.0 23,147.0
Average reinvestment -12,678.8 -12,678.8 -12,678.8 -12,678.8 -12,678.8 -12,678.8
After-tax interest expense 1,487.5 1,423.2 1,455.9 1,358.7 1,274.5 1,250.5
Free cash flows 12,065.7 14,335.4 13,032.1 12,322.9 14,844.6 11,718.7
Example: calculation of Jan-14 free cash flows
Free cash flow = OCF average reinvestment + after-tax interest expense
= 23,257 12,678.8 + 1,487.5
= 12,065.7
Free cash flow calculation
Long Term Growth Rate
2.64% as of 2
nd
July 2014
Source: http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/TextView.aspx?data=yield
Short-Term Growth Rate
Year Ending FCF
Jan-09 11,719
Jan-10 14,845
Jan-11 12,323
Jan-12 13,032
Jan-13 14,335
Jan-14 12,066
FCF has declined in
Jan 2014 because of
investing activities
carried out by Walmart

FCF is computed after
deducting Investing
activities from Net
Income to get FCF

Net Income Growth
Rate is a better
indicator of the
Walmarts Short Term
Growth Rate.
Short-Term Growth Rate = Net Income Growth Rate = 3.67%
Enterprise Value
The Present Value of the firms future anticipated free cash flows
A measure of a company's value, often used as an alternative to
straightforward market capitalization
Enterprise value is calculated as market cap plus debt, minority interest


Taken from the Jan 2014 FCF
Long Term Growth Rate is
obtained from the US Dept of
Treasury (10 Year)
Constant Growth Model
Constant Growth Model

FCF 0 12,066
Growth Rate 2.64%
FCF 1 12384.3

WACC 6.05%

Constant Growth Model 363,175

Debt 49,441
Equity Value 313,734
Total Enterprise Value = $377,269,000,000
2- Stage Model
The FCF Growth Rate from Year 1 till 4
is 3.67% ( Net Income Growth Rate)
Net Income
Jan 09 13,381.00
Jan 10 14,370.00
Jan 11 16,389.00
Jan 12 15,699.00
Jan 13 16,999.00
Jan 14 16,022.00

Net Income Growth Rate = 3.67%
2-Stage Model
Year FCF Growth FCF TV
0 12,065.7
1 3.67% 12,508.5
2 3.67% 12,967.6
3 3.67% 13,443.5
4 3.67% 13,936.9 419,496
5 2.64% 14,304.8

PV(FCF1 - FCF4) 45,615.1
PV(TV) 331,653.9

Total Enterprise Value 377,269
Debt 49,441
Equity Value 327,828
Conclusion
The valuations from the constant-growth model and the 2-
stage model were $363,175 M and $377,269 M respectively.
This is higher than the current enterprise value ($293,320 M)
as estimated by Yahoo Finance.
This is probably due to the fact that the short-term growth
rate of Walmarts free cash flows was estimated to exceed
the U.S. inflation rate.