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Chapter 11
Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
11-10
in whole or in part.
The equation presented in this chapter for computing weighted-average cost
of capital is as follows.
Using this equation, Walmart’s weighted average cost of capital at the end of
2012 is computed as follows:
c. The projected value-relevant dividends for Walmart for Years +1 through +5
are straightforward to derive using the projected comprehensive income and
as follows:
Year +1 Year +2 Year +3 Year +4 Year +5
Comp. Income $17,666 $18,416 $19,195 $20,007 $20,851
D
T+1 = [CIT × (1 + g)] + BVT – [BVT × (1 + g)]
million.
f. The data in Exhibit 11.A show that the present value at the start of Year +1 of
the continuing dividends in Years +6 and beyond amounts to $206,038.0
million.
Chapter 11
11-11
in whole or in part.
(2) After adjusting the sum of the present value using the mid-year
h. The data in Exhibit 11.B show the results of various sensitivity analysis
scenarios, varying discount rates and growth rates.
Scenario 1: Assuming that Walmart’s long-run growth will be 2%, not 3% as
Scenario 2: Assuming that Walmart’s long-run growth will be 4%, not 3% as
i. At the start of Year +1, Walmart’s share price was $69.09. The baseline share
Walmart shares are undervalued at roughly $69 and, therefore, would
recommend a buy.
Chapter 11
Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
11-12
in whole or in part.
Exhibit 11.A
Dividends Valuation for Walmart
(Problem 11.14)
Continuing
1 2 3 4 5 Value
Dividends-Based Valuation Year +1 Year +2 Year +3 Year +4 Year +5 Year +6
Dividends Paid to Common Shareholders 15,019.7 17,017.3 18,284.7 19,728.0 21,204.2
Less: Common Stock Issues –211.3 –119.0 –109.2 –99.5 –90.0
Plus: Common Stock Repurchases 0.0 0.0 0.0 0.0 0.0
Dividends to Common Equity 14,808.4 16,898.3 18,175.4 19,628.4 21,114.3 19,020.90
Chapter 11
Risk-Adjusted Expected Rates of Return and the Dividends Valuation Approach
11-13
in whole or in part.
Exhibit 11.B
Sensitivity Analysis of Dividends Valuation for Walmart
(Problem 11.14)
Dividends Valuation Sensitivity Analysis:
Long-Run Growth Assumptions
86.88 0% 2% 3% 4% 5% 6% 8% 10%
Discount 5% 125.13 182.65 254.55 470.24
Rates: 6% 104.21 137.48 170.75 237.29 436.92
7% 89.27 110.37 128.83 159.60 221.13 405.74
8% 78.08 92.29 103.66 120.72 149.15 206.00
9% 69.39 79.38 86.88 97.37 113.11 139.34 349.21
Chapter 11
11-14
in whole or in part.
Integrative Case 11.1: Starbucks
available for download by instructors (not students) from the book’s website for
through +5. This portion of the Starbucks Integrative Case applies the techniques in
investment recommendation.
The case data indicate that the market equity beta for Starbucks at the end of 2012
+1, Starbucks’ share price was $50.15.
Required
amounts and proportions:
Amount Weight
capital is as follows.
Chapter 11
11-15
in whole or in part.
computed as follows:
R
c. The projected amounts of dividends for Starbucks for Years +1 through +5 are
Year +1 Year +2 Year +3 Year +4 Year +5
dividends can be determined using clean surplus, as follows:
Year +1 Year +2 Year +3 Year +4 Year +5
D
T+1 = [CIT × (1 + g)] + BVT – [BVT × (1 + g)]
Chapter 11
11-16
in whole or in part.
f. The data in Exhibit 11.C show that the present value at the start of Year +1 of the
continuing dividends in Years +6 and beyond amounts to $41,201.0 million.
g. The data in Exhibit 11.C show the following computations:
(2) After adjusting the sum of the present value using the mid-year discounting
h. The data in Exhibit 11.D show the results of various sensitivity analysis scenarios,
varying discount rates and growth rates.
Scenario 1: Assuming that Starbucks’ long-run growth will be 2%, not 3% as
Scenario 2: Assuming that Starbucks’ long-run growth will be 4%, not 3% as
above, and that Starbucks’ required rate of return on equity is 1 percentage point
lower than the rate computed using the CAPM in Requirement a (that is, 6.50%),
the resulting share value estimate increases dramatically to $91.66 per share.
current share price falls in the lower end of the value estimate range. Students
would conclude that Starbucks shares are slightly under priced at roughly $50 per
share and, therefore, would recommend a buy (not a strong buy).
Chapter 11
11-17
in whole or in part.
Exhibit 11.C
Dividends Valuation for Starbucks
(Integrative Case 11.1)
Continuing
1 2 3 4 5 Value
Dividends-Based Valuation Year +1 Year +2 Year +3 Year +4 Year +5 Year +6
Dividends Paid to Common Shareholders 582.2 663.5 754.2 852.0 1,062.4
Less: Common Stock Issues –4.1 –5.5 –5.8 –6.0 –8.6
Chapter 11
11-18
in whole or in part.
Exhibit 11.D
Sensitivity Analysis of Dividends Valuation for Starbucks
(Integrative Case 11.1)
Dividends Valuation Sensitivity Analysis:
Long-Run Growth Assumptions
63.55 0% 2% 3% 4% 5% 6% 8% 10%
Discount 5% 68.44 104.48 149.53 284.68
Rates: 6% 55.89 76.88 97.87 139.84 265.78
6.5% 51.08 67.70 83.14 110.92 175.75 499.87
