1. Equity value using DCF: 8.677 billion USD*
2. Equity value using RIV: 11.685 billion USD
3. Equity value using AEGV: 9.813 billion USD*
*Final year, change in NOPAT is taken to be 5% of NOA to cover up for depreciation
Note: Without having a lower change in NOA in terminal year, DCF valuation is negative.
• Without NOA change in terminal year, DCF analysis is not reliable.
• OFCF is negative from 1986 to 1995 as Walmart is growing aggressively and investing heavily in capital assets and working capital.
• Yes ideally longer period for DCF helps.
• But allowing for practical concerns this is not feasible, as the longer we go into the future the higher the error possibility. There is a trade-off between model accuracy and guess-estimating accuracy.
• Yes, the accounting-based approach is more accurate as it accounts for investments as capitalized because they are likely to give economic benefits for many more years to come than the cash flow suggests.
• Suppose a company is in its growth phase, and makes heavy investments in the next five years before entering the mature phase. Cash flow analysis will show low or negative OFCF, whereas “accounting” estimates would capitalize those investments and just subtract the depreciating numbers for showing profits (of course, tax-relevant depreciation numbers maybe even more accelerated and hence unrealistic on the other extreme).
• On the other hand for a mature company, depreciation – a non-cash charge which should be subtracted – would not be subtracted if the company makes no new investments.
• AEGV seems more accurate, at least in this case, as it bypasses issue of terminal value calculation (AEGV calculates “abnormal” value add for a fixed number of years, and then assumes no extra value created compared to cost of capital for infinity)
• 1995 market-to-book ratio would be lower than 1986 one...