9 At the time that of its 10-0 filing of financial statements for the first half of its January 2002 fiscal year, Home Depot\'s shares traded at S50 per share. The following are summaries from those financial statements. (in millions of dollars) 23, 457 221 Financial liabilities Operating liabilities Common equity 1,320 6,709 6642 Operating assets Financial assets (on 2,336 million outstanding shares) 24.678 24,678 (in millions of dollars) Net sales Cost of Merchandise Sold Gross Profit 26,776 18.793 7,981 Operating Expenses: Selling and Store Operating Pre-Opening General and Administrative Total Operating Expenses 4,963 59 5,458 2.523 Operating Income Interest Income (Expense): Interest and Investment Income Interest Expense Interest, Net Earnings Before Income Taxes Income Taxes 2,534 978 Net Earnings According to financial statement footnotes, Home Depot\'s statutory tax rate (combined Federal and State rates) is 39%. Other comprehensive income (not in net earnings above) is negligible. Use a required six-month return for operations of 4% in calculations below. (a) Caleulate the following from these statements: 1. Financial leverage 2. Operating liability leverage 3. After-tax profit margin Home Depot earned a return on beginning net operating assets (RNOA) of 9.3% for the six months ending July 29, 2001. (b) 1. What was the asset turnover during these six months? 2. What was the residual operating income over the six months? (c) (d) Calculate the free cash flow generated by operations during the six months. At the current market price of S50 per share, what growth rate for residual operating income does the market forecast for the future? (e) Calculate Home Depot\'s price-to-sales ratio for trailing six-month sales (0 If both profit margin and asset turnover are expected to continue at their current levels in the future, what is the sales growth rate forecast implied in the price-to-sales ratio?
a)
1. Net financial obligations (NFO) = Financial liabilities – Financial assets
= 1,320 – 1,221
= 99
Financial leverage (FLEV) =
=
= 0.006
2. Net operating assets (NOA) = Operating assets – Operating liabilities
= 23,457 – 6,709
= 16,748
Operating liability leverage (OLLEV) =
=
= 0.401
3. Reformulate income statement:
OI before tax
2,523
Tax reported
978
Tax on net interest income (0.39 x 11)
4
974
OI after tax
1,549
PM = 1,549/26,776 = 5.79%
b)
1. RNOA = PM x ATO
9.3% = 5.79% x ?
? = 1.606
2. First get beginning net operating assets (NOA):
9.3% =
? = 16,656
ReOI = 1,549 – (0.04 x 16,656)
= 882.8
c)
C- I = OI – NOA
= 1,549 – (16,748 –16,656)
= 1,457
d)
This is a reverse engineering exercise:
Market value = 50 x 2,336 million = $116,800 million
116,800 = CSE +
=
(a 3.09% growth rate)
e)
(Unlevered) P/S =
f)
Sales growth same as growth in ReOI = 3.09%
[With constant RNOA, growth in ReOI is driven by growth in sales]
| OI before tax | | 2,523 |
| Tax reported | 978 | |
| Tax on net interest income (0.39 x 11) | 4 | 974 |
| OI after tax | | 1,549 |
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