Comprehensive Learning Assessment 2
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ProfessionalAssignment2.docxWALMART 2
Walmart
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University
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Professor
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Walmart
Walmart Inc. is a company that is classified as a multinational retail corporation operating a chain of hypermarkets. Walmart has been operating for many decades and has been able to maintain the shareholders' trust. The company has invested in its employees to enhance the operations. However, the stockholders and the investors are the most significant source of revenue for the company. This is why it maintains clear and concise financial records inbalance sheets, income statements, and historical data. This information is useful during the investors' decision-making process because they want their money to be invested in a venture that has good returns.
In this study, the financial statements and the historical data was used. The first step will be to calculate the return rate over the last 20 years the company has been operating. This is from 2000 to 2020. It is easy to make the analysis and conclusions by feeding them into the formula with these values. The investors use the return rate to estimate whether a business investment is lucrative (Burkhanov, 2018). It is the ratio of the money gained or lost by a company compared to the money is invested in the beginning. Therefore, using the return rate over several years, the investors can see the trend and hence make crucial financial decisions. The companies also can use these values to forecast the maximum wealth the stockholders should anticipate. Since investors focus on where they get the best returns, with these values, it is possible to compare companies and decide the one with greater yields and returns.
ROI formula is
ROI = [(Final Value of Investment – Initial value of investment)/ Initial investment] * 100
For Walmart,it will be:
ROI = [144.47-57.55]/57.55*100
= 151.03%
From this formula, it is clear that Walmart has been making profits over the years that are above 100%. A higher value of ROI is an indication of good performance over time on the company's profits compared to the initial investment. With this value, investors will have some confidence in investing in the company.
Every business faces a form of risk in its operations. This is why the investors must investigate the risks involved in a company to decide on investment. The value of beta is an important indicator used to show the sensitivity of stock prices to the systematic risks. These are the risks that are measured by observing the market portfolio. When the beta value is 1 it shows that the company stock moves at the same rate as the market. When the value is greater than 1,it shows that the stock is vulnerable to systematic risks, whereas below 1 shows less sensitivity (Potashnik et al., 2017).Beta's value above 1 means that the investors will demand higher returns on their investment, although they are aware the risk involved is higher. The beta value for Walmart is 0.89. This value is below 1, and hence the company experiences lower systematic risks in the market. Therefore, the stocks will have a lower return and lower risk. For investors interested in certainty in returns, this is a good company to invest in, whereas those in need of high returns will not consider Walmart.
It is essential to understand the risk-free return rates and their impacts on the business. Thisrate shows the interest the investor expects from an investment free from risks within the period they commit their resources to a firm. Beta is used in determining the return of annual rate of the U.S. treasury. The risk-free rate value is obtained by subtracting inflation rate from yield (Fernandez et al., 2019). Therefore, the formula is;
Risk free return = (Yield rate + Beta) * equity risk premium
= (1.50 + 0.89) * 5.75
= 13.74%
Therefore, when the investors make their investment, they will get 13.74% of risk-free returns from the U.S. National treasuries.
Companies are faced with the problem of debt, especially when their performance is poor. Therefore, before the investors decide to invest, they must consider debt. A good company can pay its debts, and hence it is impossible to invest in a firm struggling to pay (La Rosa et al., 2018). The cost of debt is the total interest rate the firm pays on its debts. It includes costs such as bonds and loans. It is the amount before the taxes are taken into account.
Cost of debt = Interest amount / (1-tax rate)
= 0.0314/ (1-0.303)
= 4.5%
The cost of debt is considered low, and hence investors can be encouraged to invest with Walmart.
WACC is the rate is the rate of paymentto the holders of security for asset financing. It is the cost of capitaland it is influence by external factors (Vartiainen et al., 2020). WACC is used with the value of Beta because the two are directly proportional. When one goes up, it leads to a similar change on the other.
WACC=VE∗Re+VD∗Rd∗(1−Tc)
WACC = 4.2%.
The different values obtained for Walmart indicate that it is a safe company for the investors. Therefore, they can commit to their finances and expect average returns because the ROI is not very high.
The average annual rate of return for Different Companies
Walmart
Average annual return rate= (Final stock price - Initial stock price) / Initial stock price
For the year 2019/2020, the average annual return rate for Walmart was
= (129.6013 -108.4054)/ 108.4054
= 19.55%
Average annual return ratein 2019/2020 was 19.55%
Amazon
For Amazon Inc.,
Average annual return rate= (2680.8551- 1789.1929)/ 1789.1929
= 0.498
Average annual return rateis 49.8%
Starbucks
Average annual return ratefor Starbucks is
= (82.8624 - 81.4432) / 81.4432
= 0.017
Average annual return rate is 1.74%
Pepsi
Average annual return rateis
= (136.3060 - 127.9365)/ 127.9365
= 0.065
Average annual return rateis 6.5%
Boeing
Average annual return ratefor Boeing is given by;
= (197.095 - 365.0274)/ 365.0274
= -0.46
Average annual return rate is -46.0%
In conclusion, the investors are supposed to consider the factors such as the Beta, the cost of debt, and the ROI to make the right decisions on whether to invest in a company or not. Wrong decisions at any point mean that the investor can lose the money. Therefore, it is essential to consider the market factors such as the variations in demand and all systematic risks. Investing in any of the companies mentioned above requires considerations of market, technology, and the preparedness they show in handling disasters.
References
Burkhanov, A. U. (2018). The practice of Investment Funds Development in Developed Countries. Theoretical & Applied Science, (4), 275-284.
Vartiainen, E., Masson, G., Breyer, C., Moser, D., &Román Medina, E. (2020).Impact of the weighted average cost of capital, capital expenditure, and other parameters on future utility‐scale P.V.levelised cost of electricity. Progress in photovoltaics: research and applications, 28(6), 439-453.
Potashnik, Y. S., Garina, E. P., Romanovskaya, E. V., Garin, A. P., &Tsymbalov, S. D. (2017, July). Determining the value of own investment capital of industrial enterprises.In International Conference on Humans as an Object of Study by Modern Science (pp. 170-178).Springer, Cham.
La Rosa, F., Liberatore, G., Mazzi, F., &Terzani, S. (2018). The impact of corporate social performance on the cost of debt and access to debt financing for listed European non-financial firms. European Management Journal, 36(4), 519-529.
Fernandez, P., Martinez, M., &FernándezAcín, I. (2019). Market risk premium and risk-free rate used for 69 countries in 2019: A survey. Available at SSRN 3358901.
Pepsi Inc., (PEP). (n.d.). Retrieved on February 15, 2021, from https://www.macrotrends.net/stocks/charts/PEP/pepsico/stock-price-history
Boeing, (B.A.). (n.d.). Retrieved on February 15, 2021, fromhttps://www.macrotrends.net/stocks/charts/BA/boeing/stock-price-history
Starbucks, (SBUX). (n.d.). Retrieved on February 15, 2021, fromhttps://www.macrotrends.net/stocks/charts/SBUX/starbucks/stock-price-history
Amazon Inc., (AMZN). (n.d.). Retrieved on February 15, 2021, fromhttps://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-price-history
Appendix
WALMART 2020 BALANCE SHEET
https://www.macrotrends.net/stocks/charts/WMT/walmart/balance-sheet
WALMART 2020 INCOME STATEMENT
https://www.macrotrends.net/stocks/charts/WMT/walmart/income-statement
Walmart Historical Annual Stock price
https://www.macrotrends.net/stocks/charts/WMT/walmart/stock-price-history
PEPSiCo Historical Annual Stock price
https://www.macrotrends.net/stocks/charts/PEP/pepsico/stock-price-history
BOEING Historical Annual Stock price
https://www.macrotrends.net/stocks/charts/BA/boeing/stock-price-history
Starbucks Historical Annual Stock price
https://www.macrotrends.net/stocks/charts/SBUX/starbucks/stock-price-history
Amazon Historical Annual Stock price
https://www.macrotrends.net/stocks/charts/AMZN/amazon/stock-price-history
