Lowe’s Companies Inc. is the second largest retailer of home improvement products in the world, with a specific emphasis on retail do-it-yourself (DIY) and commercial business customers. Lowe’s specializes in offering products and services for home improvement, home decor, home maintenance, home repair and remodeling, and maintenance of commercial buildings.

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Assume that on July 8, Year 6, Lowe’s stock price closed at \($45.30\) per share. An analyst at a prominent Wall Street bank set a price target of \($52\) per share based on an EPS forecast of \($2.22\) per share for fiscal Year 6.

Assume that the company’s cost of equity is 14 percent. Use the Residual Income valuation model to calculate the equity value of the Lowe’s Companies. [As a base case, a company whose expected ROE is 25 percent per year, whose cost of equity is 14 percent, and whose growth in book value is expected to be 20 percent per year for the first ten years and five percent per year thereafter, would have an intrinsic value of 4.015 times current book value.] Do you think Lowe’s is worth \($52\) per share? Why?

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LOWE'S COMPANIES INC. Consolidated Balance Sheet ($ millions) Assets Cash and cash equivalents Short-term investments Accounts receivable-net Merchandise inventory. Deferred income taxes Other current assets.. Year 5 Year 4 $ 853 273 $ 799 54 172 166 3,968 3,611 58 93 244 197 Total current assets 5,568 4,920 Property, less accumulated depreciation. 10,352 8,653 Long-term investments 29 22 Other assets. 160 141 Total assets. $16,109 $13,736 Liabilities Short-term borrowings.. Current maturities of long-term debt Accounts payable... 50 $ 100 29 59 1,943 1,715 Employee retirement plans.. 88 126 Accrued salaries and wages 306 221 Other current liabilities 1,162 796 Total current liabilities. 3,578 3,017 Long-term debt, excluding current maturities 3,736 3,734 Deferred income taxes. 478 305 Other long-term liabilities. 15 6 Total liabilities. 7,807 7,062