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If your team is assigned the lead for this case, y...




If your team is assigned the lead for this case, your team answers to the questions below must be posted by noon ET the first day of Session eight (on Monday) to receive full credit (on a 10 point scale). Late Answers will be penalized two grades for late posting up to one day late. After one day, any team or individual may post their answer. After the lead answer is posted, the other teams and members of the class are encouraged to extend/qualify the posted response, or express a different take on the issues raised. Case discussion will contribute to either the team case project or course participation portion of your grade, as appropriate Home Depot, Inc. in the New Millennium This is a follow on case to an earlier case on Home Depot, which was set in 1986 (its early years) when the company was experiencing growth pains. This new case is set in fiscal year 2000 (fiscal year ending January 31, 2001). By the time of this case, Home Depot has become a storied stock with a tremendous track record of growth and profitability over the past fifteen years. The case allows us to examine the drivers of Home Depot?s strong track record, and assess whether the company?s performance is sustainable at the same level into the future. We can also assess the assumptions about growth and profitability needed to justify the company?s current stock price, and examine whether this performance can be achieved in light of the company?s stated growth strategy. The case has financial performance till January 31, 2000 since the case is set in October 2000. The attached excel worksheet with financial statement data for the fiscal year ending January 31, 2001 is provided to help focus the forecasting and valuation analysis beginning February 1, 2001. At that time, the company was trading at $48.20 which is given in the assignment questions below. Assigned Case Questions: 1. Assess Home Depot?s financial performance from 1986 to 1999. How did the company achieve such a spectacular performance? What explains the decline in performance in 2000? The following data might be helpful in your analysis. Sales Growth and Profitability Ratios Average for fiscal years 1986 to 1999 Fiscal year 1999 Fiscal year 2000 Sales Growth Rate 27.2% 19% Return on Equity (ROE) 25.2% 26.5% 20.9% NOPAT/Sales 4.7% 6.0% 5.6% Sales/Net Assets 4.34 3.75 3.53 Operating ROA 19.6% 22.6% 19.8% Spread 18.4% 22.9% 22.4% Net Financial Leverage 0.37 0.17 0.05 Financial Leverage Gain 5.7% 4.0% 1.1% 2. What is your estimate of the intrinsic value of Home Depot's stock as of February 1, 2001, assuming that it will have: (a) the same sales growth rate as in fiscal 2000 for the next fifteen years, (b) a growth rate of 11% beyond year 15, (c) maintain its fiscal 2000 NOPAT margin for the next 15 years and beyond, (d) maintain its fiscal 2000 net working capital to sales ratio, net operating assets to sales ratio for the next 14 years and beyond, (e) maintain its fiscal 2000 book net debt to net capital ratio for the next fourteen years and beyond, (f) a risk free rate of 5.8%, cost of debt of 6%, common equity beta of 1.09, and a market risk premium of 7%. 3. What set of assumptions regarding Home Depot's future growth rate, NOPAT margin, are consistent with its observed stock price of $48.20 on February 1, 2001? Assume that all the other assumptions remain the same as in question 2, except for the market risk premium, which is now assumed to be only 4%. 4. Do you think Home Depot can achieve the performance assumptions in question 2, based on its growth strategy? Financial Statement Data


Paper#5678 | Written in 18-Jul-2015

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