Applying the Gordon Growth Model to Home Depot (HD).

a. Use FactSet to extract the consensus estimates for HDs dividend per share (DPS) and earnings per share (EPS) for the next 12 months (NTM)? What payout and plowback ratios does this correspond to?

b. Find HDs target payout ratio as guided by management in its 2017 Annual Report. Estimate HDs DPS NTM using the consensus estimate for EPS for fiscal year 2018 and managements guided payout ratio.

c. In addition to paying dividends, HD also distributes cash to shareholders in the form of share repurchases. In its 2017 10-K (search on the internet) and its most recent 10-Q (search on the Internet), HD offers details on its share repurchase program since 2002. Based on this information, come up with a reasonable dollar estimate for share repurchases over the next twelve months. If instead HD were to distribute this amount as a special dividend, what would be the special dividend per share, given the most recent number of shares of common stock outstanding, as reported in the most recent 10-Q?

d. Find HDs adjusted 3-year beta on FactSet and write it down. Compare it to our estimates of 1.5/1.65 (see slides 13, 16, and 24 of the Relative Valuation slide deck). Given the nature of HDs business, which estimate do you find more intuitive? Why?

e. Assuming a risk-free rate of 3%, a market risk premium of 5%, a perpetual growth rate of 2.5%, and your previous answers what is HDs intrinsic value according to the Gordon Growth model?

f. Try to explain the discrepancy between the intrinsic value you found in e. and the current market price of HD (around $170 per share).

Per Share Jan '18 Jan '19 Jan '20 Jul 20E Oct '20E Jan '21E Jan '21 Jan '22E Jan 20E Q4 2.12 Apr 20 Q1 2.46 04 EPS 3.39 - 2.71 2.32 10.87 11.82 Guidance 7.45 7.17 3.56 10.16 1.23 Apr '19 Q1 2 .27 - 1.36 2.81 -1.94 9.89 9.75 4.12 11.57 -1.64 Jul '19 Q2 3.17 - 1.36 3.64 -1.06 Oct '19 Q3 2.53 - 1.36 3.59 -1.00 Dividends per Share Cash Flow per Share Book Value per Share 1.38 10.09 10.03 5.46 12.52 -1.77 1.38 1.37 3.13 -1.95 More v 1.38 3.02 -2.48 4.09 -1.66 1.38 3.33 -1.88 2.85 -3.05 5.43 13.23 -2.78 6.45 14.16 -4.45 Per Share Jan '18 Jan '19 Jan '20 Jul 20E Oct '20E Jan '21E Jan '21 Jan '22E Jan 20E Q4 2.12 Apr 20 Q1 2.46 04 EPS 3.39 - 2.71 2.32 10.87 11.82 Guidance 7.45 7.17 3.56 10.16 1.23 Apr '19 Q1 2 .27 - 1.36 2.81 -1.94 9.89 9.75 4.12 11.57 -1.64 Jul '19 Q2 3.17 - 1.36 3.64 -1.06 Oct '19 Q3 2.53 - 1.36 3.59 -1.00 Dividends per Share Cash Flow per Share Book Value per Share 1.38 10.09 10.03 5.46 12.52 -1.77 1.38 1.37 3.13 -1.95 More v 1.38 3.02 -2.48 4.09 -1.66 1.38 3.33 -1.88 2.85 -3.05 5.43 13.23 -2.78 6.45 14.16 -4.45