There, in estimating the value of a share of common stock of Wal Mart Stores, we computed the present value of excess cash flows at the end of fiscal year 2008 (= beginning of fiscal year 2009) to be $269,244 million. This exercise requires you to confirm that computation. To compute the amount for the years after 2013, note we assume that the excess cash flows are $7,884 million at the end of 2013 and grow at the rate of 10% per year thereafter. That means the cash flows for the end of fiscal year 2014 are $8,672.4 (= 1.10 x $7,884) million. You can use the perpetuity growth model to verify that the present value at the end of 2013 of that growing stream of payments is $433,620 million (= $8,672.4/(.12 .10). That is, if a payment (in this case $7,884 million), grows at rate g (in this case, 10%) per period forever, the discount rate is r (in this case, 12%) per period, and the first payment occurs at the end of the first period, then the present value of that stream is $433,620 [= $8,672.4/(r 2g) = $8,672.4/(0.12 0.10)] million. Then, we discount that amount to the end of fiscal 2008 to derive $246,048 million. Analysts describe the $246,048 million valuation in such computations as the terminal value. (We do not expect that Wal Mart’s excess cash flows could increase forever at 10% per year. After a century or so, such a firm would be larger than the rest of the entire U.S. economy, combined. We use such computations to estimate values. When the discount rate (here 12% per year) exceeds the growth rate (here 10% per year) by a substantial amount (here only 2 percentage points), the present value of payments far in the future, say more than 40 years out, is negligible.)
a. Reproduce the numbers in Column using the data from Column (5) and the appropriate present value computations.
b. Re do the valuation changing the growth rate after 2013 from 10% to 9%.
c. Re do the valuation changing the growth rate after 2013 from 10% to 5%.
d. Comment on the sensitivity of this valuation modeling tool to the effect of assumed growth rates on terminal values.