6. An assessment of Target Corporation's market value ratios

A Financial Ratio Analysis of Target Corporation

An Assessment of Its Market Value Ratios

Assume that you are a prospective lending bank of Target Corporation (TGT), a retailer of everyday essentials and fashionable, differentiated merchandise at discounted prices,and are interested in the companys historical and current financial activities and performance. Use the following financial data for Targetto complete and conduct your financial ratio analysis. Then answer the questions that follow. Remember, the results of a ratio analysis often identify issues requiring additional investigation.

Target Corporation

Selected Income Statement, Balance Sheet, and Related Data

Income Statement	2010	2009	2008
Sales	$65,786,000,000	$63,435,000,000	$62,884,000,000
Credit card revenues	1,604,000,000	1,922,000,000	2,064,000,000
Less: Cost of goods sold	45,725,000,000	44,062,000,000	44,157,000,000
Gross profit	$20,061,000,000	$19,373,000,000	$18,727,000,000
Less: Selling, general, and administrative expenses	13,469,000,000	13,078,000,000	12,954,000,000
Less: Other expenses	860,000,000	1,521,000,000	1,609,000,000
Less: Depreciation and amortization	2,084,000,000	2,023,000,000	1,826,000,000
Earnings before interest and taxes (EBIT)	$5,252,000,000	$4,673,000,000	$4,402,000,000
Less: Interest expense	757,000,000	801,000,000	866,000,000
Earnings before taxes (EBT)	$4,495,000,000	$3,872,000,000	$3,536,000,000
Less: Taxes	1,575,000,000	1,384,000,000	1,322,000,000
Net income	$2,920,000,000	$2,488,000,000	$2,214,000,000
Less: Common dividends paid	$609,000,000	$496,000,000	$465,000,000
Dividends per share	$0.92	$0.67	$0.62
Balance Sheet Data
Assets:	2010	2009	2008
Cash and marketable securities	$1,712,000,000	$2,200,000,000	$864,000,000
Receivables	6,153,000,000	6,966,000,000	8,084,000,000
Inventory	7,596,000,000	7,179,000,000	6,705,000,000
Other current assets	1,752,000,000	2,079,000,000	1,835,000,000
Total current assets	$17,213,000,000	$18,424,000,000	$17,488,000,000
Net fixed assets	25,493,000,000	25,280,000,000	25,756,000,000
Other long-term assets	999,000,000	829,000,000	862,000,000
Total assets	$43,705,000,000	$44,533,000,000	$44,106,000,000
Liabilities and Equity:
Accounts payable	$6,625,000,000	$6,511,000,000	$6,337,000,000
Accruals	3,326,000,000	3,120,000,000	2,913,000,000
Other current liabilities	119,000,000	1,696,000,000	1,262,000,000
Total current liabilities	$10,070,000,000	$11,327,000,000	$10,512,000,000
Long-term liabilities	18,148,000,000	17,859,000,000	19,882,000,000
Total debt	$28,218,000,000	$29,186,000,000	$30,394,000,000
Common stock	$59,000,000	$62,000,000	$63,000,000
Additional paid-in capital	3,311,000,000	2,919,000,000	2,762,000,000
Retained earnings	12,117,000,000	12,366,000,000	10,887,000,000
Total equity	$15,487,000,000	$15,347,000,000	$13,712,000,000
Total debt and equity	$43,705,000,000	$44,533,000,000	$44,106,000,000
Other Relevant Data
Common shares outstanding	704,038,218	744,644,454	752,712,464
Total dividends paid	$609,000,000	$496,000,000	$465,000,000
Market price per share	$54.35	$51.27	$31.20

Source: Target Corporation Form 10-K. United States Securities and Exchange Commission, 29 Jan. 2011. Web. 20 Jan. 2012.

Now consider Targets market value ratios. That is, how does the companys financial condition and performance relate to the observed market price of the companys shares? (Note: Round intermediate calculations to two decimal places.)

Target Corporation
Market Value Ratios
Book value per share
2010
2009
2008
EPS
2010
2009
2008
P/E ratio
2010
2009
2008
M/B ratio
2010
2009
2008

1. From 2008 through 2010, Targets market capitalization increased. Specifically, it increased from $23,484,628,877 to $38,177,921,157 between 2008 and 2009 and to $38,264,477,148 in 2010. Which of the following statements are correct? Check all that apply.

During the periods 2008 to 2009 and 2009 to 2010, the positive pressure from the increasing market prices was greater, or stronger, than the offsetting, or negative, pressure from the decreased number of shares outstanding.

During the periods 2008 to 2009 and 2009 to 2010, the number of common shares outstanding decreased by 1.07% and 5.45%, respectively.

During the periods 2008 to 2009 and 2009 to 2010, the market price of Targets common shares increased by 64.33% and 6.01%, respectively.

During the periods 2008 to 2009 and 2009 to 2010, the market price of Targets common shares increased by 39.15% and 5.67%, respectively.

These changes in the companys market capitalization should be construed as news and should be investigated further. One reasonable question that should be asked is: For what reason were the shares, or approximately 6.47% of 2008s outstanding shares, repurchased during the period 2008 through 2010? Was it part of earlier planned program, or were they repurchased to reduce the supply of shares available in the equity market and thereby the market price of the shares? (Note: The answer to this question can be found, in part, by reading the companys annual reports.)

2. Similarly, from 2008 through 2010, the companys book value from year to year. In general, and assuming that everything else remains constant, this behavior should have tended to the companys market-to-book (M/B) ratio. However, over time, Targets M/B ratio had increased, which suggests that the percentage increase in the market price had been than the percentage increase in the companys book value.

Because the denominator of both the market price per share and the book value per share ratios is the number of shares outstanding, the trend of the M/B ratio indicates which of the following?

The market placed an increasing value on the portion of the company owned by the common shareholders.

The market placed a decreasing value on the portion of the company owned by the common shareholders.

The market placed an increasing value on the portion of the company owned by the creditors and debtholders.

3. Targets earnings per share (EPS) ratio, which is calculated by dividing its by the number of common shares outstanding, exhibited a consistently increasing trend, growing by between 2008 and 2009 and by between 2009 and 2010.

4. From 2008 through 2010, Targets price-to-earnings (P/E) ratio exhibited an inconsistent trend. Which of the following phenomena contributed to this pattern? Check all that apply.

Between 2009 and 2010, the market price per share of Targets common stock increased by a greater percentage than that exhibited by its EPS.

Between 2008 and 2009, Targets EPS increased by a greater percentage than the market price of its common shares.

Between 2008 and 2009, the market price per share of Targets common stock increased by a greater percentage than that exhibited by its EPS.