What changes in the variables would be necessary in your valuation to best approximate the market valuation - Essay Example

Part A – Fundamental Valuation Growth Rate of Dividends- Wal-Mart1 Estimated Value Growth Rate = 12.55% Discount Rate = 12.50% D0 = $1.21 D1 = 1.21 + 1.21 * 12.55% = $ 1.361 P0 = D1 / K-G = 1.361 / 12.50% - 12.55% = 1.361 / 0.05 = $ 27.22 Estimated Value = $ 27.22 Current Market Value = $ 52.082 What changes in the variables would be necessary in your valuation to best approximate the market valuation? It is possible that the actual market value of a share may differ from its calculated value as different variables may be perceived differently by each investor.

It is also important to understand that each investor has different perceptions about the risks and rewards and therefore there can be some differences in the two sets of prices. In order to best approximate the valuation with the market valuation, it is important to adjust the discount rate. The discount rate given in this case study is 12.5% which seems to be higher given the overall risk profile and fundamentals of Wal-Mart. It is therefore important that the discount rate is adjusted in order to approximate two values with each other.

Lower required rate of return therefore outlines that the investors have more confidence in the fundamentals of the firm therefore they will be requiring lower rate of returns because the overall level of risk will be low. Part-B Relative Valuation The above calculations are made based on the assumption that the growth rate required will be 7%. 4) It is important to note that the assessment of the stock regarding under or over valuation is always performed by comparing the current market value with the assessed value.

Considering the current market value of the stock, it seems that the stock is relatively undervalued and the investors can actually be advised for buying or hold. The current market price of the stock is approximately $53 per share whereas the value of the stock computed through PE ratio model suggests that the fair value of the stock is $59 suggesting that the stock is relatively under-valued. It is therefore important that those investors who are already holding the stock shall hold their positions and wait for the price to further increase before they can actually sell the stock and profit from the position. 5) Based on the fundamentals of the stock as well as the successful track record of Wal-Mart as one of the leading firms in the world, I would invest into the firm.

Though the firm is working in the retail sector with low profit margins however, given the successful history of delivering results, I as an investor would invest into this stock. It is also important to understand that based on the computations made above suggests that the fair value of the stock is higher than the current value of the stock therefore there is a cushion of approximately $6 per share if invested now and sold at the fair value