HomeDepot(20210506233538)

1、Home DepotCost of Capital of Home DepotA Finan cial An alysisPrese nted by:Group #ForFinance 332 (Prof. Park)Note: This is based on an actual team report. It is provided to assist students with the reportpreparati on.2Statement of contributionThe perce ntage weights of the con tributi on add up to 1

2、00%NamePercentage contributionSignature20%20%20%20%20%3s operatinExecutive SummaryThe purpose of this project is to provide a comprehensive financial analysis on the Home Depot Corporation. This paper includes the estimation of the cost of capital, 10 - year financial forecast and estimation of the

3、intrinsic value of Home Depot, description of the firm investing, and financing activities, and recommendatoi n for maximization of shareholders wealth.We used and various on-line resources as an information source for Home Depot s financial statements and company history. Wesetimatedthe firm s .beU

4、tasing the regression analysis, we arrived at a beta of 1.29 for Home Depot. According to or estimation, the cost of common equity is 12%, and the current after tax cost of deb2t,.25 %. The company current capital structure is about 98% equity and 2% debt. The weighted average cost of capital for th

5、e company is, therefore, about 12%.41. Company IntroductionEstablished in 1978 by Bernie Marcus and Arthur Blank, the Home Depot Corporation opened its first store in Atlanta, becoming the world s largest home improvement roewtailer. They are nthe second largest retailer in the United States, offeri

6、ng 40,000 to 50,000 different types of home improvement supplies, building materials, and lawn and garden products. They carry a wide assortment of low-cost products, and offer expert advice and exceptional customer service.As an innovator of the home improvement industry, Home Depot has expanded in

7、to Canada, Mexico, Argentina, Chile, and Puerto Rico. Currently there are 1,459 stores including fifty EXPO Design Centers, one Floor Store, and three Home Depot Landscape Supply stores. Home Depot caters to Do-It-Yourself customers, as well as home improvement, construction and building maintenance

8、 professionals.Home Depot s stock went public in 1981 and is traded in the New York Stock Exchange urnde the ticker symbol, HD. It is included in the Dow Jones Industrial Average and the Standard and Poors 500 Index.The Home Improvement sector in general is in the growth stage of its life cycle. Eve

9、n in the weak economic environment, low interest rates have allowed the real estate sector to survive. As a result, home ownership has reached new highs, and the housing industry thrived.In August 2002, Home Depot was ranked first in Quality of Earnings by Merrill Lynch in a study of large, publicly

10、 traded companies. Home Depot reported net sales for fiscal 2001 of $53.6 billion and employs approximately 280,000 people. Fortune Magazine has ranked them as “ America s Most Admired Specialty Retailer”. Business Week cited Home Depot as“TBoards in the U.S. ”In October 10, 2002, Home Depot announc

11、ed they are opening two sourcing offices in Shanghai and Shenzhen. According to Vice President of Global Sourcing, Duane Goodwin, this will allow Home Depot to 5enhance their opportunities to purchase more goods directly from their manufacturers, as well as rapidly expand their purchasing throughout

12、 China and Asia.The company s Income Statemeantd Balance Sheet are found in Appendix 1 and 2, respectively.2. Cost of Equity2.1 Beta EstimationWe arrived at beta estimate for Home Depot of 1.29 using regression analysis of the past 60 months for Home Depot and S&P 500. Home Depot s beta is slightly

13、greater than 1, which isthe market s beta. The beta for Home Depot s stock reported in finansce1.y3a7h,oaon.dcom iindustry s beta is 1T.2h8e. historical prices and the returns of Home Depot as well as the corresponding historical prices and the returns of S&P 500, which are used for the regression a

14、nalysis, are listed as Appendix 2. The beta analysis is summarized in appendix 3.2.2 Estimating Cost of Common Equity using the CAPM MethodTo estimate the cost of common equity, we used the Capital Asset Pricing Model. For the risk free rate we used the 10-year Treasury bond yield of 3.89 % as quote

15、d from as of October 31, 2002. We estimated the market risk premium to be 6 % given that the historical market risk premium was between 5% to 6 %. We arrived at the cost of common equity for Home Depot by multiplying the beta of 1.06 by the historical market risk premium of 6%, and then added this a

16、mount to the risk free rate of 3.89%. The cost of common equity is11.63%. The estimation of the cost of common equity of Home Depot using the CAPM model is summarized in Appendix 5.63. Cost of Preferred StockHome Depot does not have any outstanding preferred stock, or paid preferred dividend. The co

17、mpany does not finance through preferred stocks.4. Cost of DebtWe used a 10-year AAA corporate bond yield of 3.66% as quoted at as ofOctober 31, 2002. Given the company very lowsfinancial leverage and very high coverage ratio, we decided that the company s rating should be AAA-yfeoarrab1o0nd. To est

18、imate thecompany s tax ra,tewe divided the income tax expense of 2002: $ 1,913,000,000, by the income before tax: $ 4,957,000,000. The average tax rate is 0.3859. Our estimation for the firm-tax cost of debt is about 2.25%. The analysis of the cost of debt is summarized in Appendix D.5. Weighted Ave

19、rage Cost Of CapitalIn estimating the weighted average cost of capital, we used the cost of equity of 11.63% and the cost of debt of 2.25%. We calculated the weight of debt to be 2% and the weight of equity to be 98%. For the weight of debt we divided debt by the sum of debt and equity, and for the

20、weight of equity we divided equity by the sum of debt and equity. Our estimated Company s ccapital is 11.44%, or 12%. The calculations for the cost of capital are shown in Appendix E.7Disc ontin ued Operati onsExtraord inary ItemsEffect Of Accou nting Chan gesOther ItemsNet In comePreferred Stock An

21、d Other Adjustme ntsN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/AN/A$3,044$2,581$2,320$1,614N/AN/AN/AN/ANet In come Applicable To Common Shares$3,044$2,581$2,320$1,614Appendix 1.1 ncome StatementPeriod Ending:Total Reve nueCost Of Reve nueGross ProfitOperat ing Expe nsesResearch And Developme ntSell

22、i ng Gen eral And Admi nistrative Expe nsesDepreciati on and Amortizatio nNon Recurri ngOther Operati ng Expe nses3-Feb-02 28-Jan-01 30-Jan-00 31-Jan-99$53,553$45,738$38,434$30,219$37,406$32,057$27,023$21,614$16,147$13,681$11,411$8,605N/AN/AN/AN/A$11,098$9,348$7,503$5,935N/AN/AN/AN/A$117N/AN/AN/AN/A

23、$142$113Operati ng In comeTotal Other In come And Expe nses NetEarnings Before In terest And TaxesIn terest Expe nseIn come Before TaxIn come Tax Expe nseEquity Earnings Or Loss Uncon solidated SubsidiaryMinority InterestNet In come From$4,932$4,191$3,795$2,670$53$47$37$30$4,985$4,238$3,832$2,700$28

24、$21$28$46$4,957$4,217$3,804$2,654$1,913$1,636$1,484$1,040N/AN/AN/AN/AN/AN/AN/AN/A$3,044$2,581$2,320$1,614Non recurri ng Events* In Millions of U.S Dollars except for per share items.8Appen dix 2. Bala nee Sheet Period Ending3-Feb-0228-Ja n-0130-Ja n-0031-Ja n-99Curre nt AssetsCash And Cash Equivale

25、nts$2,477$167$168$62Short Term In vestme nts$69$10$2N/ANet Receivables$920$835$587$469Inven tory$6,725$6,556$5,489$4,293Other Current Assets$170$209$144$109Total Curre nt Assets$10,361$7,777$6,390$4,933Long Term In vestme ntProperty, Pla nt, and Equipme nt Gross1812915232118909422Accumulated Depreei

26、ati on$2,754$2,164$1,663$1,262Property Pla nt And Equipme nt Net$15,375$13,068$10,227$8,160In vestme nt Adva nces to subsidiariesN/AN/A$15$15Other Non-Curre nt Assets$83$77$48$26Intan gible Assets$419$314$311$268Other Assets$156$134$90$63Total Assets$26,394$21,385$17,081$13,465Current LiabilitiesAcc

27、ou nts Payable$3,436$1,976$1,993$1,586Accrued Expe nses$1,998$1,677$1,573$1,157Short Term And Curre nt Long Term Debt$5$4$29$14In come Taxes$211$78$61$100Other Current Liabilities$851650N/AN/ATotal Curre nt Liabilities$6,501$4,385$3,656$2,857Long Term Debt$1,250$1,545$750$1,566Other Liabilities$372$

28、245$237$208Deferred Long Term Liability Charges$189$195$87$85Minority InterestN/A$11$10Negative GoodwillN/AN/AN/ATotal Liabilities$8,312$6,381$4,740$4,716Stock Holders EquityPreferred StockN/AN/AN/AN/ACommon Stock$117$116$115$111Reta ined Earnings$12,799$10,151$7,941$5,876Treasury StockN/AN/AN/AN/AC

29、apital Surplus$5,412$4,810$4,319$2,817Other Stockholder Equity($246)($73)($34)($64)Total Stockholder Equity$18,082$15,004$12,341$8,740Net Tan gible Assets$17,663$14,690$12,030$8,749* In Millions of U.S Dollars except for per share items.9Appendix 3. Historical prices and returns of Home Depot and S

30、& P 500HDHDAdjustedS&P 500AdjustedS&P 500DatePriceReturnPriceReturn1-Oct-0228.459.00%860.025.49%3-Sep-0226.120.62%815.2811.00%1-Aug-0232.886.65%916.070.49%1-Jul-0230.8315.93%911.62-7.90%3-Jun-0236.6711.79%989.82-7.25%1-May-0241.5710.10%1067.14-0.91%1-Apr-0246.24-4.62%1076.92-6.14%1-Mar-0248.48-2.67%

31、1147.393.67%1-Feb-0249.81-0.18%1106.73-2.08%2-Jan-0249.9-1.81%1130.2-1.56%3-Dec-0150.829.36%1148.080.76%1-Nov-0146.4722.16%1139.457.52%1-Oct-0138.04-0.37%1059.781.81%4-Sep-0138.1816.49%1040.94-8.17%1-Aug-0145.72-8.71%1133.58-6.41%2-Jul-0150.086.62%1211.23-1.07%1-Jun-0146.97-4.08%1224.38-2.50%1-May-0

32、148.974.66%1255.820.51%2-Apr-0146.799.27%1249.467.68%1-Mar-0142.821.52%1160.33-6.42%1-Feb-0142.1811.83%1239.94-9.23%2-Jan-0147.845.51%1366.013.46%1-Dec-0045.3416.59%1320.280.41%1-Nov-0038.89-8.77%1314.95-8.01%2-Oct-0042.6318.78%1429.4-0.49%1-Sep-0052.4910.16%1436.51-5.35%1-Aug-0047.65-7.06%1517.686.

33、07%3-Jul-0051.273.64%1430.83-1.63%1-Jun-0049.472.04%1454.62.39%1-May-0048.4813.27%1420.6-2.19%3-Apr-0055.912.41%1452.43-3.08%1-Mar-0063.8212.30%1498.589.67%1-Feb-0056.831.55%1366.42-2.01%3-Jan-0055.9617.63%1394.46-5.09%1-Dec-9967.9430.23%1469.255.78%1-Nov-9952.174.61%1388.911.91%1-Oct-9949.8710.38%1

34、362.936.25%1-Sep-9945.1811.58%1282.71-2.86%2-Aug-9940.49-3.55%1320.41-0.63%1-Jul-9941.98-0.99%1328.72-3.20%1-Jun-9942.414.01%1372.715.44%3-May-9937.19-5.34%1301.84-2.50%1-Apr-9939.29-4.01%1335.183.79%1-Mar-9940.934.36%1286.373.88%1-Feb-9939.22-1.36%1238.33-3.23%4-Jan-9939.76-1.12%1279.644.10%1-Dec-9

35、840.2123.08%1229.235.64%2-Nov-9832.6714.19%1163.635.91%1-Oct-9828.6110.29%1098.678.03%1-Sep-9825.943.59%1017.016.24%3-Aug-9825.04-8.95%957.2814.58%1-Jul-9827.50.81%1120.67-1.16%1-Jun-9827.285.74%1133.843.94%1-May-9825.812.76%1090.82-1.88%1-Apr-9822.883.02%1111.750.91%2-Mar-9822.215.86%1101.754.99%2-

36、Feb-9820.985.59%1049.347.04%2-Jan-9819.872.79%980.281.02%1-Dec-9719.335.00%970.431.57%3-Nov-9718.410.55%955.44.46%1-Oct-9718.316.95%914.62-3.45%16-Sep-9717.12947.2810Appe ndix 4. Beta estimati on output SUMMARYOUTPUTRegressi on StatisticsMultiple R0.648426823R Square0.420457345Adjusted R Square0.410

37、634588Stan dard Error0.08074751Observati ons61ANOVAdfSSMSFSign ifica neeFRegressi on10.2790916370.27909163742.804413351.60141E-08Residual590.3846894580.00652016Total600.663781094Stan dardCoefficie ntsErrort StatP-valueLower 95%In tercept0.0140068670.0103387241.3547964980.1806475920.006680894X Variable 11.2904471530.1972404346.5425081851.60141E-080.895769542Upper 95%Lower 95.0%Upper 95.0%0.0346946280.0066808940.0346946281.6851247650.8957695421.68512476511Appendix 5. Home Depot s Cost of Capital(1) Cost of com mon equity:CAPM = 3.89 % + 1.29 * 6 %= 11.63 %In estimat ing the cost of com mon