Question

1. Suppose that Wal-Mart Stores, Inc. anticipates that profits over the next six years to be as follows:

Year	Expected Profits (Millions)
2020	$12,200
2021	$14,300
2022	$14,000
2023	$15,600
2024	$17,400
2025	$21,200

1. Calculate the value of Wal-Mart Stores, Inc. today. Assume the discount ratio to be three percent.
2. Repeat (a), except assume the discount rate to be five percent.
3. Compare your answers from (a) and (b). Can you draw any conclusions about the value of the firm and the discount rate?

Answer 1

ANSWER:

A) I = 3%

Pw = profits in 2020(p/f,i,n) + profits in 2021(p/f,i,n) + profits in 2022(p/f,i,n) + profits in 2023(p/f,i,n) + profits in 2024(p/f,i,n) + profits in 2025(p/f,i,n)

pw = 12,200(p/f,3%,1) + 14,300(p/f,3%,2) + 14,000(p/f,3%,3) + 15,600(p/f,3%,4) + 17,400(p/f,3%,5) + 21,200(p/f,3%,6)

pw = 12,200 * 0.9709 + 14,300 * 0.9426 + 14,000 * 0.9151 + 15,600 * 0.8885 + 17,400 * 0.8626 + 21,200 * 0.8375

pw = 11,844.66 + 13,479.12 + 12,811.98 + 13,860.40 + 15,009.39 + 17,754.67

pw = 84,760.22

B) I = 5%

Pw = profits in 2020(p/f,i,n) + profits in 2021(p/f,i,n) + profits in 2022(p/f,i,n) + profits in 2023(p/f,i,n) + profits in 2024(p/f,i,n) + profits in 2025(p/f,i,n)

pw = 12,200(p/f,5%,1) + 14,300(p/f,5%,2) + 14,000(p/f,5%,3) + 15,600(p/f,5%,4) + 17,400(p/f,5%,5) + 21,200(p/f,5%,6)

pw = 12,200 * 0.9524 + 14,300 * 0.907 + 14,000 * 0.8638 + 15,600 * 0.8227 + 17,400 * 0.7835 + 21,200 * 0.7462

pw = 11,619.05 + 12,970.52 + 12,093.73 + 12,834.16 + 13,633.36 + 15,819.77

pw = 78,970.58

C) The value of firm decreases with increase in discount rate as when the discount rate was 3% then the value of firm was $84,780.22 and when the discount rate was 5% the value of the firm was $78,970.58