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Specialty Retail

Specialty Retail. By Leah Constan-Tatos. Capital structure. Debt to Equity Ratio = 3.45 (as of September 2013) Debt occurs in the form of a: Senior Secured Notes Senior Notes Short term borrowings and An amended credit agreement

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Specialty Retail

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  1. Specialty Retail By Leah Constan-Tatos

  2. Capital structure • Debt to Equity Ratio = 3.45 (as of September 2013) • Debt occurs in the form of a: • Senior Secured Notes • Senior Notes • Short term borrowings and • An amended credit agreement • Common stock (with 800M shares) and Treasury stock amounts are fairly insignificant contributors to equity

  3. Data for Regression

  4. Regression Model

  5. Beta compared to estimates • Beta is the slope of the regression line=0.28 • Beta estimates:

  6. Cost of Equity using CAPM • rEq = rRf + [B(rMkt-rRf)] • rRf = 3.66% • rMkt = 4% (according to Goldman Sachs)

  7. Relevance of Data • Volatility in the risk free rate, which is unusual for 30 Year T-Bonds, may contribute to the odd behavior of the returns from ODP. • ODP’s beta, according to the market, averages at approximately 4.7% which suggests that ODP’s stock price is highly susceptive to a change in the overall market. • According to my calculations, ODP’s beta of 0.28 is not receptive to changes in the market • A potential reason for this includes: economic stability does not impact the demand for office equipment and supplies unless the goods provided are inferior goods. Economic turmoil will result in heavier reliance on these products.

  8. Estimating the after tax cost of debt for ODP • rD = Pretax borrowing rate of debt x (1-tax rate) = 2.9% • Pretax borrowing rate = Interest Expense/avg(amount of interest-bearing debt)

  9. Cost of operating capital • rEnt = [rD*(vD/vENT)]+[rEQ*(vEQ/vENT)]

  10. DCF Valuation

  11. Websites Accessed • IBIS World http://clients1.ibisworld.com.proxy.library.nd.edu/reports/us/industry/default.aspx?entid=1098 • Bloomberg - Office Depot Form 10-K, 2013 http://investing.businessweek.com/research/stocks/financials/secfilings.asp?ticker=ODP • Yahoo Finance http://finance.yahoo.com/q/in?s=ODP+Industry

  12. S&P Capital IQ http://www.netadvantage.standardandpoors.com.proxy.library.nd.edu/NASApp/NetAdvantage/cp/companyValuation.do

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