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1. Consider the following excerpt from a Prudential report on Wal-Mart, dated May 13, 2003. The report states:

We are maintaining our Hold rating on Wal-Mart as we believe the stock's current valuation of 28 times our 2003 EPS estimate of $2.01 adequately reflects the company's 13% 5-year EPS growth rate... Wal-Mart is currently trading at 28.2 times our 2003 EPS estimate of $2.01, a 57% premium to S&P 500. This is not far from the retailer's five-year average high premium of 59%. The stock is also close to its 52-week high of $59.30, achieved in May 2002. It is difficult for us to envision investors paying an even larger premium, particularly for 13% projected grower. We believe the stock will continue to hover around a 55% premium to the market multiple or 27.9 times. Using this valuation and our 2003 EPS estimate of $2.01 yields a 12-month price target of $56, up from $55.

Discuss the merits of the valuation technique mentioned in this excerpt, with reference to the contents of the material we studied so far in the course. Base your discussion on the following problems.

a) Is using a heuristic necessarily wrong in respect to valuation?

b) Do you think eBay is an anomalous case, and there are situations where the use of heuristics makes sense?

c) Is valuation part science and part art?

d) What advice would you give financial managers when it comes to valuing their firms?

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M941729

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