Question

Estimating Share Value Using the DCF Model
Following are forecasts of sales, net operating profit after tax (NOPAT), and net operating assets (NOA) as of January 31, 2016, for Wal-Mart Stores, Inc.

	Reported	Horizon Period
$ millions	2016	2017	2018	2019	2020	Terminal Period
Sales	$482,130	$486,951	$491,821	$496,739	$501,706	$506,723
NOPAT	16,634	17,043	17,214	17,386	17,560	17,735
NOA	124,940	126,186	127,448	128,722	130,009	131,309

Answer the following requirements assuming a discount rate (WACC) of 7%, a terminal period growth rate of 1%, common shares outstanding of 3,144 million, net nonoperating obligations (NNO) of $41,329 million, and noncontrolling interest (NCI) on the balance sheet of $3,065 million.
(a) Estimate the value of a share of Wal-Mart's common stock using the discounted cash flow (DCF) model as of January 31, 2016.

Rounding Instructions:

• Round your answer to the nearest whole number except for the discount factors and the stock price per share.

• Round the discount factors to five decimal places and the stock price to two decimal places.

• Use your rounded answers for subsequent calculations.

Do not use negative signs with any of your answers below.

	Reported	Forecast Horizon
WMT ($ millions)	2016	2017	2018	2019	2020	Terminal Period
Increase in NOA		Answer	Answer	Answer	Answer	Answer
FCFF (NOPAT - Increase in NOA)		Answer	Answer	Answer	Answer	Answer
Discount factor [1/(1+rw)t]	(round 5 decimal places)	Answer	Answer	Answer	Answer
Present value of horizon FCFF		Answer	Answer	Answer	Answer
Cumulative present value of horizon FCFF	Answer
Present value of terminal FCFF	Answer
Total firm value	Answer
NNO	Answer
NCI	Answer
Firm equity value	Answer
Shares outstanding (millions)	Answer
Stock price per share	Answer	(round two decimal places)

(b)Wal-Mart (WMT) stock closed at $68.80 on March 30, 2016, the date the 10-K was filed with the SEC. How does your valuation estimate compare with this closing price? What do you believe are some reasons for the difference?

Stock prices are a function of many factors. It is impossible to speculate on the reasons for the difference.

Our stock price estimate is slightly higher than the WMT market price, indicating that we believe that WMT stock is slightly undervalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our higher stock price estimate might be due to more optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is slightly higher than the WMT market price, indicating that we believe that WMT stock is slightly undervalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our higher stock price estimate might be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

Our stock price estimate is slightly higher than the WMT market price, indicating that we believe that WMT stock is slightly overvalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our higher stock price estimate might be due to more pessimistic forecasts or a higher discount rate compared to other investors' and analysts' model assumptions.

Answer 1

	Reported	Forecast Horizon
WMT	2016	2017	2018	2019	2020	Terminal
($ millions)						Period
Increase in NOA		1,246	1,262	1,274	1,287	1,300
FCFF (NOPAT - Increase in NOA)		15,797	15,952	16,112	16,273	16,435
Discount factor [1/(1+rw)t]	(round 5 decimal places)	0.93458	0.87344	0.81630	0.76290
Present value of horizon FCFF		14,764	13,933	13,152	12,415
Cumulative present value of horizon FCFF	54,263
Present value of terminal FCFF	208,970	Calculated as = 16435 / (7% - 1%) x 0.7629
Total firm value	263,233	A
NNO	41,329	B
NCI	3,065	C
Firm equity value	218,839	D = A - B - C
Shares outstanding (millions)	3,144	N
Stock price per share	69.61	D/N

Part (b)

Stock prices are a function of many factors. It is impossible to speculate on the reasons for the difference.

The correct answer is the first option i.e

Our stock price estimate is slightly higher than the WMT market price, indicating that we believe that WMT stock is slightly undervalued. Stock prices are a function of expected NOPAT and NOA, as well as the WACC discount rate. Our higher stock price estimate might be due to more optimistic forecasts or a lower discount rate compared to other investors' and analysts' model assumptions.