Design a spreadsheet and prepare a set of financial statement forecasts for Walmart for Year ??1 to Year ??5 using the assumptions that follow. Project the amounts in the order presented (unless indicated otherwise) beginning with the income statement, then the balance sheet, and then the statement of cash flows. For this portion of the problem, assume that Walmart will exercise its financial flexibility with the cash and cash equivalents account to balance the balance sheet.
If you have programmed your spreadsheet correctly, the projected amount of cash grows steadily from Year ??1 to Year ??5 and the projected cash balance at the end of Year ??5 is a whopping $33,511 million (allow for rounding), which is more than 12.5 percent of total assets. Identify one problem that so much cash could create for the financial management of Walmart.
Assume that Walmart will augment its dividend policy by paying out 30 percent of lagged net income plus the amount of excess cash each year (if any). Assume that during Year ??1 to Year ??5, Walmart will maintain a constant cash balance of $7,275 million (the ending cash balance in 2008). Revise your forecast model spreadsheets to change the financial flexibility account from cash to dividends. Determine the total amount of dividends that Walmart could pay each year under this scenario. Identify one potential benefit that increased dividends could create for the financial management of Walmart.
Calculate and compare the return on common equity for Walmart using the forecast amounts determined in Parts a and c for Year ??1 to Year ??5. Why are the two sets of returns different? Which results will Walmart's common shareholders prefer? Why?