# Samples Papers

Profit and Loss paper

Chapter assignments and case study

Name of student

Institutional affiliation

Date

P8-1 Return rates

a) Expected return rate

Expected return on investment X

Rt = (Cashflow + Coupon payments – Payments at t-1)/(Payment at t-1)

Rt = (1,500 + 21000-20000)/20000

Rt = \$2500/\$20000

Rt = 12.5

X = 12.5%

Expected investment return for Y

Rt = (Cashflow + Coupon payments – Payments at t-1)/(Payment at t-1)

Rt = (\$6800 + \$55000)/\$55000

Rt = \$6800/\$55000

Rt = 12.36%

Y = 12.36%

b) Recommended

I would recommend investment X because its rate of return is higher. The risk level in both investments is equal (Mari & Marra, 2018).

P8-2 Return calculations

Return= (Ending Value + Cash flow)/Beginning Value-1

Or

Rate of return = (Cash flow + (Ending-Initial))/Initial

P8-3 Risk preferences

a)risk neutral

Sharon should select investment X because being a risk neutral involves looking for project with higher return expected irrespective of uncertainty and risks. The investments have same return but have different risks and hence Sharon will select the investment with lowest risk to return ratio.

b)Risk averse

Risk averse will select lower return lower risk compared to the higher return at high risk. The investment has similar return and hence select an investment with lowest risk to return ratio. Therefore, should select investment X.

As a risk averse manager, investment X would be selected since it provides the highest return and the risk level is the lowest. Investment X has a higher return increase for taking on more level of risk compared to current earnings of the firm.

c)risk seeking

For a risk seeking investor or manager, Sharon should accept investment with a higher risk and high return Z and Y since she is willing to accommodate a higher level of risk without the return increasing.

d)fourth investment

because investment X has lowest risk to return ratio for X, Y and Z. Therefore, we should prefer investment X rather than Z and Y (Mari & Marra, 2018). Investment W ha higher risk and return instead of investment X. Therefore, investment W has both return and risk which is higher than investment X and it will be difficult to make decision between W and X which will depend on the investor degree of risk.

ASSIGNEMNT 2: CHAPTER 9

P9-1 The  WACC and capital cost

a)North facility recommendation on investment opportunity

The North has an investment earning 8% and the firm can issue debt at an interest rate of 8% and the worth of the project would be worthy it and hence we recommend the investment to the North (Mari & Marra, 2018).

The investment on the North Project is preferred since the expected return of the project of 8% is higher than expected cost of financing of 7% based on the after-tax debt cost.

b)South facility recommendation

It is not recommended investing in the South project since the expected return of the project is 15% and its  less than cost of financing of 16% based on the after-tax cost of debt. The south is expected to generate a return of 16% for its shareholders but it it just generates 15%. Therefore, investment in the south is not recommended.

c)Discussion of part a and b

The analysis is of less interest to investors since analysts focused more on one source of capital instead of the overall mix of capital. A better picture would be preferred and could have given better picture.

d)Find WACC

Equity = 60%*16%

Debt = 40% *7%*10%

WACC = 10% (40% *7% + 60%*16%) =

WACC = (0.096 + 0.028)10%

WACC = 12.4% = 0.124

e)Recommendations

North investment has an 8% return which is lower compared to the 12.4% WACC and therefore should not be accepted. The south investment has a return of 15% which is higher compared to WACC of the whole project and hence should be accepted.

f)Analysts initial recommendations

WACC was not considered in the initial recommendation. Therefore, it leads to selection of investment with lower return. The selection was based on the basis of individual products and not based on the whole firm. However, using WACC, the project with whose return is high will be accepted. The investment value in the market will also increase.

P9-2 debt cost by all methods

a)Total proceeds

Nd = 1,010-30 = 980

b)Cash flow (firm)

c)Debt cost before/after

Before = 7%

After = 7% (1-0.21) = 5.53%

d)Approximation formula

Before tax = [(70+1000-980)/15]/ [(980+1000)/2] = (70 + 1.33)/990 = 71.33/990 = 0.1126 = 0.072 = 7.2%

After tax = 7.2% (1-0.21) = 5.688%

e)Compare

The calculated technique indicates actual cost and are faster to compute. The approximation formula is closely fast and accurate and doesn’t require calculator. I prefer the calculated method since its fast and accurate.

P9-3 Before/after tax cost of debt

a)Before tax interest rate

Before tax:

\$200000 =  +

Where rd is the interest rate per month thus making the equation factual. Use excel to calculate the value of r using the RATE command = rate (number of periods, payments of coupon, -total proceeds, par value)

= rate (360, -\$1,199.10, \$200,000) = 0.5%

Annualize the rate = 12*0.5 = 6%

b)After tax rate of interest rate

= rd*(1-T) and T = tax rate= 30%

= 6%*(1-0.3) = 4.2%

P9-4 Debt cost using formula of approximation

Cost of debt before tax = kd = [Interest + ((FV-PV)/n)]/[(FV+PV)/2]

(Baule, 2019)

Debt cost after tax = Kd * (1- Tax rate)

Bond A:

Present value = \$1000-20-25 = \$955

Par value = 1000

Years = 20 years

Interest coupon = 9%*1000 = 90

Kd = [90+((\$1000-955)/20)]/[(1000+955)/2] = 9.44%

Ki = kd*(1-T) = 9.44%* (1-21%) = 7.46%

Bond B:

Present value = \$1000+10-40 = \$970

Par value = 1000

Years = 16 years

Interest coupon = 10%*1000 = 100

Kd = [100+((\$1000-970)/16)]/[(1000+970)/2] = 10.34%

Ki = kd*(1-T) = 10.34%* (1-21%) = 8.17%

Bond C:

Present value = \$1000-15-30 = \$955

Par value = 1000

Years = 15 years

Interest coupon = 12%*1000 = 120

Kd = [120+((\$1000-955)/15)]/[(1000+955)/2] = 12.58%

Ki = kd*(1-T) = 12.58%* (1-21%) = 9.94%

Bond D:

Present value = \$1000-15 = \$985

Par value = 1000

Years = 25 years

Interest coupon = 9%*1000 = 90

Kd = [90+((\$1000-985)/25)]/[(1000+985)/2] = 9.13%

Ki = kd*(1-T) = 9.13%* (1-21%) = 7.21%

Bond E:

Present value = \$1000-60-20 = \$920

Par value = 1000

Years = 22 years

Interest coupon = 11%*1000 = 110

Kd = [110+((\$1000-920)/22)]/[(1000+920)/2] = 11.84%

Ki = kd*(1-T) = 11.84%* (1-21%) = 9.35%

CASE STUDY

a)After tax cost of debt

Present value = \$1000-32-45 = \$923

Par value = 1000

Years = 20 years

Interest coupon = 10.5%*1000 = 105

Kd = [105+((\$1000-923)/20)]/[(1000+923)/2] = 11.32%

Ki = kd*(1-T) = 11.32%* (1-21%) = 8.9428%

b)Cost of preferred stock

value of share = \$95

dividend =95*0.09 = \$8.55

cost of issuance = \$7

Present value = 95-8.55 = 88

Cost of preferred stock = 8.55/88 = 9.72%

c)cost of common stock

risk free rate, RF = 4%

Market risk = 13%

Beta = 1.3

Cost of common equity = 4%+ 1.3 (13%-4%) = 15.7%

d)WACC

WACC = (We*Ke) + (Wp *Kp) + (Wd*Kd)

WACC = 0.3*15.7+0.2*9.72+0.5*8.94 = 11.124%

e)1)new common cost of equity

Change in risk premium = (1.5-1.3)*(13-9)

New Ke = 4%+1.5(13-9) = 17.5%

2) new WACC

New WCC = 17.5*0.3+8.94*0.5+0.2*9.72 = 11.664%

3)Which capital structure is better

The best capital structure is original since its WACC is lower compared to the new capital structure. The low cost of capital is important to the firm.

References

Baule, R. (2019). The cost of debt capital revisited. Business Research, 12(2), 721-753.

Mari, C., & Marra, M. (2018). Valuing Firms Under Default Risk and Bankruptcy Costs: A WACC-Based Approach. International Journal of Business, 23(2), 111-130.

Bongaerts, D., & Schoenmaker, D. (2019). The next step in green bond financing. Available at SSRN 3389762.

## Paralyzed veterans of America

Paralyzed veterans of America

Name of student

Institutional affiliation

Date

Introduction

Scenario description

The paralyzed veterans of America (PVA) is a philanthropic and service organization that has been allowed by the government of the US to represent the interest of military veterans who are disabled and suffering from injuries of the spinal cord including other conditions (Sharpe & Velleman, 2019). The non-profit entity has been participating in raising funds since the year 1946 in support of numerous activities such as health care of veterans, education and research for the injuries of the spinal cord and ensure support of the benefits and rights of the veterans. The firm is engaged in generation of donations which is characterized by occasional sending of mailing address labels and greeting cards with donations request to potential donors. After generating the donations, it is expected that response rate is 5% from the PVA from individuals that have made contribution to the organization (Donna and Frederick, 2017). The organizations have donations accounting for 28% of total expenses but the challenge is the decision by the firm looking for a way they could improve their efficiency through tracking and identifying a donor, the average previous donations and gift numbers amount they will receive.

Analysis factors

Quantifiable factors

The PVA is first required to identify the objective of data analysis, what the data is being referred to and the variables to be included in the final analysis report (Donna and Frederick, 2017). The dataset under analysis contains information of more than 3648 donors that offered solicitation in the recent past. The examples of the PVA quantifiable include variables employed when measuring the received PVA and donations numbers. It will also assess the Gift Amount based on the variable response. The next quantifiable variable will involve using the AvgGift, Last Gift, NumProm, NGiftAll and NumPrm12. The utilization of other variables assists to identify what was donated to the organization in their last solicitation and the above variables is made up of Male Vets, Homeowners, LocalGov, Viet Vets, FedGov and StateGov.

Problem statement

The PVA created a problem statement which involves the following: How past demographic variables and giving variables of donors had impacted the donations in the future.

Strategy

To assess the PVA contributor into the future, the organization is required to implement strategic plan that will offer results which are successful (Donna and Frederick, 2017). It may involve creation of scatter plots to assess the number of Gifts with the variable predictor. Therefore, I have used the below scatterplots that will be used by PVA to forecast the future donations as generated from the donor. After the information is obtained, the organization will further focus on increasing the outreach for more donors, this will help improve the brand of the organization and hence increase donations into the future.

Dummy variables refer to variables assigned to a categorical or qualitative data, to assign a numeric value to them. In general, the dummy variables are assigned the value of 1 or 0 to make them easier to use. The presence of an attribute is attributed to value of 1 while 0 is treated as the attribute being absent. For an m number of category of variables to be represented, one requires an m-1 dummy variable.

a)Company unionization status (Unionized, No union)

Words are not employed as indicators in the regression model because they contain no value when the model of the equation is substituted and therefore its interpretation will not be meaningful.

No union = 0, Unionized = 1

b)Gender

Male =1, Female =0

Past due = 0, Paid on time = 1

c)Account status

d)Political party affiliation

Since we have three party affiliation levels, we expect to require 2 indicator variables and other baseline will be used. The value 1 is represented by variable 1 to represent Democrat and otherwise represented by 0 while variable 2 has 0 for otherwise and value 1 for Republican

Therefore, there are two variables with Democrat represented = 1 while otherwise is represented by 0 and another variable is shown by Republican = 1 and otherwise represented by 0.

Reference

Donna R. and Frederick R. (2017). Four-Step Statistical Process and Bias(A1 – CCSS Math). Retrieved from https://mathbitsnotebook.com/Algebra1/StatisticsData/ST4steps.html

Sharpe, N. R., D., D. V. R., & Velleman, P. F. (2019). Business statistics. Boston, MA: Pearson. Alexander, D. (n.d.). Data Mining. Retrieved from http://www.laits.utexas.edu/~anorman/BUS.FOR/course.mat/Alex/

## H&M in fast fashion: continued success

H&M in fast fashion: continued success

Name of student

Institutional affiliation

Date

Synopsis of the H&M strategy. 2

Assessment of H&M resources. 3

Resources possessed by H&M… 3

Competencies. 4

H&M’s strategic capabilities provide for competitive advantage. 6

To what extent can they be sustained?. 7

Imitating success of H&M… 7

Strength and sustainability of the competitive process. 8

How to sustain and further strengthen H&M’s competitive advantage. 10

# Synopsis of the H&M strategy

H&M is the most successful and recognizable global retailer in clothing and has more than 3700 stores and the number of employees is about 132000 spreading in over 61 countries (Mäkelä, 2020). The firm was founded in 1947 by a Swedish Erling Persson. As a pioneer in the fast fashion, it has best reply to fashion items and offering new trends which are made available in stores. The long-term H&M standpoint is focusing on the fashion mix and quality at the best price.

The H&M firm has experienced tremendous success in the fast fashion with numerous strategic abilities. The spirit of the H&M can be tracked as far back as 1940s when Erling Persson, whose philosophy and legacy of keeping business simple is being practiced in the corporate culture. H&M has continuously emphasized relentless expansion and long-term view. In essence, the successful business model replication is important to the survival of the Swedish retail fashion company.

The H&M company has employed the business model widely known as cheap-and-chic or fast fashion, and emphasizes high fashion at prices slightly lower than its competitors (Mochalova, 2017). Given that H&M is focused on recruiting right team to respond or capture the market trends, the cost benefit is being threatened by the increasing prices of input and competitors with lower structures of cost. The simple and flat organizational structure has become more challenging in preserving tremendous growth of the H&M. The second challenge is the fact that H&M has fallen behind its competitors in emerging economies of south America and Asia, which has resulted to H&M lagging behind Zara based on its market capitalization. Due to its intensive long term advertising campaigns done with celebrities of high profiles, H&M enjoys reputational advantage and clear recognition of brand compared to its rivals such as Gap and Zara.

# Assessment of H&M resources

## Resources possessed by H&M

Physical facilities: They consist of production offices mainly used in coordination with approved and commissioned suppliers and factories globally. Other physical facilities include warehouses and distribution centers.

Intangible assets: It includes the brand name of H&M which has strong equity/reputation and systems of the IT, which have continuously improved to ensure demand and supply match and to assess the needs of customer and preferences based on patterns of sales (Mochalova, 2017).

Human resources: The leadership for the firm is strong and follows a three generation of the Persson family, whose influence and legacy is important to the culture of H&M, as well as a highly motivated and committed workforce, whose personal qualities are important compared to formal credentials and qualifications.

Financial: The majority ownership and long-term commitment of the Persson family is a source of strong financial foundation to the H&M.

## Competencies

Culture: The H&M business model focuses on delivering the latest fashion at best prices using its committed workforce but in simple way. To ensure it has attained the intended goals, H&M depends on strong culture where norms and values such as involvement of the employee, pace, experimentation, taking initiative, informality and decentralization are highly praised and encouraged.

Replication: With due reference to the growth strategy of H&M, replication is an important competence that the firm depends on. To ensure large number of stores are opened up per annum, H&M has reduced the use of formal procedures and rules and instead equip employees with tacit skills based on experiential learning obtained from the field. In such manner, there is replication of the ‘spirit’ at a faster rate with low or minimal variability.

Design: H&M has a decentralized design activity which allows for faster response in the ever-changing trends in the fashion market. It also ensures that H&M remains original and novel.

Store concept: H&M has always the best locations for its store business and ensures the window displays are changed on periodic basis and regularly updated to garner continuous attention of customers and that internal store design is arranged in way that will offer as more convenient in-store experience for clients (Mochalova, 2017).

CSR and marketing: H&M have utilized conventional channels for marketing to increase brand awareness and set up social media accounts where to collect and follow the client suggestions and feedback. Corporate social responsibility offers a critical competence to the H&M, assuming the apparel/textile industry which is under constant review and hence H&M has become more visible player in the market.

H&M obtains its sustained competitive advantage from its unique organizational culture and related management of the human resource, the ability of replicating similar store concept globally and overall market position and strong brand. The H&M has an organizational culture strongly influenced by stronger persona of its founder Erling Persson.

H&M brand has a unique position of being regarded as low price, high quality, high fashion. The brand has shaped the fast fashion segment in the apparel industry. The values and spirit of H&M was developed by the central leaders in training and recruitment of new employees globally (Mochalova, 2017). Therefore, the H&M is therefore capable to successfully replicate business concept and culture in diverse stores all over the world, which supports the growth of the company at a steady rate. The H&M has a track record which attest to the fact that its unique leadership, culture and HR practices offers valuable strategic capabilities that ensures the company gains a sustainable edge in strategic competition.

H&M has enjoyed competitive advantage compared to its close competitors, but in the context that its sustainability in the long-term position is going to be temporary (Ting, 2014). The flexible and particular store layout offer unique collections for the design and are rare and valuable for strategic capabilities. Another concept deals with purchasing which has gained competitive advantage of H&M described as temporary. The numerous medium and small sized suppliers and vendors allows fashion retailers of diverse sizes to improve their purchasing power during negotiations. H&M offers competitive parity to its rivals. They include finance and supply chain management (SCM). The sophisticated SCM system at H&M makes it’s a valuable resource.

## H&M’s strategic capabilities provide for competitive advantage

Based on the VRIO Framework, the competencies supported by an organization are Valuable, Costly to Imitate, Rare have the potential of causing a competitive advantage to the firm. Below is a framework for H&M:

The firm has virtually controlled its logistics internally by utilizing the integrated direct distribution meant to support the efficient and shift flow of goods while the middlemen are avoided. The operation of the business is based on the leased store premises to improve adaptability and flexibility on the changing patterns of demand and attraction location of the key market. It has catalogue sales and strong social media presence.

## To what extent can they be sustained?

The brand image of H&M and its excellent culture is helpful when they are being differentiated from its rivals, that is why they have leveraged the above two competencies in the current market to establish leadership in the market (Giertz-Mårtenson, 2020). The emerging market, has offered unique replication ability for the business model that has allowed it to successfully expand in presence. These capabilities are said to be sustainable because its costly and difficult to imitate. The capabilities for imitating is difficult since the capability is attributed to historical decision that occurred very long time back, by which the current advantage no longer exist. The reason for the capability is unclear and difficult to accurately identify. The capability follows a complex interpersonal relationships and social network.

Imitating success of H&M
The strong brand of Zara competes effectively with H&M and its is why it can imitate the success of H&M to a larger extent compared to other competitors. However, it’s difficult to copy the H&M culture since it involves social complexities and numerous small actions that sum up the entire culture leading to casual ambiguity. Therefore, building it over the short term is difficult over the short run.

H&M is helpful when mitigating risks associated with removal of competitive advantage because of imitation (Segran, 2019). The competitive position of the H&M not only relies on its strategic capabilities of the management, but what is done by the competitors and the environmental changes. The competitors of H&M such as Zara have same competence for shaping/catching fashion trends and setting up stores in popular places and designing interior layouts and window displays in a manner that provide appealing and convenient shopping experience for the clients. The sophisticated system of the SCM in the H&M  is a valuable resource. However, the SCM has been on systems such as warehousing facilities, IT systems and logistics system which are readily available for acquisition by anyone. The SCM system of Zara is superior compared to SCM of H&M. Despite Persson family offering financial stability, this scenario has been relocated by other competitors of H&M.

## Strength and sustainability of the competitive process

The temporary competitive advantage of the H&M and competitive parity areas has taken more sustainable and advantageous position. The competitive position of H&M not only relies on its own strategic management capabilities, but what is also done by its competitor and the changes in the environment. There is possibility for the development of new strategic capabilities. H&M has diverse ways of developing new ways of managing current strategic capabilities. H&M began as a small player with imaginative and creative ideas regarding the fashion industry and they were shaped to unprecedented and new strategic capabilities for the industry.

The internationalization and growth to new foreign market and concept of replication has played a critical objective in the overall strategy of H&M (multidomestic, export, transnational and global). The H&M has other essential element called “cheap-and-chic” as its overall model of the business. Therefore, the firm is under constant pressure to ensure its cost structure is always kept under control.

H&M is being pressured to economize following increased competition originating from emerging nations. In order to minimize costs, H&M has centralized large proportion of its procurement system, purchasing and supply chain management. The firm employs standardized collection for design, concept of store and HRM practices globally.

The definition of the HRM bases its strategy on high pressure on minimization of cost and low pressure for domestic responsiveness (Dienel, 2014). H&M is about to assess the full presence in markets in Asia, in which additional adaptations and adjustments to preferences in domestic demand such as collection of designs that may be required. Therefore, H&M should start to feel the increased pressure for adaptations in local areas and the global strategy could be rendered a viable option in the future.

The non-hierarchical and flat organizational structure of the H&M allows for a bigger autonomy to be granted to diverse stores and subsidiaries all over the world. The higher autonomy is said to be an essential pre-requisite for increased responsiveness. The business model of growth through replication is the main idea behind H&M success.

## How to sustain and further strengthen H&M’s competitive advantage

The have planned to develop new capabilities: It includes designing and store operations where the two capabilities are rare and valuable but simple to imitate. H&M are required to influence them further and hence become costly when imitating.

The existing capabilities is strengthened. Consumers have, over the recent past developed brand preference which are socially responsible. With H&M catering to the latest organic lifestyle trend, it should exploit the opportunity instead of its other competitors and the share taken back from Zara and the superior brand image re-enforced.

The international strategy involved the H&M successfully relocating its model and increase to other markets. The operation on global scale will offer advantages for example, economies of scale and hence minimizing costs and placed in better position to effectively compete with Zara and any kind of competition is completely crashed.

References

Dienel, E. (2014). Two questions for H&M CEO Karl-Johan Persson: How do you promote transparency and transformation? BSR. org Blog. https://www.bsr.org/en/our-insights/blog-view/two-questions-for-hm-ceo-karl-johan-persson-how-do-you-promote-transparency

Giertz-Mårtenson, I. (2020). H&M: How Swedish entrepreneurial culture and social values created fashion for everyone. In European fashion. Manchester University Press. https://manchesteruniversitypress.co.uk/9781526122100

Mäkelä, J. (2020). Creating an Authentic Sustainable Brand: Case Companies H&M Group and Marimekko. https://www.theseus.fi/handle/10024/341976

Mochalova, K. (2017). Control and Coordination of Suppliers in MNEs: Case: Hennes & Mauritz (H&M), Case: Company X. https://www.theseus.fi/handle/10024/139783

Segran, (2019). H & M, Zara, and other fashion brands are tricking shoppers with vague sustainability claims. Fast Company, 8. https://www.fastcompany.com/90385370/hm-zara-and-other-fashion-brands-are-tricking-consumers-with-vague-sustainability-claims

Ting, W. (2014). H&M Conscious: For A More Sustainable Fashion Future An interview with Karl-Johan Persson, CEO of H&M. 4. https://www.cnki.com.cn/Article/CJFDTotal-YGFT201404028.htm

VISION & STRATEGY – H&M Group [Accessed on 12/22/2021] https://hmgroup.com/wp-content/uploads/2020/10/HM_Group_SustainabilityReport_2018_Chapter2_VisionStrategy.pdf

H&M strategy: Becoming more flexible, fast and efficient [Accessed on 12/22/2021] https://www.fibre2fashion.com/news/retail-industry/h-m-strategy-becoming-more-flexible-fast-and-efficient-270828-newsdetails.htm

H&M vs. Zara vs. Uniqlo: What’s the Difference? – Investopedia [Accessed on 12/22/2021] https://www.investopedia.com/articles/markets/120215/hm-vs-zara-vs-uniqlo-comparing-business-models.asp

Uniqlo vs H&M Case Study- Growth Strategies – 440 Industries [Accessed on 12/22/2021] https://440industries.com/uniqlo-vs-hm-case-study-growth-strategies/

Marketing Strategy of H&M: Selling Passion for Fashion [Accessed on 12/22/2021] https://marqueex.com/marketing-strategy-of-hm-selling-passion-for-fashion/

## Walmart valuation

Walmart valuation

Name of student

Institutional affiliation

Date

Company valuation

Stock valuation refers to the process of evaluating the projected and current stock value at a given period (Alsharari, 2021). The stock valuation is determined using two main methods. They include relative and absolute valuation. Absolute valuation refers to calculation of present value of the business through forecasting its future streams of income. Relative valuation refers comparison of stock value to its peers and competitors within same industry to evaluate the worth of the stock.

Absolute valuation is computed using the discounted cash flow method (DCF) and discounted dividends model (DDM) technique. The methods focus on the stock, cash flow, growth and dividends.

Gordon growth model (GGM)

The formula is used for calculating the DDM. It involves a constant rate for future dividends. The formula for calculating the GGM is as shown below:

D0 = D1 ÷ (r – g)

Where D1 = Expected future dividend payments

D0 = Stock current value = \$139.18

r=cost of equity = 15%

g= growth rate at constant rate = 2%

dividends yield = 1.58%

D0 = D1 ÷ (r – g)

D0 = 1.58%*139 ÷ (15% – 2%) = \$16.95

Market multiples methods

It is also known as peer group analysis or trading multiples or equity computations or a public market multiple. It refers to the relative method of valuation where the current value of a company is compared to the similar business by assessing the trading multiples such as EV/EBITDA, P/E or other ratios. The most common techniques employed is the EBITDA. The business is provided with observable value based on the current worth of other. The comparative analysis is the widely used technique since they are current and very easy to calculate. Based on the method, it follows that if company X trades at 10 times P/E ratio and the earnings for company Y is \$2.5 per share, the stock of Y must be worth \$2 per share since the two firms have similar characteristics.

DCF analysis

The discount cash flow (DCF) analysis refers to intrinsic approach of valuation where the unlevered free cash flow of a business is forecasted into the future and later, they are discounted using the weighted average cost of capital (WACC) of the firm. The analysis of DCF is based on building DCF model which will be sued for accurate valuation. The model of the DCF will allow the analyst perform scenario and sensitivity analysis. For bigger business, the value of DCF is based on the sum of the parts analysis, where diverse business units are individually modeled and summed together.

The next step is assessing the investment opportunity of Walmart by determining the stock intrinsic value. We shall assess how Walmart is compared to other firms within the sector and the average in the industry. The common method used in comparison is the price earnings (P/E). We shall compare the PE ratio of Walmart to its close competitors such as Costco and Target.

Based on the above calculations, its apparent that Walmart performs poorly compared to its close competitors and the whole industry as whole. This shows that Walmart is underpriced compared to its competitors in the retail industry. The above is a subject analysis and based on the perceived Walmart value as envisioned by its investors compared to other discount store within the industry.

We shall use the dividend discount model to calculate the intrinsic value of the stock. We shall employ the multistage model to compute the stock of Walmart. Our financial evaluation of Walmart indicate they are under aggressive growth at a rate of 3.82% per annum and the growth rate of dividend is 15%. The future projection of the stock indicates the trend will continue over the next five years. The historical period representing high growth lasts less than 5 years. We are optimistic that after 5 years of growing of Walmart, the rate of growth will slow down. Therefore, we shall use 3 stage model with a two-year dividend growth stage of 8% before attaining a per annum dividend growth rate of 3.5%.

After growth rates have been determined, we shall select an appropriate discount rate. we shall assess the CAPM model but its apparent that is challenging at the moment. We believe that the low beta rates of Walmart may not provide an accurate measure of risk faced by investors. However, we have instead used the 6.5% discount rate. The rate is critically still lower than average but shows the inherent risks faced by the industry and those created by the existing economy.

Table 1 Three stage discount model

The cash flows is scheduled from dividends for each year based on the super growth period and the cash flow is further determined from permanent growth stage based on the constant growth model.

The intrinsic value is determined using the stock value of Walmart of \$60.93. After comparing the above with the market value \$139.93, the stock is highly overvalued.

Residual operating income model

The technique focuses on adjusting the future earnings and estimates of the firm to compensate for the cost of equity and hence the firm gains more accurate value. In computing the residual income of the firm, take into consideration the shareholders required rate of return or opportunity cost. The important calculation involves equity charge

Equity charge = cost of equity X equity capital

After computing the equity charge, subtract from the net income of the firm to arrive at residual income.

Equity charge = \$83.3b x 10.8% = \$8.9b

Although the firm is reporting a profit from its income statement, after including the cost of equity in relation to the shareholders, its economically unprofitable based on the given risk level. The company is profitable from the accounting basis but not profitable from the perspective of shareholders since it can’t generate residual income.

Capital asset pricing model

To utilize the above method, we shall first determine the cost of equity. The capital asset pricing model (CAPM) is important when calculating the appropriate cost of equity for the firm. The risk-free rate is used by the firm, including the market risk premium to attain the cost of equity (Ke = Rf +bRm). The risk-free rate is employed when evaluating the cost of equity and was derived based on the US Treasury bond of 4.3%. Since the rates are currently low, any further reduction will lead to inaccurate estimates. The cost of equity will decline which is unsustainable since the rates will eventually increase and we are currently focusing on long term projections of the estimates.

The individual risk of the company is represented by beta. The Walmart beta was calculated using the “Value Line”. With a beta of 0.89, it implies Walmart is an investment with low risk compared to the performance of the market. Its attractive to risk averse investors. The market risk premium for the firm is 8.3% obtained from the S&P. By using the figures above, Walmart’s the cost of equity is 10.8% (Ke= 3.43%+ 0.89*8.3%)

Constant Growth Model

The assumption of the constant growth model is that dividends will increase over the same percentage every year. The formula used to calculate the constant growth model is the Po-D1/ (Ke-g) and the equation indicates that dividend growth rate is less than cost of equity. However, the equation is not factual for the case of the Walmart since its Value Line projected growth rate is 12% which is higher than cost of equity of Walmart of 10.8%.

Constant growth model, Po = D1/(Ke-g) = 0.32/0.108-0.12)

*The model cannot be employed since the growth rate is more than the cost of capital

Non constant growth rate

The technique is important when firms don’t experience a constant growth in the payments of dividends. Two diverse growth rates are used by the model which include for all years and the coming years. The future dividends are summed up and later discounted back to the present value. To compute the infinity dividends, the constant model of growth is employed and discounted back to present value. The two numbers are added together. The growth rate is projected based on the dividends over the next five years but still don’t project the growth in dividends to the indefinite growth. Therefore, to attain the objective of valuation method, we shall employ a projection growth rate of 12% for the dividends over the five years and growth rate of 8% thereafter. It’s assumed that growth of Walmart will slow down since it has entered maturity stage of the lifecycle of the industry. Its operation is replicated in every country and state and opportunities for expansion is no longer available. Based on the growth rates, the Walmart stock price is currently valued at \$36.70 as shown below. This indicates that the stock of Walmart is currently overvalued since its trading at \$139.96

Income Statement Method

The method of income statement uses the sales times after tax profit margin to assess the earnings, which is found by dividing outstanding shares to find the EPS. These are multiplied by the P/E ratio to find stock price. The future sales margin is determined by historical numbers. For Walmart, we shall use 12% as the profit margins being projected at 3.5% which are evaluated using the Value Line. The further analysis shows the price of stock is \$139.93 in 2021 and hence currently overvalued and should not be bought.

Decision to invest

The stock of Walmart is currently overvalued since its trading at \$139.96

Balance sheet analysis

Over the years under analysis, the total assets for Walmart have increased by an average of 1.2%. with the continued decline of the assets every year, there have been a subsequent increase in liabilities by an average of 0.24%. Despite the liabilities increasing, the non-current liabilities have declined each year by an average of 2.8%. This means that Walmart the amount borrowed by Walmart has declined slightly over the years. The decrease in assets can be attributed to declining sales and the growth is not funded by internal capital (Burbach, 2021). Walmart has also reduced issuing additional shares or borrowing. Overall, the firm appears to improve in its performance as time goes by. Though they are not drastic, the average change in current assets for Walmart is 2.86% which has slightly improved from 2019 and 2020 but has not account for a major decline in the year 2018 and 2019. Current assets refer to type of assets that can easily be converted to cash over a short period of time. Increasing cash reserves shows improved performance of the company. The decrease in current assets represents a declining pile of cash, which could represent trouble. Furthermore, we have observed a decreasing current asset implying the firm lacks adequate cash or other liquid assets to pay its short-term obligations when they fall due.

Projection growth rate

Our financial evaluation of Walmart indicate they are under aggressive growth at a rate of 3.82% per annum and the growth rate of dividend is 15%. The future projection of the stock indicates the trend will continue over the next five years. The historical period representing high growth lasts less than 5 years. We are optimistic that after 5 years of growing of Walmart, the rate of growth will slow down. Therefore, we shall use 3 stage model with a two-year dividend growth stage of 8% before attaining a per annum dividend growth rate of 3.5%.

Walmart is doing relatively fine. Its investing, operating and financing cash flow all have increased over the past three years from 2018 to 2020 (Burbach, 2021). The largest drop is associated with the financing option where a decline of 173.8% was recorded. This is attributed to paying out dividends to shareholders and settling long term debt. While Tesco has experienced a decline in the operating cash flows, the firm had both investing and financing cash flows increasing from 2

017 to 2020. However, Walmart experienced a small decline in its operating cash flows averaging 5.6% over 9.2% in the three years under analysis. For the case of Walmart, net income and operating cash flows have remained relatively flat over the same period.

Table 2 Income statement projection

Cash flow from operations is made of certain items which are differently treated compared to the income statement. We have non cash expenses such as amortization, depreciation and share based compensation which must be used when computing the net profit (Burbach, 2021). However, not all the above transactions involve cash items and the mentioned non cash revenues or expenses must be computed into the net income of the company as well as its total liabilities and total assets. Apart from depreciation, the main adjustments following the net income of the Tesco include compensation such as the non-cash shared based, los or gain on disposition of equipment and property and pension scheme. For the case of Walmart, the three adjustments related to the net income include deferred income taxes, inventories and other operating activities.

In 2017, Walmart purchased jet.com in cash for \$3 billion and \$300 million as shares. The Jet.com refers to an online firm selling diverse items at affordable prices. Major products category includes household supplies, groceries, pet supplies, clothing and furniture. The items are delivered and compiled in the box of the customer from the front door. This is essential for Walmart while aggressively competing with other online retailers such as Amazon. Based on the 10-k filling of Walmart, Walmart paid about \$6.2 billion, \$6.3 billion and \$6.1 billion in fiscal years 2017, 2018 and 2019 respectively. These amounts have an impact on the financing cash flow of Walmart. In 2019, Tesco had paid a quarterly dividend of about \$0.21 per share leading to total amount of \$38.5 million in total payments.

Walmart has also made purchases related to its own shares. Based on the annual filings of the company, in 2018, Walmart bought back about \$62400000 of its own shares based on average price of \$65.90 per share. The total yield of the firm is \$4112160000 which was spent on buy back of shares for the year ending 2018. Tesco has not engaged in buy backs over the recent past since 2019.

While undertaking a comparison vertical analysis of both Tesco and Walmart balance sheet, we have discovered several issues related to the company performance, on the relative sizes and differences of the two firms and the moving trends of both and decrease in diverse financial instruments that allows one to view the results of investment and management decisions and operations but also future trend opportunities.

As previously stated, Walmart Stores Inc (WMT) is the largest retail firm operating 14000 stores globally and more than 5000 stores in US including the Sam’s Club locations. Walmart is five times larger than its close competitor, Target. Walmart appears to be more efficient in its operation compared to Target, as shown by the higher asset and inventory turnover as well as amount of dollar generated per asset. Walmart commands almost 20 times the total markets share of Target.

References

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