Reference no: EM132172406
Question 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? Focus on the modified Du Pont decomposition and sales growth trends:
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Average: FY
1986-1999
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FY 1999
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FY 2000
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Sales growth
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31.0%
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27.2%
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19.0%
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ROE
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25.2%
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26.5%
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20.9%
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NOPAT/Sales
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4.7%
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6.0%
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5.6%
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Sales/Net asset
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4.34
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3.75
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3.53
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Operating ROE
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19.6%
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22.6%
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19.8%
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Spread
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18.4%
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22.9%
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22.4%
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Net financial leverage
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0.37
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0.17
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0.05
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Financial leverage gain
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5.7%
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4.0%
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1.1%
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Question 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 sales 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 2001 net working capital to sales ratio, net operating assets to sales ratio for the next 14 years and beyond,
(e) maintain its fiscal 2001 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%.
Question 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%.
Question 4. Do you think Home Depot can achieve the performance assumptions in question 2 and 3, based on its strategy?
Question 5. What is your best case; worst case; and most likely estimate of the intrinsic value of Home Depot's stock as of February 1, 2001? Justify your assumptions based on your strategy analysis. Explain all forecast output. (Hint: focus on sales and NOPAT margin forecast, and try some capital market variables as different scenarios).