Question

What is the required rate of return (RS) of Walmart Inc. share (WMT), given the following inputs: beta (B)=0.6, market return (RM)= 9%, risk-free rate (RRF)= 3%?

A.

4.5%

B.

9.2%

C.

6.6%

D.

8.6%

QUESTION 17

1. If WMT pays $2.12 in dividends (D0) and has a constant growth (g) of 4.5%, then its intrinsic value is____

A.

$105.50

B.

$88.72

C.

$97.64

D.

$112.37

QUESTION 18

1. If WMT is currently traded for $98.50, would you long or short the stock?

A.

Short

B.

Long

C.

None since there is no investment opportunity at $98.50 market price

QUESTION 19

1. If WMT maintains the same performance (D0=$2.12 and constant growth of 4.5%) while the market return goes up to 11% and the risk-free rate increases to 4%, then what is the new intrinsic value of WMT?

$59.88

$74.81

$98.13

$102.44

QUESTION 20

1. Given the new market conditions (Question#19), would you long or short the stock if WMT is traded for $68?

A.

Long

B.

Short

C.

None since there is no investment opportunity at $98.50 market price

Answer 1

16) Given:

Beta B = 0.06
RM = 9%
RRF = 3%

Considering the CAPM model, required rate of return for Walmart is

RS = RRF + B*(RM – RRF)
RS = 3% + 0.6*(9% - 3%)
RS = 3% + 3.6%
RS = 6.6%

Option C 6.6%

17) Given:

Walmart pays $2.12 as dividend (D0) with constant growth rate (g) = 4.5%.

According to the question above, required rate of return RS = 6.6%

Intrinsic value = D0*(1+g) / (k -g)
                          = 2.12*(1+0.045) / (0.066 – 0.045)
                          = 2.2154 / 0.021
                          = $105.50

Option A $105.50

18)

If WMT is currently trading at $98.50 we should long the stock as the intrinsic value of the stock is higher than its present market price.

Option B   Long

19) Now, RRF = 4%
RM = 11%
beta B = 0.6

RS = RRF + B*(RM – RRF)
RS = 4% + 0.6*( 11% - 4%)

RS = 4% + 4.2%
RS = 8.2%

D0 = $2.12
g = 4.5%

Intrinsic value = D0*(1+g) / (k -g)
                          = 2.12*(1+0.045) / (0.082 – 0.045)
                         = 2.2154 / 0.037
                          = $59.88

Option a $59.88

20) Given the new market condition we should short the stock as the intrinsic value of the stock is low than the market price.

Option B Short

16) Given:

Beta B = 0.06
RM = 9%
RRF = 3%

Considering the CAPM model, required rate of return for Walmart is

RS = RRF + B*(RM – RRF)
RS = 3% + 0.6*(9% - 3%)
RS = 3% + 3.6%
RS = 6.6%

Option C 6.6%

17) Given:

Walmart pays $2.12 as dividend (D0) with constant growth rate (g) = 4.5%.

According to the question above, required rate of return RS = 6.6%

Intrinsic value = D0*(1+g) / (k -g)
                          = 2.12*(1+0.045) / (0.066 – 0.045)
                          = 2.2154 / 0.021
                          = $105.50

Option A $105.50

18)

If WMT is currently trading at $98.50 we should long the stock as the intrinsic value of the stock is higher than its present market price.

Option B   Long

19) Now, RRF = 4%
RM = 11%
beta B = 0.6

RS = RRF + B*(RM – RRF)
RS = 4% + 0.6*( 11% - 4%)

RS = 4% + 4.2%
RS = 8.2%

D0 = $2.12
g = 4.5%

Intrinsic value = D0*(1+g) / (k -g)
                          = 2.12*(1+0.045) / (0.082 – 0.045)
                         = 2.2154 / 0.037
                          = $59.88

Option a $59.88

20) Given the new market condition we should short the stock as the intrinsic value of the stock is low than the market price and the stock is overvalued.

Option B Short