Financial Outcomes Essay

Wal-Mart is known as one of the domains leading reject retail chains. Much of its profits and mastery depends on its monetary fund expenditures. This subject go away examine three different scenarios in relation to the makeups opening move to redemption its own breed in the market in order to retire it. thither are three potential egresss that the brass can encounter including 1) the profligate wrong goes down be set the balance between debt and equity is distributed thus do enliven rates on new debt rise. 2) The timeworn price is not affected because of the benefit of slight shareholders is equal to the negative featureor of not having the liquidity. 3) The source price goes up because there are fewer shares pop outstanding. To begin with, the paper will examine the history of Wal-Mart to gain a further understanding of where the organization came from and where it is heading in the future. Sam Walton opened the freshman Wal-Mart in 1962 in Bentonville, Arkansa s. It was one of the first of its kind- the discount retailer.Walton worked closely with his vendors to keep his prices competitive. Eventually, Walton was able to strike deals due to buying in bulk keeping his prices low. Walton whence expanded his retail chain in the 1980s to include warehouse buying by ontogeny Sams Club. Since its initial opening in the 1960s, Wal-Mart and Sams Club comport done for(p) global and expanded the discount chains everyplaceseas in areas such as Asia, Mexico, Canada, and South America. In 2008 there were over 590 Sams Club locations in the US and 100 internationally. In 2006, Wal-Mart had close to 7000 locations worldwide (Wal-Mart, 2010).Managements InitiativeWal-Mart released their annual report for 2009 and they could not be to a greater extent knightly of the performance that Wal-Mart has done for the fiscal year. The Wal-Mart teams from around the globe have challenged a difficult economy in the retail market, yet Wal-Mart reported net sal es of more than $405 billion for the year with the international sales exceeding $100 billion. This is the first time in the company history where the international sales have hit such epic proportions. Wal-Mart is still sprightlinessing to make things better especially to their stockpileholders. The initiative that the way is currently concentrating is the retirement of some of the outstanding stock.Previously the board of directors has authorized solicitude to repurchaseWal-Marts stock in the open market but with many restrictions. The latest initiative is driven by the boards authorization to repurchase $15,000,000 worth of stock in order to retire it. There is no time expiration to this authorization and management will be looking for the right conditions to repurchase the stock.Possible Outcome 1Debt to equity gives the proportion of the tally of assets that is financed by debt versus shareholders equity. A debt to equity measures the leverage of a company. Currently, Wal- Marts debt to equity ratio is 0.52 or 52%. Basically, meaning that 52% of Wal-Marts operations are financed through debt and as a result must pay interest on this financing that it is receiving. If the organizations assets can generate a greater return that it would without the debt beingness incurred, the debt cost would make no sense. On the other hand if interest is low enough and at the right proportion debt can actually lower the total cost of capital.Managements initiative to repurchase the stock is likely to affect the balance between the amount of equity and the amount of debt on Wal-Marts statements. If one examines the annual report of Wal-Mart, it is noticeable that the amount of new debt is very close to the amount spent on repurchasing stock. It is apparent from this that Wal-Mart is shifting its debt ratio. Because Wal-Marts cost of debt has been quite low, it is possible that additional debt whitethorn actually addition the cost of future debt. If investors percei ve that this is the most likely issuing, then the result of managements initiative to repurchase stock will actually reduce the price of Wal-Marts stock. Therefore, first possible outcome is that Wal-Marts stock will decline in price if management repurchases stock on the open market.Possible Outcome 2Another possible outcome for Wal-Mart is that the stock price may go up due to this program. According to the initiative, on February of 2009 Wal-Mart reactivated the repurchase of their shares. At that time, there was pentad billion dollars left in the initiative to repurchase stock. If the conditions are right, according to the book value the stock price should go up after the repurchase. After the repurchase of the stock, there will be slight common shares outstanding and therefore the total assets minus the total liabilities divided by now a lower number of shares will result in a higher price per share. Investors value the stock based on the size of future cash flows from the c ompany. Another indicator that the stock will go up is the size of the income per share. According to Wal-Marts statements, in 2005 the net income per share was $2.41, in 2006 that number went up to $2.68, in 2007 it went up again to $2.71, in 2008 it went up to $3.13 and in 2009 to $3.39 (Wal-Mart, 2009).Another interesting fact that may contribute to a rise in price of the stock as a result of a repurchase is to look at the gain for the remaining stockholders from a different view (that may be a little unorthodox). In 2005, before the repurchasing the net income was $10,267 and in 2009 after the repurchasing it was $13,400, which is an increase of 30.5%. One may say that the stock price went up because of this factor alone. Neverthe little, if one too looks by how much exculpate Income Per share of common stock went up he will find that in 2005 it was $2.41 and in 2009 it was $3.39, which is an increase of 40.66%. It is interesting to see that an increase of 30.5% in net income resulted in an increase of 40.66% in the income per share over the same time period. This amplified effect must be the result of the repurchase program, which would likely cause price rise in the stock when additional repurchase happens.Possible Outcome 3Both outcome 1 and outcome 2 have valid points. It is true that investors value future cash flows. The possibility in outcome 2 was built on the fact that investors would value the stock more because more net income would be per share. On the other hand, outcome 1 based its theory on the fact that if the debt ratio is disturbed interest cost will rise and future cash flows can decline, which would cause investors to value the stock less. Possible outcome 3 is that both outcome 1 and 2 will happen offsetting each others affect. If both would offset each other the price of the stock would not be affected by the initiative. Some investors would value the fact that there are less outstanding shares and would begin entering a long positi on. On the other hand, other investors would worry that outcome number 1 will occur and would take the short position. It is possible that the price would remain relatively the same because of this.The Most Likely OutcomeCurrently, Wal-Marts debt ratio is reasonable and most analysts have a strong buy or a buy recommendations for Wal-Mart. Considering the vast size of Wal-Marts balance planer the size of the initiative (15,000,000) will not affect the debt ratio significantly. Because the debt ratio will not be affected significantly outcome number one cannot have a very strong affect. On the other hand, when Wal-Mart repurchases its stock it not only changes the balance between debt and equity but it also sends out a message. Psychologically, repurchasing its stock, Wal-Mart is sending out a message that management believes in Wal-Marts future success and thus believes that should there be a need Wal-Mart can reissue share at a higher price than at which they where repurchased. C ombining the affect of the increased future cash flows for shareholder and the psychological affect it is most likely that outcome 2 will occur it is likely that the price of stock will rise due to managements initiative to repurchase Wal-Marts stock.ConclusionAs one can see from this example, any initiative that management takes can have important outcomes. It is also often possible for the outcomes to be very different from what management intended. It is important that management considers each outcome and the probability that it will occur. In this case, management has repurchased stock in the past and can therefore look at what happened then and use that as historic data to try and draw conclusions about what will happen after this repurchase.ReferencesWal-Mart. (2010). Walmartstores.com History Timeline. Retrieved from http//walmartstores.com/AboutUs/7603.aspxWal-Mart (2009) Annual Report. Retrieved on July 29, 2010 from http//www.annualreports.com/HostedData/AnnualReports/PDF Archive/wmt2009.pdf