Question

Thank you in advance for the help on this question. There are 3 parts, a, b and c!

Suppose that Wal-Mart Stores, Inc. anticipates that profits over the next six years to be as follows:

Year Expected Profits

2020 $12,200

2021 $14,300

2022 $14,00

2023 $15,600

2024 $17,400

2025 $21,200

(a) Calculate the value of Wal-Mart Stores, Inc. today. Assume the discount ratio to be three percent.

(b) Repeat (a), except assume the discount rate to be five percent.

(c) Compare your answers from (a) and (b). Can you draw any conclusions about the value of the firm and the discount rate?

Answer 1

a) value of Wal Mart Stores using 3% discount rate
Year	Expected Profit ( in $)	Present Value factor @ 3%	Present value of Expected Profit ( in $)
2020	12200	0.971	11844.66
2021	14300	0.943	13479.12
2022	1400	0.915	1281.20
2023	15600	0.888	13860.40
2024	17400	0.863	15009.39
2025	21200	0.837	17754.67
Value of Wal Mart stores today	73229.44
a) value of Wal Mart Stores using 5% discount rate
Year	Expected Profit ( in $)	Present Value factor @ 5%	Present value of Expected Profit ( in $)
2020	12200	0.952	11619.05
2021	14300	0.907	12970.52
2022	1400	0.907	1269.84
2023	15600	0.823	12834.16
2024	17400	0.784	13633.36
2025	21200	0.746	15819.77
Value of Wal Mart stores	68146.69
c )
if we increase discount rate, value of wal-mart stores gets reduced.