Capital Valuation - Walmart
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Justify the current market price of the organization's (Walmart) debt, if any, and equity using various capital valuation models.
- Show calculations that support your findings, including those involving rate of return.
- Defend which valuation model best supports your findings.
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Solution Summary
Expert justifies the current market price of the organization's debt. The valuation models best supports finding is defended.
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Capital valuation is a process of determining the current value of company's asset, debt and equity by using different models or techniques (Pratt, 2003).
Capital Valuation of Wal-Mart
The capital structure of Wal-Mart includes both debt and equity in terms of long term debt and common stock shares respectively. There are various capital valuation models such as non-constant dividend growth, constant dividend discount growth, price/earnings (P/E) ratio, discounted cash flow analysis etc. that can be useful to justify current market price of company's debt and equity by calculating value of debt and equity capital (Lee & Lee, 2010).
Debt Valuation
In order to justify current market price of Wal-Mart's debt, the market value of company's debt is determined by using capital valuation models or Miller-Modigliani approach. It is more difficult to obtain or determine market value of debt as compared to equity, because most of the firms have non-traded debt that normally specified in book value not in market value term (Tuller, 2008). The long term debt of the firm includes unsecured debts that are dominated in U.S. dollar, Euro, Sterling and Yen. The following table exhibits the long term debt structure of Wal-Mart.
(In millions of U.S. dollars) Maturity Dates
by Fiscal Year January 31, 2011
Amount Interest Rate
Unsecured Debt
Fixed
Variable
$29,945
500
4.7%
5%
Total Denominated U.S. Dollar
Fixed
Variable 2012-2041 30,445
1369
-
4.9%
-
Total Denominated Euro
Fixed
Variable 2030 1,369
6,402
-
5.2%
-
Total Denominated Sterling
Fixed
Variable 2013-2039 6,402
3,085
2,242
1.5%
1%
Total Denominated Yen 2012-2021 5,327
Total Unsecured Debt 43,543
Total Other Debt (in USD) 2012-2029 1,537
Total Debt 45,080
Less amounts due within one year
Derivative fair value adjustments (4,655)
267
Long-term Debt $40,692
(Source: Annual Report, 2011).
In this case, the current market value of Wal-Mart's debt can be justified by calculating market value of debt. In this way, the following formula can be useful to determine market value of company's debt.
+
Where,
Dm = Estimated market value of debt
i = Interest rate = 4.7%
n = Maturity period = 20 years (Assumed)
Book value of debt = $40,692 million (Annual Report, 2011).
Interest expenses (during 2011) = $2322 million
Then, market value of Wal-Mart debt will be -
+
= $45927 million or $45.93 billion
Assumption: (It is assumed that the average maturity period for debt is 20 years, ...
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