Walmart, America’s largest retailer had the market’s second largest debt issuance in the U.S. in 2019,...

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Finance

Walmart, America’s largest retailer had the market’s secondlargest debt issuance in the U.S. in 2019, selling $16 billion in30 year bonds. The funds were to help finance the purchase ofFlipkart, India’s largest online seller. Thanks to Walmart’s highcredit rating, the bonds were classified by Moody’s (one of the topbond rating agencies) as Aa2, or very highly rated. The bond salewas managed by a syndicate of investment banks, including BarclaysPlc, Citigroup Inc., JPMorgan Chase & Co., Bank of AmericaCorp., HSBC Holdings Plc and Wells Fargo & Co.
Data for Walmart as of April 2019
Market Price
$103.18
# Shares (mm, or millions)
2,897
Long term debt ($mm from balance sheet)
$45,396
Tax rate (T)
25%
Walmart beta (?)
0.66
Current risk free rate (rf)
2.59%
Estimated market risk premium
6.00%
Estimated underwriter spread
1.0%
Estimated additional flotation costs
0.5%
Estimated total flotation cost (as a % of debt face value)
1.50%
WalMart data to use
2015
2016
2017
2018
2019
Dividend payout ratio (dividends paid out as a % of netincome)
38.02%
42.89%
45.59%
62.04%
91.68%
Net income ($ millions)
$16363
$14694
$13643
$9862
6670
Common equity $ (millions, book value)
$85937
$83611
$80535
$80822
79634
ROE (net income/common equity or NI/CE)
19.04%
17.57%
16.94%
12.20%
8.38%
2015
2016
2017
2018
2019
Dividend history ($/share)
$1.91
$1.96
$2.00
$2.04
$2.08
2020
2021
2022
2023
Dividend estimates ($/share)
$2.14
$2.05
$2.40
$2.48
Basic “starting point” data:
You are to calculate each of the following based on the dataprovided above.
1)
Value of equity (market capitalization)
298912.46
2)
Value of long term debt (use book valueas given)
$45,396
3)
Weight of equity
0.868
4)
Weight of debt
0.132
Need help with the questions below based on theinformation above:
5. What is the 3 year growth rate (2020-2023) ofexpected dividends?
What is the 4 year growth rate (2015-2019) of actualdividends?
DISCUSS: Do either of these values seem appropriate? If so,which one and why?
What are the difficulties in estimating the "constant" growthrate for Walmart using the firm's ROE and payout ratio? [g =ROE*(1-payout ratio]
Using the CAPM equation for the required cost of capital, r =rf + ?(market risk premium), what is the required cost of equity(r_e)?
What is the adjusted pre-tax cost of debt (r_d)?

Answer & Explanation Solved by verified expert

3.8 Ratings (473 Votes)

289710318 29891246 Mlns Debt 45396 298912462989124645396 0868 Wt E 453962989124645396 0132 Wt D dividends as given above 191 196 2 204 208 214 205 24 248 Growth in dividends over the previous yr 262 204 200 196 421 1707 333 53Year growth rate of expected div20202023 divAv3 540 64Year growth rate of actual div20152019 divAv4 215 74year growth See Answer

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Walmart, America’s largest retailer had the market’s secondlargest debt issuance in the U.S. in 2019, selling $16 billion in30 year bonds. The funds were to help finance the purchase ofFlipkart, India’s largest online seller. Thanks to Walmart’s highcredit rating, the bonds were classified by Moody’s (one of the topbond rating agencies) as Aa2, or very highly rated. The bond salewas managed by a syndicate of investment banks, including BarclaysPlc, Citigroup Inc., JPMorgan Chase & Co., Bank of AmericaCorp., HSBC Holdings Plc and Wells Fargo & Co.Data for Walmart as of April 2019Market Price$103.18# Shares (mm, or millions)2,897Long term debt ($mm from balance sheet)$45,396Tax rate (T)25%Walmart beta (?)0.66Current risk free rate (rf)2.59%Estimated market risk premium6.00%Estimated underwriter spread1.0%Estimated additional flotation costs0.5%Estimated total flotation cost (as a % of debt face value)1.50%WalMart data to use20152016201720182019Dividend payout ratio (dividends paid out as a % of netincome)38.02%42.89%45.59%62.04%91.68%Net income ($ millions)$16363$14694$13643$98626670Common equity $ (millions, book value)$85937$83611$80535$8082279634ROE (net income/common equity or NI/CE)19.04%17.57%16.94%12.20%8.38%20152016201720182019Dividend history ($/share)$1.91$1.96$2.00$2.04$2.082020202120222023Dividend estimates ($/share)$2.14$2.05$2.40$2.48Basic “starting point” data:You are to calculate each of the following based on the dataprovided above.1)Value of equity (market capitalization)298912.462)Value of long term debt (use book valueas given)$45,3963)Weight of equity0.8684)Weight of debt0.132Need help with the questions below based on theinformation above: 5. What is the 3 year growth rate (2020-2023) ofexpected dividends?What is the 4 year growth rate (2015-2019) of actualdividends?DISCUSS: Do either of these values seem appropriate? If so,which one and why?What are the difficulties in estimating the "constant" growthrate for Walmart using the firm's ROE and payout ratio? [g =ROE*(1-payout ratio]Using the CAPM equation for the required cost of capital, r =rf + ?(market risk premium), what is the required cost of equity(re)?What is the adjusted pre-tax cost of debt (rd)?

Market Price	$103.18
# Shares (mm, or millions)	2,897
Long term debt ($mm from balance sheet)	$45,396
Tax rate (T)	25%
Walmart beta (?)	0.66
Current risk free rate (rf)	2.59%
Estimated market risk premium	6.00%
Estimated underwriter spread	1.0%
Estimated additional flotation costs	0.5%
Estimated total flotation cost (as a % of debt face value)	1.50%

WalMart data to use	2015	2016	2017	2018	2019
Dividend payout ratio (dividends paid out as a % of netincome)	38.02%	42.89%	45.59%	62.04%	91.68%
Net income ($ millions)	$16363	$14694	$13643	$9862	6670
Common equity $ (millions, book value)	$85937	$83611	$80535	$80822	79634
ROE (net income/common equity or NI/CE)	19.04%	17.57%	16.94%	12.20%	8.38%
	2015	2016	2017	2018	2019
Dividend history ($/share)	$1.91	$1.96	$2.00	$2.04	$2.08
		2020	2021	2022	2023
Dividend estimates ($/share)		$2.14	$2.05	$2.40	$2.48

1)	Value of equity (market capitalization)	298912.46
2)	Value of long term debt (use book valueas given)	$45,396
3)	Weight of equity	0.868
4)	Weight of debt	0.132