Question

Walmart corp. has just distributed 3$ dividend to the shareholders. Market experts beleive that the company will grow by 10% in one year and then shrink by 5% for two consecutive years. After that, experts beleive that the company will be growing consistently by 5%. Based on these expectations, what should be the current value of a Walmart stock? (Required return = 13%)

Answer 1

Dividend in next year = Recently paid Dividend*(1+growth rate)

We will use Dividend discount model and Constant growth model to find the share price of Walmart stock:

(Cash flows) Dividend will grow by 10% in 1st year = $3*1.1 = $3.3

(Cash flows) Dividend will shrink by 5% in 2nd year = $3.3*0.95 = $3.135

(Cash flows) Dividend will shrink by 5% in 3rd year = $3.135*0.95 = $2.97825

So after year 3 the dividend will grow by 5% consistently, so now we will use Constant growth model to find the PV of Dividendss in year 3 by using the following formula:

PV of Dividends in year 3 = D4/ (Required return - growth rate)

Dividend in year 4(D4) =  $2.97825*1.05 = $3.1272

PV of Dividends in year 3 = $3.1272*/ (13% - 8%) = $39.0895

Cash flows in year 3 = $2.97825 + $39.0895 = 42.06778

Now we will discount all the Cash flows in order to find the price of the Walmart stock:

Current value of the Walmart Stock = (CF1/((1+Required return)^1)) + (CF2/((1+Required return)^2)) + (CF3/((1+Required return)^3))

CF 1 - Dividend in year 1

CF 2 - Dividend in year 2

CF 3 - Dividend in year 3 + PV of all the dividends after year 3

Current value of the Walmart Stock =

Years	Cash Flows	PV
1	3.3	2.9204
2	3.135	2.4552
3	42.06778	29.1551
Required return	13.00%
Current value	34.5