AgendaTime Item Purpose6:00 Home Depot To apply material

7:00 Lecture - Prospective To Understand and Analyze Prospective Analysis

7:30 HardKey – In groups To apply valuation analysis

8:45 HardKey - Summary Understand Issues

9:00 Final Exam Distribution Deal with Concerns

9:15 Meet with MBA students Determine status of projects

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• Heichinger

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

Projected Income Statement(in millions)

Net Sales 1,000$ EBIT 27.0$ Net Interest (8.7)$ Profit before taxes 18.3$ taxes (8.4)$ Net Income 9.9$

Projected Cash Flow StatementCash FlowNet Income 9.9$ Depr. & DT 8.0$ WC from Oper. 17.9$ Increase in Inv. (31.4)$ Increase in Rec. (5.9)$ Increase in Pay 18.0$ Net Cash from oper (1.4)$

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?

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

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

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

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

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

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