# Walmart Inc. (NYSE:WMT)

## Present Value of Free Cash Flow to the Firm (FCFF)

Intermediate level

In discounted cash flow (DCF) valuation techniques the value of the stock is estimated based upon present value of some measure of cash flow. Free cash flow to the firm (FCFF) is generally described as cash flows after direct costs and before any payments to capital suppliers.

### Intrinsic Stock Value (Valuation Summary)

Walmart Inc., free cash flow to the firm (FCFF) forecast

US\$ in millions, except per share data

Year Value FCFFt or Terminal value (TVt) Calculation Present value at 5.02%
01 FCFF0 16,734
1 FCFF1 17,504  = 16,734  × (1 + 4.60%) 16,668
2 FCFF2 18,163  = 17,504  × (1 + 3.77%) 16,469
3 FCFF3 18,696  = 18,163  × (1 + 2.94%) 16,143
4 FCFF4 19,089  = 18,696  × (1 + 2.10%) 15,695
5 FCFF5 19,332  = 19,089  × (1 + 1.27%) 15,135
5 Terminal value (TV5) 522,347  = 19,332  × (1 + 1.27%) ÷ (5.02%1.27%) 408,946
Intrinsic value of Walmart Inc.’s capital 489,056
Less: Debt and finance lease obligations (fair value) 63,162
Intrinsic value of Walmart Inc.’s common stock 425,894

Intrinsic value of Walmart Inc.’s common stock (per share) \$150.29
Current share price \$137.27

Based on: 10-K (filing date: 2020-03-20).

Disclaimer!
Valuation is based on standard assumptions. There may exist specific factors relevant to stock value and omitted here. In such a case, the real stock value may differ significantly form the estimated. If you want to use the estimated intrinsic stock value in investment decision making process, do so at your own risk.

### Weighted Average Cost of Capital (WACC)

Walmart Inc., cost of capital

Value1 Weight Required rate of return2 Calculation
Equity (fair value) 388,989  0.86 5.37%
Debt and finance lease obligations (fair value) 63,162  0.14 2.83% = 4.16% × (1 – 31.90%)

Based on: 10-K (filing date: 2020-03-20).

1 US\$ in millions

Equity (fair value) = No. shares of common stock outstanding × Current share price
= 2,833,752,938 × \$137.27 = \$388,989,265,799.26

Debt and finance lease obligations (fair value). See details »

2 Required rate of return on equity is estimated by using CAPM. See details »

Required rate of return on debt. See details »

Required rate of return on debt is after tax.

Estimated (average) effective income tax rate
= (24.40% + 34.50% + 32.20% + 30.30% + 30.30% + 32.20%) ÷ 6 = 31.90%

WACC = 5.02%

### FCFF Growth Rate (g)

#### FCFF growth rate (g) implied by PRAT model

Walmart Inc., PRAT model

Average Jan 31, 2020 Jan 31, 2019 Jan 31, 2018 Jan 31, 2017 Jan 31, 2016 Jan 31, 2015
Selected Financial Data (US\$ in millions)
Interest expense, debt, capital lease and financing obligations 2,599  2,346  2,330  2,367  2,548  2,461
Income from discontinued operations, net of income taxes —  —  —  —  —  285
Consolidated net income attributable to Walmart 14,881  6,670  9,862  13,643  14,694  16,363

Effective income tax rate (EITR)1 24.40% 34.50% 32.20% 30.30% 30.30% 32.20%

Interest expense, debt, capital lease and financing obligations, after tax2 1,965  1,537  1,580  1,650  1,776  1,669
Add: Cash dividends declared 6,048  6,102  6,124  6,216  6,294  6,185
Interest expense (after tax) and dividends 8,013  7,639  7,704  7,866  8,070  7,854

EBIT(1 – EITR)3 16,846  8,207  11,442  15,293  16,470  17,747

Short-term borrowings 575  5,225  5,257  1,099  2,708  1,592
Long-term debt due within one year 5,362  1,876  3,738  2,256  2,745  4,810
Finance lease obligations due within one year 511  —  —  —  —  —
Capital lease and financing obligations due within one year —  729  667  565  551  287
Long-term debt, excluding due within one year 43,714  43,520  30,045  36,015  38,214  41,086
Long-term finance lease obligations, excluding due within one year 4,307  —  —  —  —  —
Long-term capital lease and financing obligations, excluding due within one year —  6,683  6,780  6,003  5,816  2,606
Total Walmart shareholders’ equity 74,669  72,496  77,869  77,798  80,546  81,394
Total capital 129,138  130,529  124,356  123,736  130,580  131,775
Financial Ratios
Retention rate (RR)4 0.52 0.07 0.33 0.49 0.51 0.56
Return on invested capital (ROIC)5 13.04% 6.29% 9.20% 12.36% 12.61% 13.47%
Averages
RR 0.41
ROIC 11.16%

FCFF growth rate (g)6 4.60%

Based on: 10-K (filing date: 2020-03-20), 10-K (filing date: 2019-03-28), 10-K (filing date: 2018-03-30), 10-K (filing date: 2017-03-31), 10-K (filing date: 2016-03-30), 10-K (filing date: 2015-04-01).

2020 Calculations

2 Interest expense, debt, capital lease and financing obligations, after tax = Interest expense, debt, capital lease and financing obligations × (1 – EITR)
= 2,599 × (1 – 24.40%) = 1,965

3 EBIT(1 – EITR) = Consolidated net income attributable to Walmart – Income from discontinued operations, net of income taxes + Interest expense, debt, capital lease and financing obligations, after tax
= 14,8810 + 1,965 = 16,846

4 RR = [EBIT(1 – EITR) – Interest expense (after tax) and dividends] ÷ EBIT(1 – EITR)
= [16,8468,013] ÷ 16,846 = 0.52

5 ROIC = 100 × EBIT(1 – EITR) ÷ Total capital
= 100 × 16,846 ÷ 129,138 = 13.04%

6 g = RR × ROIC
= 0.41 × 11.16% = 4.60%

#### FCFF growth rate (g) implied by single-stage model

g = 100 × (Total capital, fair value0 × WACC – FCFF0) ÷ (Total capital, fair value0 + FCFF0)
= 100 × (452,151 × 5.02%16,734) ÷ (452,151 + 16,734) = 1.27%

where:
Total capital, fair value0 = current fair value of Walmart Inc.’s debt and equity (US\$ in millions)
FCFF0 = the last year Walmart Inc.’s free cash flow to the firm (US\$ in millions)
WACC = weighted average cost of Walmart Inc.’s capital

#### FCFF growth rate (g) forecast

Walmart Inc., H-model

Year Value gt
1 g1 4.60%
2 g2 3.77%
3 g3 2.94%
4 g4 2.10%
5 and thereafter g5 1.27%

where:
g1 is implied by PRAT model
g5 is implied by single-stage model
g2, g3 and g4 are calculated using linear interpoltion between g1 and g5

Calculations

g2 = g1 + (g5g1) × (2 – 1) ÷ (5 – 1)
= 4.60% + (1.27%4.60%) × (2 – 1) ÷ (5 – 1) = 3.77%

g3 = g1 + (g5g1) × (3 – 1) ÷ (5 – 1)
= 4.60% + (1.27%4.60%) × (3 – 1) ÷ (5 – 1) = 2.94%

g4 = g1 + (g5g1) × (4 – 1) ÷ (5 – 1)
= 4.60% + (1.27%4.60%) × (4 – 1) ÷ (5 – 1) = 2.10%