Problem: During class, using a number of financial ratios we compared the performance of Wal-Mart and Target, 2 large retail businesses in the Variety/Discount Retail Store sector, and share our findings with Polly Flinn, Senior VP at Wal-Mart. Describe the Dupont Identity, its components, and what it measures (describe and show formulas), and use the Dupont Identify to discuss how Wal-Mart and Target compared to each other (not necessary to show the actual numbers for either company).

Problem: Assume that Real Madrid's nominal required (risky) rate of return is 13%, the nominal less risky rate is 6%, and inflation is 3%. At the end of 2012, you try to value the stock price of Real Madrid. Select financial information for 2012 is shown below:

You have created pro forma financial statements for Real Madrid, and have estimated that for the next 5 years (2013-2017), the riskier free cash flow (excluding the depreciation tax shield) is expected to grow at a 7% real rate due to a new big sponsorship, and then stabilize at a real growth rate of 2% in the long-term due to having to pay to renew the contracts for "Los Gallacticos".

Other factors to consider:

You are certain of depreciation and interest expenses, which will remain at their 2012 levels forever. Therefore, cash flows related to the depreciation expense should be discounted at the less risky rate.

• Capital Spending will grow at the same rate as the riskier free cash flow.
• The "Working Capital Requirement" is not expected to change (i.e., increases in Accounts Receivable and Inventory will be exactly offset by increases in Accounts Payable).
• The market value of Real Madrid's debt is $140,000,000 in 2012, which it intends to keep at this level in the future.
• Cash flows are assumed to occur evenly over the course of the year.

a. (5 points) What are the nominal rates of return and growth rates that you should use in your valuation work (show your work, please round the percent figure to 2 decimal places (xx.xx%))?

b. (20 points) What are the appropriate Free Cash Flow streams in 2012 to consider in valuing Real Madrid (5 points)? What is the present value of Real Madrid (Enterprise Value) at the end of 2012 based on your projections (10 points, please round to 3 decimals)? Finally, because it is such an important figure, please identify the total Terminal Value at the end of 2017 (5 points, please round to 3 decimals).

c. (5 points) What is the value of Real Madrid's equity and price per share end-2012 (please round equity value to 3 decimals and share price to 2 decimal places)?

Price: $14.23

Solution: The downloadable solution consists of 6 pages, 823 words and 2 charts.
Deliverable: Word Document