Home Depot Inc Case Study

Home Depot Inc Group 9.Docx

By keilhacker | Studymode.com

Home Depot, Inc. in the New Millennium

Michael Keilhacker

Florida International University

1. What is your estimate of the intrinsic value of Home Depot’s stock as of February 1, 2001? Over the last four years the company grew between 19% and 31%. All analysts forecast that the company will continue to growth due to their strategic goals to open new shops. However, as the overall economy is slowing down, Home Depot will likely be affected by decreased output. Therefore, we took the expected growth rate of 25% for 2002, and for subsequent years the rate will decline by 5% and 3%, respectively. The NOPAT margin is 5.6% at the end of 2000, and due to the economic environment we assume that the margin will decline slightly by 20 basis points per year. Beginning net-working-capital-to-sales ratio and the beginning net-debt-to-capital ratio are given for the years from 1999 to 2001. In 1998, the beginning net-working capital-to-sales ratio is assumed to be 20 basis points lower than in the year 1999. This assumption is based on the fact that sales were lower and that the company did not have as much working-capital as it did in 1999. For years 2002 through 2004 we lowered the ratio again by 20 basis points per year, which is also related to the economic situation. However, we did take into account that the company is trying to grow internally by opening new stores. Nevertheless, we did not know if Home Depot can manage their costs in a way that the ratios could head in a positive direction, and therefore, were more pessimistic in our forecast.

For the beginning net-debt-to-capital ratio we assumed that the value for 1998 is the same as in 1999. For 2002 to 2004, we took the average from 1999 to 2001 because we believe the company will use their strong cash flow, as well as debt, to invest in new stores.

The after-tax cost of debt is calculated by taking the interest expenses from the income statement compared to the long-term debt, excluding current installments and other long-term liabilities; we calculated the tax rate to be 39%.

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