Chemistry Vocabulary Chapter 5 - Part 5

In this case we will be examining company and market data to determine the value of Wal-Mart’s stock as of February 2010 - Chemistry Vocabulary Chapter 5 introduction. In determining the value of the stock we will be able to give an educated prediction on whether Wal-Mart is a good investment. Tools such as the dividend discount model, Price-earnings Model, and the application of the capital asset pricing model will be used to determine if Wal-Mart would be a smart investment at the given time. Using the Dividend Discount Model, or DDM, is one way to evaluate the worth of Wal-Marts stock.

This model states that the current stock price represents the present value of all the expected future dividends discounted at the investors required rate of return. To determine the firm’s stock price we will use dividend growth, expected dividend and the investor’s required rate of return. We are given dividend growth and the expected dividend at 5% and $1. 21, and using the Capital Asset Pricing Model we can determine the investor’s required rate of return. Using this equation and the numbers provided we can determine that Wal-Mart’s approximate stock price will be $60. 0. This price is higher than the most recent closing price for February 2010 which was $53. 48. So far, based on these models and numbers we can determine that Wal-Mart’s stock would be a good investment. Although this is true, the analysis does not end here. The next thing that we are going to use in evaluating Wal-Mart’s stock is the Price Earnings ratio, or P/E. This ratio provides investors with information on the risk of investing in a certain company’s stock.

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Generally, the higher the P/E ratio the higher the expected return on investment, which is ultimately what investors are interested in. To use the P/E ratio though we need to examine the ratios of similar companies in the same industry, which is luckily provided. Using the Forward P/E we can evaluate the current stock over the next four quarters. The Forward P/E can also be used to see how the current price stacks up against what is expected to happen. If the Forward P/E is lower than the current P/E then earnings are expected to grow.

On the other hand, if the current P/E is lower than the Forward P/E then earnings are expected to slow down in the future. Wal-Mart’s forward P/E sits at 13. 4 while its current P/E is at 14. 7. This shows that earnings are expected to grow. The final model that will be used is the Capital Asset Pricing Model, or CAPM. This calculates the riskiness of a certain company’s stock compared with the rest of the market. Based on Bloomberg’s estimates we can see that Wal-Mart’s stock is about 33% less risky than the rest of the market which would be a good sign for investing in the company.

Based on these three aspects that were examined it could be said that investing in Wal-Mart’s stock would be a good idea. This being said, there are many other models and ratios that could be used that may or may not show Wal-Mart as a favorable investment. Another thing to keep in mind is the fact that a lot of these numbers are estimates based on how the market went in the past. This means that there could be some outside forces that come into play that could affect the overall value of Wal-Mart’s stock.

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