Walmart Company.Risk and the required rate of return
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In 2011, Walmart had a divided yield of 2.76%. Walmart has a good history of consecutive increase in annual divided since in 1974. The company divided growth stand at $1.46 in 2011. This figure is correct because the divided growth for 2010 and 2009 was $1.21 and $1.09 respectively. This shows that the company has maintained divided growth rate at an average of 17%. However, in 2011 the increase was above 20%, which was the highest figure the company had reported.
Required rate of return is defined as how much profit is required to initiate an investment. Corporate managers evaluate the required rate of return for items in institution such as stock market investment. The capital asset pricing model (CAPM) approach is mainly applied in determining the required rate of return. This method needs three aspects of information, which includes average market return, rate of return on a risk-free investment and the beta. Hence, the formula is given by RRR = B(Rm – Rf) + Rf. B stands for beta, Rf for the risk-free rate and Rm average market return. Risk-free investment stands for those investments that investor are sure what will yield in the end, whilst beta is used to measure volatility when compared to the return in the market (Racette, 2010).
The assumption in this case is the rate of return for the risk-free investment that is 2.98%. Average market return is given as 13.47% while beta is given as 0.37. Hence, RRR = 0.37(13.47% – 2.98%) + 2.98% = 6.86%. therefore, 6.86% is the required rate of return for Walmart Company. this rate makes sense because it’s the rate that the company can be able to achieve.
Racette, G. A. (2010). Risk and the required rate of return. New York: Harvard.