Summarize the questions and say what information we can get from them. a. The fi

Summarize the questions and say what information we can get from them.
a. The financial statement forecasts and financial ratios for Walmart for Year +1 to Year
+5 appear in Exhibits 10.A–10.C.Income Statement Forecasts
b. The increasing balances in cash through Year +5 result because cash flow from operations and from new borrowing are more than sufficient to finance Walmart’s growth and capital expenditures on property, plant, and equipment. The excess cash presents a number of potential agency problems for financial management of Walmart. Students can discuss how the excess cash is underinvested because the rate of return expected on cash (1.5%) is lower than the cost of debt and equity capital for Walmart, so the excess cash is value-destroying. Students also can discuss how the excess cash creates agency problems, in which the cash may be mismanaged (used for value-destroying acquisitions) or subject to embezzlement. The excess cash also signals Walmart shareholders that the firm is not utilizing company resources efficiently.
c. After the plug is changed from cash to dividends, the new financial statement forecasts for Walmart are presented next in Exhibits 10.D–10.F. The benefits from increasing cash dividend payments stem from reducing Walmart’s exposure to the agency and underinvestment problems mentioned in Requirement b above. Students also can consider whether the dividends provide a significant yield for Walmart common shareholders and what they signal about management’s expectations for persistent future cash flows. You also can point out that the shift from plugging cash to dividends affects all these statements (income statements, balance sheets, and cash flows).
d. Exhibit 10.G presents profitability and risk ratios for Walmart based on the financial statement forecasts originally developed (with the plug to cash) and the revised forecasts (with the plug to dividends). The projections indicate a declining ROCE as well as a declining ROA for Walmart with the plug to cash, the result of a declining total assets turnover. The ROCE in Year +5 is 22.2% with the revised forecasts, whereas it is only 15.7% under the original forecasts. Similarly, the ROA in Year +5 is 9.0% under the revised forecasts and only 7.9% under the original forecasts. Clearly, Walmart shareholders will prefer the higher rates of return under the increased dividend policy.

Leave a Reply

Your email address will not be published.