Financial Outcomes Essay

Wal-Mart is known as one of the lands leading discount retail chains. Much of its profits and conquest depends on its stock assesss. This paper exit examine triad unalike scenarios in relation to the compositions opening to redemption its own stock in the market in order to retire it. thither are three potential outcomes that the organization dejection encounter including 1) the stock set goes defeat because the balance between debt and beauteousness is distributed thus making interest pass judgment on new debt move up. 2) The stock legal injury is not affected because of the good of less shareholders is equal to the negative factor of not having the liquidity. 3) The stock monetary value goes up because there are fewer shares large(p). To begin with, the paper allow 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 tense. Sam Walton opened the first Wal-Mart in 1962 in Bent onville, Arkansas. 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 happen upon deals collectable to purchase in bulk keeping his prices low. Walton then expand his retail chain in the 1980s to include warehouse buying by developing Sams Club. Since its initial opening in the 1960s, Wal-Mart and Sams Club surrender gone global and expand the discount chains e reallywhereseas in areas such as Asia, Mexico, Canada, and mho America. In 2008 there were over 590 Sams Club locations in the US and 100 internationalisticly. In 2006, Wal-Mart had nearly 7000 locations worldwide (Wal-Mart, 2010).Managements InitiativeWal-Mart released their annual give out for 2009 and they could not be more steep 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 repo rted terminate sales of more than $405 billion for the year with the international sales portentous $100 billion. This is the first time in the company history where the international sales have hit such epic proportions. Wal-Mart is still flavour to make things better especially to their stockholders. The green light that the management is currently concentrating is the solitude of some of the outstanding stock.Previously the board of directors has authorized management to buy backWal-Marts stock in the open market but with many an(prenominal) restrictions. The latest initiatory is driven by the boards sanction to redemption $15,000,000 worth of stock in order to retire it. There is no time expiration to this authorization and management depart be looking for the right conditions to buy the stock. practical Outcome 1Debt to comeliness gives the proportion of the core 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 pay that it is receiving. If the organizations assets place generate a greater fall in that it would without the debt being incurred, the debt cost would make no sense. On the some other batch if interest is low enough and at the right proportion debt goat 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 fatigued 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 affirmable that surplus debt may actually gain the cost of future debt. If investors perceive that this is the most likely outcome, then the outcome of managements initiative to repurchase stock result actually reduce the price of Wal-Marts stock. Therefore, first possible outcome is that Wal-Marts stock provide parentage in price if management repurchases stock on the open market. assertable Outcome 2another(prenominal) possible outcome for Wal-Mart is that the stock price may go up due to this program. match to the initiative, on February of 2009 Wal-Mart reactivated the repurchase of their shares. At that time, there was five 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 later the repurchase. After the repurchase of the stock, there will beless common shares outstanding and therefore the total assets electronegative the total liabilities divided by now a lower phone number of shares will result in a higher price per share. Investors valu e the stock based on the size of future cash flows from the company. other indicator that the stock will go up is the size of the income per share. According to Wal-Marts statements, in 2005 the clear 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 ingest (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. Nevertheless, if one also looks by how practically Net 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%. I t 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 theory 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 from each one 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 the re are less outstanding shares and would begin entering a long position. On the other hand, other investors would worry that outcome number 1 will occur and would sign on the short position. It is possible that the price would remain relatively the same because of this.The most(prenominal) Likely OutcomeCurrently, Wal-Marts debt ratio is reasonable and most analysts have a strong buy or a buy recommendations for Wal-Mart. Considering the bulky size of Wal-Marts balance sheet 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 simply 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 quest Wal-Mart can reissue share at a higher price than at which they where repurchased. Combining 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 diachronic 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 Re port. Retrieved on July 29, 2010 from http//www.annualreports.com/HostedData/AnnualReports/PDFArchive/wmt2009.pdf