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HW-1065 Walmart Analysis
A: prepare a condensed cash flow analysis and a brief summary of the inferences you see in the cash flow statement(s) for your company. You may need to look at some trends to draw conclusions. Consider the following questions: • Is your company profitable on a cash flow basis? How does this compare to accrual basis profitability? • Are there any indications of liquidity concerns? If so, what are they? • Is there a reason to be worried about solvency? • How does the company use its cash?
B: Calculate ROI for Wal-Mart in at least 2 different ways. Hint: asset turnover, adjusted profit margin and leverage are important components to consider. • Calculate ROA for Wal-Mart. Provide a brief discussion of the relationship between asset turnover and profit margin for your company. Hint: non-operating and intangible assets should be considered. • Compare your ratios to competitors (Target and Costco) and the industry norm. Briefly comment on the results.
C: Prepare a 5-year income statement trend analysis for Wal-mart and then analyze these trends using margins. Be sure to consider the following elements at a minimum: Revenue, Cost of sales, Gross margin, Operating margin, Net income margin, Selling expenses, and General expenses. Briefly answer these questions. • What revenue/expense/profit trends do you see? • What might be the cause of the trends? • What challenges does the company face in the market place? • What are the prospects for profitable growth and why?
D: Prepare a 5-year prospective analysis (forecast). Then, using the residual income model, calculate a value for the stock. Arrive at a “Year 1” Pro Forma income statement by making the adjustments you deem necessary to the most recent income statement available. Your adjustments might include i) the elimination of transitory items, ii) increases or decreases to earnings for GAAP anomalies, and iii) other economic factors which might impact future cash flow streams. Arrive at a Year 1” Pro Forma book equity amount by making the adjustments you deem necessary to the most recent balance sheet. Your adjustments might include i) off balance sheet financing items, ii) increases or decreases for GAAP anomalies, and iii) other economic factors which might impact future cash flow streams. Determine what assumptions you will use to project future value. These assumptions should be based on 5 year historical trends, general knowledge obtained from the Form 10K and other sources, AND the industry/economic analysis. Be sure to provide all relevant assumption details in footnotes to the final valuation. Once you have decided on these assumptions, take the “Year 1” income statement described above and forecast the next 5 years using the RI model format. Determine a discount rate using methods discussed in class. Prepare an analysis of how you determined the discount rate for your valuation. Calculate a value for your company using the RI model. Answer the following questions: o How does your value compare to the current stock price for your company? What are your initial observations? (Short answer) o How does the residual income model compare to the traditional DCF models? (Short answer)
E: Assess the liquidity of Wal-Mart. Compute the ratios listed below and compare them to competitors. • Current ratio • Operating ratios appropriate for your company • Net trade cycle Does you company have good liquidity? Write a few brief comments in this regard. Compute the ratios listed below and compare them to competitors. • Debt to equity • Financial leverage • Asset composition Does your company appear to be solvent. Write a few brief comments in this regard. Compute the ratios listed below and compare them to competitors. • Fixed charges ratio • Times interest earned • Coverage preferred dividends Does your company appear to have good earnings coverage? Write a few brief comments in this regard.
F: • Using the 5 year predictions from your prospective income statement analysis for Wal-mart, calculate the price to book ratio for your company. How does this calculation compare to the reported P/B ratio. Discuss the comparative results. • Using year 2 predictions from your prospective income statement analysis for walmart, calculate the price to earnings ratio for year 2 for your company. How does this calculation compare to the reported P/E ratio. Discuss the comparative results. • What conclusions can you draw regarding P/B and P/E ratios?
Answer will be sent by email as attachment.
B: Calculate ROI for Wal-Mart in at least 2 different ways. Hint: asset turnover, adjusted profit margin and leverage are important components to consider. • Calculate ROA for Wal-Mart. Provide a brief discussion of the relationship between asset turnover and profit margin for your company. Hint: non-operating and intangible assets should be considered. • Compare your ratios to competitors (Target and Costco) and the industry norm. Briefly comment on the results.
C: Prepare a 5-year income statement trend analysis for Wal-mart and then analyze these trends using margins. Be sure to consider the following elements at a minimum: Revenue, Cost of sales, Gross margin, Operating margin, Net income margin, Selling expenses, and General expenses. Briefly answer these questions. • What revenue/expense/profit trends do you see? • What might be the cause of the trends? • What challenges does the company face in the market place? • What are the prospects for profitable growth and why?
D: Prepare a 5-year prospective analysis (forecast). Then, using the residual income model, calculate a value for the stock. Arrive at a “Year 1” Pro Forma income statement by making the adjustments you deem necessary to the most recent income statement available. Your adjustments might include i) the elimination of transitory items, ii) increases or decreases to earnings for GAAP anomalies, and iii) other economic factors which might impact future cash flow streams. Arrive at a Year 1” Pro Forma book equity amount by making the adjustments you deem necessary to the most recent balance sheet. Your adjustments might include i) off balance sheet financing items, ii) increases or decreases for GAAP anomalies, and iii) other economic factors which might impact future cash flow streams. Determine what assumptions you will use to project future value. These assumptions should be based on 5 year historical trends, general knowledge obtained from the Form 10K and other sources, AND the industry/economic analysis. Be sure to provide all relevant assumption details in footnotes to the final valuation. Once you have decided on these assumptions, take the “Year 1” income statement described above and forecast the next 5 years using the RI model format. Determine a discount rate using methods discussed in class. Prepare an analysis of how you determined the discount rate for your valuation. Calculate a value for your company using the RI model. Answer the following questions: o How does your value compare to the current stock price for your company? What are your initial observations? (Short answer) o How does the residual income model compare to the traditional DCF models? (Short answer)
E: Assess the liquidity of Wal-Mart. Compute the ratios listed below and compare them to competitors. • Current ratio • Operating ratios appropriate for your company • Net trade cycle Does you company have good liquidity? Write a few brief comments in this regard. Compute the ratios listed below and compare them to competitors. • Debt to equity • Financial leverage • Asset composition Does your company appear to be solvent. Write a few brief comments in this regard. Compute the ratios listed below and compare them to competitors. • Fixed charges ratio • Times interest earned • Coverage preferred dividends Does your company appear to have good earnings coverage? Write a few brief comments in this regard.
F: • Using the 5 year predictions from your prospective income statement analysis for Wal-mart, calculate the price to book ratio for your company. How does this calculation compare to the reported P/B ratio. Discuss the comparative results. • Using year 2 predictions from your prospective income statement analysis for walmart, calculate the price to earnings ratio for year 2 for your company. How does this calculation compare to the reported P/E ratio. Discuss the comparative results. • What conclusions can you draw regarding P/B and P/E ratios?
Answer will be sent by email as attachment.
