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Agenda

Agenda. Home Depot. Competitive Strategy. Home Depot – Performance. ROE Dupont formula Common Size input Asset Turnover – Inventory Turnover – Store Info Comparison to Hechinger. Home Depot – Cash Flow Analysis. Negative Invest in PPE - $90 mil Borrowed $120 mil in 84, and $92 in 85

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Agenda

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  1. Agenda

  2. Home Depot • Competitive Strategy

  3. Home Depot – Performance • ROE • Dupont formula • Common Size input • Asset Turnover – Inventory Turnover – Store Info • Comparison to Hechinger

  4. Home Depot – Cash Flow Analysis • Negative • Invest in PPE - $90 mil • Borrowed $120 mil in 84, and $92 in 85 • Heichinger

  5. Cash Required for Expansion – Can we get it?????

  6. Projected Income Statement

  7. Projected Cash Flow Statement

  8. What do we need • $8.4 mil per store (6.6 for PPE & 1.8 mil for inv) • 9 stores * $8.4 = $75.6 mil • Plus $1.4 mil • Thus need $77 mil • What to do?

  9. Financing Options • Difficult to get – maximum interest allowed is $4.8mil at 8% - can only borrow $60 mil • Could sale & lease back • Issue equity • Improve cash flows from operations? how

  10. What did they do? • Sales grew to $1.001 bil in 86 & 1.45 in 87 • Earnings grew to 23.8 mil and 54.1 mil 86/87 • ROS up to 2.4% and 3.7% thru better inventory control, better cost control and 38% increase in in transactions per store • Raised $50mil through equity

  11. Class 5 – Prospective Analysis • We are we going • We want to know the value of the firm • How do we define the value of any asset • Present value of future earning potential

  12. Accounting Based MethodsDiscounted Cash Flows • Compute free cash flow for appropriate number of years • Compute Terminal Value (next Class) • Discount Both based upon the WACC • Add Excess Cash • Subtract debt • Gives you present Value to Equity holders

  13. Accounting Based Methods Abnormal Earnings • Compute Forecasted Earning (after tax & interest) • Compute Normal earnings • Difference = Abnormal Earnings (similar to EVA) • Discount abnormal Earnings & Terminal Value • Add the Book value at the valuation date

  14. Accounting Based Methods Abnormal ROE • Forecast ROE (remember it’s a RATIO) • Subtract ROE based upon normal return • Determine the cumulative growth in beg. Book value and apply to Abnormal ROE • Determine the Present value of abnormal ROE • Determine the Cumulative PV of ROE • Calculate the Terminal Value • Apply Cum. PV of Abnormal ROE to the book value of equity at the beginning

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