Reference no: EM13108796

Read CASE "Home Depot, Inc. in the New Millennium" and answer questions below.

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?