Hello

This is regarding BUS5440. I need help with the following discussion questions and I need the answer in next 2 hrs as I have a deadline today,

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Share your WACC project findings by posting the following information on the discussion board: ?Name of your firm, industry, beta used, cost of equity, debt, and the WACC ?What problems did you encounter in determining your firm?s WACC? ?How much confidence do you have in your WACC? Were you surprised at the value? ?(Response should be a minimum of 400 words) ?Use APA format for any quotations or citations you use to support your answer ? ********************************************

I am attaching the WACC project report that I did for your reference.

The Home Depot Inc Tanushree Bhattacharya Florida Institute of Technology Financial Management - BUS5440 June 7, 2016 Table of Contents Executive Summary..............................3 Company Introduction / Background..............................5 Financial Analysis.......... 8 Weighted Average Cost of Capital (WACC)...........11 Future Cash Flows ...............18 Historical Stock Price.....................27 Security Analyst's Reports................30 Dividend and Capital Structure ...............32 Corporate Governance......................36 Merger and International Strategy ...............37 References .....................................38 1 Executive Summary The attached report analyzes the financial position of The Home Depot. Home Depot (HD) is the largest U.S. home improvement retailer as well as the fastest growing retailer in U.S. history. The company was founded in 1978 by four gentlemen who had a vision for a one stop shop for do-it-yourselfers. The company's headquarters is in Atlanta, Georgia and has stores in all fifty states as well as Canada, Mexico and China. The company is publicly traded on the New York Stock Exchange (NYSE).Home Depot offers many different products for the home improvement enthusiast or the do-it-yourselfer. Some of the products the company offers are: hardware, plumbing, electrical, building materials, lumber, paint and flooring to name a few. They also provide services such as flooring, carpeting and counter tops installation, as well as rental tools. Their customer base includes three different groups: Do-ItYourselfers, Do-I-For-Me Customers as well as Professional Customers. Home Depot is open seven days a week, 24hours a day. Some of Home Depot's largest competitors include companies such as Lowe's, Ace Hardware and Sears. Lowe's of course is Home Depot's biggest competition because the two companies offer similar products and services. The Home Improvement industry has had some ups and downs during the last few years mainly due to tough economic conditions. Home Depot found a decrease in the amount of new construction materials that were purchased but did see increases in the amount of home improvement projects. Customers were not looking to purchase new homes but rather wanted to update and maintain their existing homes. This report summarizes Home Depots financial position from 2010 to 2011. Home Depot increased its sales from last year but was 41.3% lower than industry average. The debt to equity ratio increased by 14.8% from2010 which is still higher than industry average. Home Depot did increase its net profit margin from last year but was 1.3 points higher than the home improvement industry. Home Depot continues to outperform the industry concerning investments with a Return on Equity (ROE) at 17.1% which is nearly double that of the industry. Return on Assets (ROA) also increased by 7.9% which equates to 29% higher than the industry average. An analysis of Home Depot's Weighted Cost of Capital (WACC) shows a rate of 9.10%. This WACC factor shows that Home Depot is competitive and in alignment with today's marketplace. At the end of March, 2011, there were approximately 164,000 shareholders as investors of Home Depot stock. When looking at a trailing 12 month comparison of Home Depot's stock prices, Home Depot outperformed the industry competitors as well as the market indices for this period. Since rebounding from the past financial crisis during the past few years, Home Depot for the last year has had a 52 week high of $48.07 and a 52week low of $28.13. Home 2 Depot prices have certainly in the past year stabilized at high levels making it an attractive investment. I as an Analysts estimate that Home Depot's earnings will raise from a January 2011 EPS of $2.01 to $2.32 in January 2012 and $2.75 in 2013 which is 70% higher than Lowe's. Annualized projected EPS growth rate for Home Depot is to have an EPS growth rate of 14.30% compared to the industry average of 14.00%. When compared to Lowe's, Home Depot has twice the market capitalization. Home Depot has a high gross margin at 34.4% which is comparable to Lowe's at 34.8%. With all things considered, there is a \"bullish\" consensus on Home Depot's stock. In summary, it is our recommendation that investing in Home Depot's stock is a good decision. The company consistently out performs its competition while earning a good return for its investors. The company has a lower risk than the industry and the S&P 500 when it comes to their betas. The company has a slightly higher debt to income ratio which may make it more expensive for the company to borrow. However, its return on equity shows a good use of equity Home Depot has remained successful due to its mission to always know what the customer wants and to provide what the customer wants. Company Introduction Company History The Home Depot was founded in 1978 by Bernie Marcus and Arthur Blank who partnered with Ken Langone, an investment banker, as well as, Pat Farrah, a merchandising guru. All four men had a vision to build stores with one stop shopping for the do-it-yourselfer. The first Home Depot store was opened in Atlanta, Georgia on June 22, 1979. The stores started off smaller than they are today at 60,000 square feet per store, stocking 25,000 SKUs. They even placed empty card board boxes to the ceiling to give the impression of having more merchandise. Home Depot is the fastest growing retailer in U.S. history. The company in 1981 went public on NASDAQ and then in 1984 they moved to the New York Stock Exchange. They realized their fastest growth between 1980and 2000 but are 3 continually finding ways to make their company more favorable with the consumer. They pride themselves in developing their employees and it shows in their product knowledge. Home Depot is the largest home improvement retailer in the United States. They have stores in all fifty (50) states as well as Canada, Mexico and China. Home Depot's corporate headquarters is located in Atlanta, Georgia. Strategy Home Depot proposed in 2010, a three-pronged initiative in order to fuel more business. The three areas that were reviewed are: supply chain transformation, merchandise transformation and customer service. The supply chain initiative includes the roll out of the company's new Rapid Deployment Centers (RDC).These centers should keep the stores serviced faster and more effectively. The merchandise transformation initiative includes the company's commitment to \"great value and re-establishing product authority.\" The customer service strategy is summed up as \"taking care of their associates\" and \"taking care of customers.\" Both of these two parts of the initiative help with easier return process, guaranteed price matching as well as other bonuses. Main Product and Services Home Depot stocks and has available to consumers between 30,000 to 40,000 products during a year. As of January 30, 2011, the product mix was as follows: 30.0% Plumbing, electrical and kitchen items 29.4% Hardware and seasonal 21.7% Building materials, lumber and millwork 18.9% Paint and flooring Home Depot continually strives to offer the products that the do-it-yourselfer is looking for. They continually form strategic alliances and exclusive agreements with their suppliers in order to provide a large variety of recognizable brands for the consumer. Some examples of the brands they carry are Behr Premium Plus paint, Hampton Bay lighting, Vigoro lawn care products, and Husky hand tools. Martha Stewart Living products have been well received by Home Depot customers. Home Depot also offers several different services for the consumer. Some of the services they offer include installation services for carpet, cabinets, flooring, water heaters and countertops. Home Depot also offers toolrentals. Primary Markets and Customers Home Depot characterizes their customers into three groups: The Do-It-Yourself (\"D-I-Y\") Customers - This type of customers are homeowners who purchase their products and go home and do their own projects and installation. 4 The Do-It-For-Me (\"D-I-F-M\") Customers - This type of customers are homeowners who purchase a product but would like for Home Depot to assist them with an installation or just completion of a project. Professional Customers - This type of customers are general contractors, small business owners tradesmen, and repairmen. These customers often take advantage of Home Depot's delivery and will call services. Major Competitors Lowe's, Ace Hardware and Sears are some of Home Depot's major competitors. Lowe's is Home Depot's biggest competition because they offer similar product offerings as Home Depot. Sears is similar to Home Depot because it sells Craftsman Tools as opposed to Home Depot's line of tools. Ace Hardware comes closer to Home Depot's offerings because of the variety in their stores. Ace Hardware Stores are usually much smaller in size than Home Depot thus they cannot offer the number of different items that Home Depot can. Industry Overview The Do-It-Yourself or Home Improvement industry is beginning to recover from the housing crisis that has occurred in recent years. Consumers are beginning to invest in more renovations and remodeling. The housing crisis was very tough for the do-it-yourself market as consumers were not spending as much money as they had before. Until 2016, the home improvement industry is expected to grow by at least 1.4% annually. The U.S. GDP is expected to grow at a rate of 1.8% signifying that the home improvement industry is in a mature phase of its life cycle because the rate of growth within a ten year period (2006-2016) is less than the U.S. GDP. For Home Depot however, the reverse can be said for their business during the housing crisis. Their sales turned around during the crisis and they found that more consumers were working on do-it-yourself projects, home maintenance and small furnishings. However, consumers were not doing any expensive remodeling during this period. Home Depot was able to stand out from the rest of the industry because of their friendly and knowledgeable people (known as the \"orange-blooded\" associates) by offering some of the free workshops and services that they offered. Summary Why has Home Depot been so successful in the past? Home Depot knows what the consumer wants and provides what they want. Home Depot is open seven (7) days a week, 24 (twenty-four) hours a day in order to provide 5 everyone the opportunity to get what they want any time that they want. Home Depot prides its success on the following factors: \"know your customers, scale your operation so it can grow rapidly, market heavily and keep an eye on your financial model. References: Home_Depot_on_path_to_recoveryhttp://corporate.homedepot.com/OurCompany/History/Pages/default.aspx blog.highbeambusiness.comhttp://www.masterplans.com/business-plan-articleshomedepothttp://www.hometextilestoday.com/article/529670ibisworld.com/industry/Dec 2011Fletcher, Fran July 11, 2011 Financial Analysis Financial Ratio Analysis for the Home Depot GROWTH RATES % COMPAN Y INDUSTR Y 2010 11 3.8 Sales (Qtr vs year ago Qtr) 4.4 Net Income (YTD vs YTD) NA NA NA 121.9 12 -2.4 11.2 95 Sales (5-Year Annual Avg) -2.46 -0.77 7.84 -2.46 Net Income (5-Year Annual Avg) -9.96 -8.45 7.53 -9.96 Dividends (5-Year Annual Avg) 18.76 21.97 5.13 18.76 Net Income (Qtr vs year ago Qtr) PRICE RATIOS COMPAN Y Current P/E Ratio 19.5 7.5 S&P 500 INDUSTR Y S&P 500 2010 19.2 61.6 18.8 P/E Ratio 5-Year High NA 8.9 14.7 23.7 P/E Ratio 5-Year Low NA 3.2 3.4 8.2 Price/Sales Ratio 1.01 380.98 2.2 0.89 Price/Book Value 3.94 3.26 3.76 3.25 Price/Cash Flow Ratio 13.3 12.1 9.6 12.2 S&P 500 2010 PROFIT MARGINS % Gross Margin COMPAN Y INDUSTR Y 34.4 33.95 38.79 34.3 8.4 6.96 17.76 7.8 Net Profit Margin 5.32 4.29 12.85 4.9 5Yr Gross Margin (5-Year Avg) 33.8 34.7 39.4 33.8 7.7 7.3 15.9 7.7 Pre-Tax Margin 5Yr Pre Tax Margin (5-Year Avg) 6 5Yr Net Profit Margin (5-Year Avg) FINANCIAL CONDITION Debt/Equity Ratio 4.9 COMPAN Y 4.5 INDUSTR Y 11.4 4.9 S&P 500 2010 0.61 0.53 0.99 0.52 Current Ratio 1.5 1.4 1.2 1.3 Quick Ratio 0.4 0.4 0.7 0.3 Interest Coverage 12 10.7 24.1 11.2 Leverage Ratio 2.3 2.2 3.4 2.1 11.53 12.02 20.86 11.64 S&P 500 2010 Book Value/Share Investment Returns % COMPAN Y INDUSTR Y Return On Equity 20.04 10.08 22.16 17.4 Return On Assets 8.9 6.4 6.9 8.2 Return On Capital 12.1 4 9.4 11 Return On Equity (5-Year Avg) 17.3 9.6 20.5 17.3 8 7.1 6.4 8 10.9 7.1 8.7 10.9 S&P 500 2010 Return On Assets(5-Year Avg) Return On Capital(5-Year Avg) MANAGEMENT EFFICIENCY COMPAN Y INDUSTR Y Income/Employee 19515 14434 73059 17625 Revenue/Employee 367005 346090 500724 359032 Receivable Turnover 51.9 34.5 13.2 66.4 Inventory Turnover 4.2 6.2 8.2 4.3 Asset Turnover 1.7 1.6 0.7 1.7 Dupont Analysis ROA for 2011 was 8% and 6.2% for 2010 and ROE for 2011 was 18.68% and 14.38% for the year prior. Thesetwo ratios can give a good signal to investors that the company is performing well against 2010. Financial ratio analysis The company has experienced an increase of sales from last year but is 41.3% lower than the industry. Its 5year annual sales average is 1.69% lower than the industry and 1.51% lower in Net Income compared to the industry. Dividends remained the same from last year , however lower than the industry. The current P/E ratio is higher than the industry average Book value and Cash Flow ratios are higher than the industry average. Gross Profit Margin is higher than last year and higher than the industry. More importantly Home Depot increased its Net Profit Margin from last year and is 1.3 points higher than the industry. 7 The debt to equity ratio had increased 14.8% from last year and is 13.2% higher than the industry. This increase may raise concern for lenders in the upcoming year. The Current ratio increased by 13.4% from the year prior and remained 6.7% above the industry. The Leverage ratio for the Home Depot increased by 8.7%from last year this is 4.3% higher than the industry average. The company had a 1% decrease in its Book Value/Share ratio which is 4.1% lower than the industry. This may raise concern for some investors as the book value of the stock has performed lower than the industry. The company had outperformed the industry considerably for its investments. The company's Return on Equity was nearly double of the industry. Its ROA had increased from the year prior by 7.9% which is 29%higher than the industry. The Return on Capital is nearly 3 times that of the industry. The company's Investment performance shows the company's rate of return on its investments has outperformed the industry and is and for the company. The company has a 26.1% higher income/employee average and had experienced a 10.7% increase from last year. The company's revenue/employee was 3.2% higher than the year prior and 5.7% higher than the industry. This is a good sign than the management is maximizing its productivity of the workers. Inventory Turnover is 33.3% lower than the industry this may be a signal that the inventory is staying in the stores too long before being sold or the company is buying too much merchandise beyond the demand of its customers. The company has performed better then the industry on key ratios for 2011 while improving their performance from 2010. The company's improved performance can be credited to good management decisions. In 2011the company had experienced high performance while becoming more profitable. References: http://investing.money.msn.com/investments/key-ratios?symbol=HD 2/10/2012 http://phx.corporate-ir.net/phoenix.zhtml?c=63646&p=irol-reportsannual 2/10/2012 WEIGHTED AVERAGE COST OF CAPITAL (WACC) An accurate analysis of a firm's WACC requires a complete data set of \"inputs\" to ensure proportionate and precise figures are utilized to establish the baseline costs for Equity, Debt & Preferred Stock. All inputs required are 8 indicated below utilizing several financial models to calculate the required Inputs. Models such as the discounted cash flow (DCF) method and the Capital Asset Pricing Model (CAPM) are utilized in lock step with the analysis of Home Depot's financial statements to generate an accurate (and benchmarked) WACC factor. Calculated Beta (Using regression analysis of daily data over 2 year fiscal period) To ensure alignment with current Home Depot Form 10K filings (last published January 2011; with fiscal 2012filings due in a week or two) and the current year now in year-end closing processes, 2 years of data has been selected as the data sample for calculating Home Depot's beta utilizing regression analysis. Table 4.1 Regression Analysis Using slope function to Calculate Beta (Sample of two (2) previous fiscal years of data, total data file contains 506 lines of daily stock data) Dates 2 Fiscal Years (Daily) 31/1/2012 30/1/2012 27/1/2012 26/1/2012 25/1/2012 24/1/2012 23/1/2012 20/1/2012 19/1/2012 18/1/2012 17/1/2012 13/1/2012 12/1/2012 11/1/2012 10/1/2012 9/1/2012 6/1/2012 5/1/2012 4/1/2012 3/1/2012 HD Stock Daily Closing Price 44.39 44.77 44.87 44.95 45.26 44.96 44.88 44.51 45.41 44.88 43.74 43.51 43.39 43.46 43.53 43.23 43.2 43.09 42.74 42.14 % Change -0.849% -0.223% 0.178% -0.685% 0.667% 0.178% 0.831% -1.982% 1.181% 2.606% 0.529% 0.277% -0.161% -0.161% 0.694% 0.069% 0.255% 0.819% 1.424% 0.238% S&P Market (SPX-500) 1312.41 1313.01 1316.33 1318.43 1326.06 1314.65 1316 1315.38 1314.5 1308.04 1293.67 1289.09 1295.5 1292.48 1292.08 1280.7 1277.81 1281.06 1277.3 1277.06 % of Change -0.046% -0.252% -0.159% -0.575% 0.868% -0.103% 0.047% 0.067% 0.494% 1.111% 0.355% -0.495% 0.234% 0.031% 0.889% 0.226% -0.254% 0.294% 0.019% 1.547% The published beta estimates from the recorded sources (i.e. Yahoo Finance published beta) and the regression analysis produced beta drawn from the historic stock and market data analysis do yield figures that do differ, but only slightly by a factor of 0.01 as indicated in the table below. Table 4.2 Home Depot Beta Beta Calculated (506 daily Stock Figures) Beta Posted/Pub* (unlevered) 0.88 0.89 9 *Sources financeyahoo.com/HD The published beta vs. the beta that can calculate using a scatter diagram and regression analysis will depend on the Analyst completing the assessment. In our case, we are using 2 full fiscal years of stock closing prices as our data sample to establish a sample size large enough to be utilized. The published beta is typically calculated against 10 years and in some cases aged historical data even further back in time. The resulting industry calculated/supplied beta figure captures a larger variance sampling of data to establish the beta coefficient factor used in calculating Home Depot's beta vs. the market. The data selected for the regression analysis reflects the most recent 2 fiscal years, which is utilizing historic data since the impact of the global financial crisis, reflecting some of the hardest times since the great depression (though in 2012, we are still not out of the woods) in the calculation of the 0.88 beta figure. Weighted Average Cost of Capital Inputs (Note: Color highlight linkages for data sources & calculations can be followed through the attached tables) Table 4.3 Calculating Home Depot Stock Expected Growth Rate DCF Establishing Inputs for Cost of Equity EPS $2.3 2 Dividend Retention Ratio $1.16 ROE (5 Yr Avg) 17.30% Table 4.4 50% Growth Rate 8.70% Summary of Home Depot Current Market Bonds Bond Symbol HD.GJ HD.GH HD.GL HD.GN HD.GK HD.GM HD.GO Mean Rate for 3x most recent issued Bonds Issuer Name HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC Coupon 5.25 5.4 3.95 4.4 5.88 5.4 5.95 5.74 Maturity 41624 42430 44089 44287 50025 51394 51592 Price 108.488 114.723 111.54 112.69 123.577 117.5 126.094 (Flat not weighted) 10 The above table illustrates the current Home Depot Bond activity and is being referenced to permit an educated approach in assessing and analyzing the firm's internal cost of debt for today's market and the proposed cost of debt rate to be applied in the WACC calculation. Table 4.5 Summary of Calculation Model \"Inputs\" As indicated in the above inputs table, the cost of equity as calculated using the CAPM model as Table 4.7indicates is 10.16% for the value of rs. The table reflects a debt rate for internal cost of debt estimated to be5.5%. The resulting cost of debt after tax factor applied in the WACC formula as 3.67%; as expected the rate is less than the expected rate of return for cost of equity. Table 4.6 Corporate Tax Deduction Figure Yields an approximate 33% corporate tax rate (T) Table 4.7 Capital Asset Pricing Model - Required Return = rS Expected Market Return of shareholders and future investors has been calculated using actual HomeDepot stock data, growth rate forecasts and ROE figures (as indicated in table 4.5 - \"Inputs\") Table 4.8 Capital Structure Weighting - Debt, Preferred Stock and Equity 11 Depot has not offered nor has any preferred stock in the market; effective FY10 the figures reflect $0.00cost of rps. Table 4.9 The Weighted Cost of Capital (WACC) Calculation Home Depot may actually have a competitive WACC situation; however, opportunities for improvement always exist in today's business marketplace. The ratio of debt is a little light if optimal value in Home depot is to be achieved. The agents could increase the organizations value while decreasing the WACC percentage with a different capital structure. Home Depot's operations could be maximized while reducing their WACC factor by increasing the debt ratio of the firm's capital structure by 20% to 25% to lower the WACC factor by 17%. If the HD's debt ratio was increased to 40%, therefore maximizing the value of operations, then the firm's WACC would drop to 7.57%from the current 9.10%; but this may make the market unsettled with such a dramatic shift. To ensure not too much risk or uncertainty was \"injected in to the business\Tool Kit for Capital Structure Decisions Optimum Capital Structure Problem (Millions of Dollars Except Per Share Data) NUMBERS IN RED MUST BE INPUTTED, NUMBERS IN BLUE ARE CALCULATED Input Data (Millions Except Per Share Data) Tax rate 30.79% Debt (D) $3,457.00 Number of shares (n) 290 Stock price per share (P) $71.91 Capital Structure (Millions Except Per Share Data) Market value of equity (S = P n) Total value (V = D + S) Percent financed with debt k (w Percent financed with stock (ws = S/V) $20,846.71 $24,303.71 14.2% 85.8% Cost of Capital Cost of debt (rd) 3.33% 1.15 Beta (b) Risk-free rate (rRF) 2.20% Market risk premium (RPM) Cost of equity (rs = rRF + b RPM ) 10.30% 14.05% Cost of Equity from Dividend Growth Model Future Dividend Growth Rate Last Dividend $ Share Price $ (4/5/13) 19.05% 0.9000 71.91 $ Cost of Equity from Dividend Growth Model 20.54% Cost of Equity from Bond Plus Markup Cost of debt Risk Markup Cost of Equity from Bond Plus Markup Average rs 3.33% 9.80% 13.13% 15.9% WACC 13.97% ESTIMATING THE OPTIMAL CAPITAL STRUCTURE The optimal capital structure is the one that maximizes the value of the company. Also, that same capital structure m influences the expenses of obligation and value. The consequences for obligation are typically evaluated by chatting demonstrate that Strasburg can acquire diverse sums, yet the more it obtains, the higher the expense of its obligation. Estimating Optimal Capital Structure (Millions of Dollars) Percent of Firm Financed with 30% 40.00% 50.00% 1. ws 70.00% 60.00% 50.00% 2. rd 3. 4. b rs 3.33% 1.34 3.33% 1.51 3.33% 1.75 15.98% 17.73% 20.18% 5. rd (1T) 2.30% 11.88% 2.30% 11.56% 2.30% 11.24% 6. WACC Notes: 1. The percent financed with equity is: ws = 1 wd 2. The interest rate on debt, rd, is obtained from investment bankers. 3. The levered beta is estimated using Hamada's formula, and unlevered beta of bU = x and a tax rate of 30.79%: b = bU [1 + (1-T) (wd/ws)]. 4. The cost of equity is estimated using the CAPM formula with a risk-free rate of 2.20% and a market risk premium of 10.30%: rs = rRF + (RPM)b. 5. The after-tax cost of debt is rd (1T), where T = 30.79%. 6. The weighted average cost of capital is calculated as: WACC = ws rs + wd rd (1-T). THE HAMADA EQUATION Hamada built up his condition by blending the CAPM with the Modigliani-Miller model. We utilize the model to dec betas connected with various obligation proportions to discover the expense of value connected with those obligation b = bU x [1 + (1-T) x (D/S)] b = bU x [1 + (1-T) x (wd/ws)] bU = b / [1 + (1-T) x (wd/ws)] Here b is the leveraged beta, bU is the beta that the firm would have if it used no debt, T is the marginal tax rate, D i Levered beta, b Current wd Current ws Tax rate bU 1.15 14% 86% 30.79% 1.0316 As shown above, beta rises with financial leverage. With beta specified, we can determine the effects of leverage on Data From: Data From http://csimarket.com/stocks/singleydividend.php?code=MAR Also, that same capital structure minimizes the WACC. We start by assessing how capital structure are typically evaluated by chatting with investors and venture brokers. Exchanges with its investors higher the expense of its obligation. Note: the rates depend on business sector values. Percent of Firm Financed with Debt (wd) 60.00% and unlevered beta of bU = x 70.00% 80.00% 90.00% 40.00% 30.00% 20.00% 10.00% 3.33% 2.10 3.33% 2.70 3.33% 3.89 3.33% 7.46 23.86% 29.98% 42.24% 79.01% 2.30% 10.93% 2.30% 10.61% 2.30% 10.29% 2.30% 9.98% a with a risk-free = rRF + (RPM)b. model. We utilize the model to decide beta at various measure of monetary influence, and after that utilization the lue connected with those obligation proportions. Here is the Hamada equation: debt, T is the marginal tax rate, D is the market value of the debt, and S is the market value of the equity. etermine the effects of leverage on the cost of equity. that utilization the he equity. The Home Depot Inc Tanushree Bhattacharya Florida Institute of Technology Financial Management - BUS5440 June 7, 2016 Table of Contents Executive Summary..............................3 Company Introduction / Background..............................5 Financial Analysis.......... 8 Weighted Average Cost of Capital (WACC)...........11 Future Cash Flows ...............18 Historical Stock Price.....................27 Security Analyst's Reports................30 Dividend and Capital Structure ...............32 Corporate Governance......................36 Merger and International Strategy ...............37 References .....................................38 1 Executive Summary The attached report analyzes the financial position of The Home Depot. Home Depot (HD) is the largest U.S. home improvement retailer as well as the fastest growing retailer in U.S. history. The company was founded in 1978 by four gentlemen who had a vision for a one stop shop for do-it-yourselfers. The company's headquarters is in Atlanta, Georgia and has stores in all fifty states as well as Canada, Mexico and China. The company is publicly traded on the New York Stock Exchange (NYSE).Home Depot offers many different products for the home improvement enthusiast or the do-it-yourselfer. Some of the products the company offers are: hardware, plumbing, electrical, building materials, lumber, paint and flooring to name a few. They also provide services such as flooring, carpeting and counter tops installation, as well as rental tools. Their customer base includes three different groups: Do-ItYourselfers, Do-I-For-Me Customers as well as Professional Customers. Home Depot is open seven days a week, 24hours a day. Some of Home Depot's largest competitors include companies such as Lowe's, Ace Hardware and Sears. Lowe's of course is Home Depot's biggest competition because the two companies offer similar products and services. The Home Improvement industry has had some ups and downs during the last few years mainly due to tough economic conditions. Home Depot found a decrease in the amount of new construction materials that were purchased but did see increases in the amount of home improvement projects. Customers were not looking to purchase new homes but rather wanted to update and maintain their existing homes. This report summarizes Home Depots financial position from 2010 to 2011. Home Depot increased its sales from last year but was 41.3% lower than industry average. The debt to equity ratio increased by 14.8% from2010 which is still higher than industry average. Home Depot did increase its net profit margin from last year but was 1.3 points higher than the home improvement industry. Home Depot continues to outperform the industry concerning investments with a Return on Equity (ROE) at 17.1% which is nearly double that of the industry. Return on Assets (ROA) also increased by 7.9% which equates to 29% higher than the industry average. An analysis of Home Depot's Weighted Cost of Capital (WACC) shows a rate of 9.10%. This WACC factor shows that Home Depot is competitive and in alignment with today's marketplace. At the end of March, 2011, there were approximately 164,000 shareholders as investors of Home Depot stock. When looking at a trailing 12 month comparison of Home Depot's stock prices, Home Depot outperformed the industry competitors as well as the market indices for this period. Since rebounding from the past financial crisis during the past few years, Home Depot for the last year has had a 52 week high of $48.07 and a 52week low of $28.13. Home 2 Depot prices have certainly in the past year stabilized at high levels making it an attractive investment. I as an Analysts estimate that Home Depot's earnings will raise from a January 2011 EPS of $2.01 to $2.32 in January 2012 and $2.75 in 2013 which is 70% higher than Lowe's. Annualized projected EPS growth rate for Home Depot is to have an EPS growth rate of 14.30% compared to the industry average of 14.00%. When compared to Lowe's, Home Depot has twice the market capitalization. Home Depot has a high gross margin at 34.4% which is comparable to Lowe's at 34.8%. With all things considered, there is a \"bullish\" consensus on Home Depot's stock. In summary, it is our recommendation that investing in Home Depot's stock is a good decision. The company consistently out performs its competition while earning a good return for its investors. The company has a lower risk than the industry and the S&P 500 when it comes to their betas. The company has a slightly higher debt to income ratio which may make it more expensive for the company to borrow. However, its return on equity shows a good use of equity Home Depot has remained successful due to its mission to always know what the customer wants and to provide what the customer wants. Company Introduction Company History The Home Depot was founded in 1978 by Bernie Marcus and Arthur Blank who partnered with Ken Langone, an investment banker, as well as, Pat Farrah, a merchandising guru. All four men had a vision to build stores with one stop shopping for the do-it-yourselfer. The first Home Depot store was opened in Atlanta, Georgia on June 22, 1979. The stores started off smaller than they are today at 60,000 square feet per store, stocking 25,000 SKUs. They even placed empty card board boxes to the ceiling to give the impression of having more merchandise. Home Depot is the fastest growing retailer in U.S. history. The company in 1981 went public on NASDAQ and then in 1984 they moved to the New York Stock Exchange. They realized their fastest growth between 1980and 2000 but are 3 continually finding ways to make their company more favorable with the consumer. They pride themselves in developing their employees and it shows in their product knowledge. Home Depot is the largest home improvement retailer in the United States. They have stores in all fifty (50) states as well as Canada, Mexico and China. Home Depot's corporate headquarters is located in Atlanta, Georgia. Strategy Home Depot proposed in 2010, a three-pronged initiative in order to fuel more business. The three areas that were reviewed are: supply chain transformation, merchandise transformation and customer service. The supply chain initiative includes the roll out of the company's new Rapid Deployment Centers (RDC).These centers should keep the stores serviced faster and more effectively. The merchandise transformation initiative includes the company's commitment to \"great value and re-establishing product authority.\" The customer service strategy is summed up as \"taking care of their associates\" and \"taking care of customers.\" Both of these two parts of the initiative help with easier return process, guaranteed price matching as well as other bonuses. Main Product and Services Home Depot stocks and has available to consumers between 30,000 to 40,000 products during a year. As of January 30, 2011, the product mix was as follows: 30.0% Plumbing, electrical and kitchen items 29.4% Hardware and seasonal 21.7% Building materials, lumber and millwork 18.9% Paint and flooring Home Depot continually strives to offer the products that the do-it-yourselfer is looking for. They continually form strategic alliances and exclusive agreements with their suppliers in order to provide a large variety of recognizable brands for the consumer. Some examples of the brands they carry are Behr Premium Plus paint, Hampton Bay lighting, Vigoro lawn care products, and Husky hand tools. Martha Stewart Living products have been well received by Home Depot customers. Home Depot also offers several different services for the consumer. Some of the services they offer include installation services for carpet, cabinets, flooring, water heaters and countertops. Home Depot also offers toolrentals. Primary Markets and Customers Home Depot characterizes their customers into three groups: The Do-It-Yourself (\"D-I-Y\") Customers - This type of customers are homeowners who purchase their products and go home and do their own projects and installation. 4 The Do-It-For-Me (\"D-I-F-M\") Customers - This type of customers are homeowners who purchase a product but would like for Home Depot to assist them with an installation or just completion of a project. Professional Customers - This type of customers are general contractors, small business owners tradesmen, and repairmen. These customers often take advantage of Home Depot's delivery and will call services. Major Competitors Lowe's, Ace Hardware and Sears are some of Home Depot's major competitors. Lowe's is Home Depot's biggest competition because they offer similar product offerings as Home Depot. Sears is similar to Home Depot because it sells Craftsman Tools as opposed to Home Depot's line of tools. Ace Hardware comes closer to Home Depot's offerings because of the variety in their stores. Ace Hardware Stores are usually much smaller in size than Home Depot thus they cannot offer the number of different items that Home Depot can. Industry Overview The Do-It-Yourself or Home Improvement industry is beginning to recover from the housing crisis that has occurred in recent years. Consumers are beginning to invest in more renovations and remodeling. The housing crisis was very tough for the do-it-yourself market as consumers were not spending as much money as they had before. Until 2016, the home improvement industry is expected to grow by at least 1.4% annually. The U.S. GDP is expected to grow at a rate of 1.8% signifying that the home improvement industry is in a mature phase of its life cycle because the rate of growth within a ten year period (2006-2016) is less than the U.S. GDP. For Home Depot however, the reverse can be said for their business during the housing crisis. Their sales turned around during the crisis and they found that more consumers were working on do-it-yourself projects, home maintenance and small furnishings. However, consumers were not doing any expensive remodeling during this period. Home Depot was able to stand out from the rest of the industry because of their friendly and knowledgeable people (known as the \"orange-blooded\" associates) by offering some of the free workshops and services that they offered. Summary Why has Home Depot been so successful in the past? Home Depot knows what the consumer wants and provides what they want. Home Depot is open seven (7) days a week, 24 (twenty-four) hours a day in order to provide 5 everyone the opportunity to get what they want any time that they want. Home Depot prides its success on the following factors: \"know your customers, scale your operation so it can grow rapidly, market heavily and keep an eye on your financial model. References: Home_Depot_on_path_to_recoveryhttp://corporate.homedepot.com/OurCompany/History/Pages/default.aspx blog.highbeambusiness.comhttp://www.masterplans.com/business-plan-articleshomedepothttp://www.hometextilestoday.com/article/529670ibisworld.com/industry/Dec 2011Fletcher, Fran July 11, 2011 Financial Analysis Financial Ratio Analysis for the Home Depot GROWTH RATES % COMPAN Y INDUSTR Y 2010 11 3.8 Sales (Qtr vs year ago Qtr) 4.4 Net Income (YTD vs YTD) NA NA NA 121.9 12 -2.4 11.2 95 Sales (5-Year Annual Avg) -2.46 -0.77 7.84 -2.46 Net Income (5-Year Annual Avg) -9.96 -8.45 7.53 -9.96 Dividends (5-Year Annual Avg) 18.76 21.97 5.13 18.76 Net Income (Qtr vs year ago Qtr) PRICE RATIOS COMPAN Y Current P/E Ratio 19.5 7.5 S&P 500 INDUSTR Y S&P 500 2010 19.2 61.6 18.8 P/E Ratio 5-Year High NA 8.9 14.7 23.7 P/E Ratio 5-Year Low NA 3.2 3.4 8.2 Price/Sales Ratio 1.01 380.98 2.2 0.89 Price/Book Value 3.94 3.26 3.76 3.25 Price/Cash Flow Ratio 13.3 12.1 9.6 12.2 S&P 500 2010 PROFIT MARGINS % Gross Margin COMPAN Y INDUSTR Y 34.4 33.95 38.79 34.3 8.4 6.96 17.76 7.8 Net Profit Margin 5.32 4.29 12.85 4.9 5Yr Gross Margin (5-Year Avg) 33.8 34.7 39.4 33.8 7.7 7.3 15.9 7.7 Pre-Tax Margin 5Yr Pre Tax Margin (5-Year Avg) 6 5Yr Net Profit Margin (5-Year Avg) FINANCIAL CONDITION Debt/Equity Ratio 4.9 COMPAN Y 4.5 INDUSTR Y 11.4 4.9 S&P 500 2010 0.61 0.53 0.99 0.52 Current Ratio 1.5 1.4 1.2 1.3 Quick Ratio 0.4 0.4 0.7 0.3 Interest Coverage 12 10.7 24.1 11.2 Leverage Ratio 2.3 2.2 3.4 2.1 11.53 12.02 20.86 11.64 S&P 500 2010 Book Value/Share Investment Returns % COMPAN Y INDUSTR Y Return On Equity 20.04 10.08 22.16 17.4 Return On Assets 8.9 6.4 6.9 8.2 Return On Capital 12.1 4 9.4 11 Return On Equity (5-Year Avg) 17.3 9.6 20.5 17.3 8 7.1 6.4 8 10.9 7.1 8.7 10.9 S&P 500 2010 Return On Assets(5-Year Avg) Return On Capital(5-Year Avg) MANAGEMENT EFFICIENCY COMPAN Y INDUSTR Y Income/Employee 19515 14434 73059 17625 Revenue/Employee 367005 346090 500724 359032 Receivable Turnover 51.9 34.5 13.2 66.4 Inventory Turnover 4.2 6.2 8.2 4.3 Asset Turnover 1.7 1.6 0.7 1.7 Dupont Analysis ROA for 2011 was 8% and 6.2% for 2010 and ROE for 2011 was 18.68% and 14.38% for the year prior. Thesetwo ratios can give a good signal to investors that the company is performing well against 2010. Financial ratio analysis The company has experienced an increase of sales from last year but is 41.3% lower than the industry. Its 5year annual sales average is 1.69% lower than the industry and 1.51% lower in Net Income compared to the industry. Dividends remained the same from last year , however lower than the industry. The current P/E ratio is higher than the industry average Book value and Cash Flow ratios are higher than the industry average. Gross Profit Margin is higher than last year and higher than the industry. More importantly Home Depot increased its Net Profit Margin from last year and is 1.3 points higher than the industry. 7 The debt to equity ratio had increased 14.8% from last year and is 13.2% higher than the industry. This increase may raise concern for lenders in the upcoming year. The Current ratio increased by 13.4% from the year prior and remained 6.7% above the industry. The Leverage ratio for the Home Depot increased by 8.7%from last year this is 4.3% higher than the industry average. The company had a 1% decrease in its Book Value/Share ratio which is 4.1% lower than the industry. This may raise concern for some investors as the book value of the stock has performed lower than the industry. The company had outperformed the industry considerably for its investments. The company's Return on Equity was nearly double of the industry. Its ROA had increased from the year prior by 7.9% which is 29%higher than the industry. The Return on Capital is nearly 3 times that of the industry. The company's Investment performance shows the company's rate of return on its investments has outperformed the industry and is and for the company. The company has a 26.1% higher income/employee average and had experienced a 10.7% increase from last year. The company's revenue/employee was 3.2% higher than the year prior and 5.7% higher than the industry. This is a good sign than the management is maximizing its productivity of the workers. Inventory Turnover is 33.3% lower than the industry this may be a signal that the inventory is staying in the stores too long before being sold or the company is buying too much merchandise beyond the demand of its customers. The company has performed better then the industry on key ratios for 2011 while improving their performance from 2010. The company's improved performance can be credited to good management decisions. In 2011the company had experienced high performance while becoming more profitable. References: http://investing.money.msn.com/investments/key-ratios?symbol=HD 2/10/2012 http://phx.corporate-ir.net/phoenix.zhtml?c=63646&p=irol-reportsannual 2/10/2012 WEIGHTED AVERAGE COST OF CAPITAL (WACC) An accurate analysis of a firm's WACC requires a complete data set of \"inputs\" to ensure proportionate and precise figures are utilized to establish the baseline costs for Equity, Debt & Preferred Stock. All inputs required are 8 indicated below utilizing several financial models to calculate the required Inputs. Models such as the discounted cash flow (DCF) method and the Capital Asset Pricing Model (CAPM) are utilized in lock step with the analysis of Home Depot's financial statements to generate an accurate (and benchmarked) WACC factor. Calculated Beta (Using regression analysis of daily data over 2 year fiscal period) To ensure alignment with current Home Depot Form 10K filings (last published January 2011; with fiscal 2012filings due in a week or two) and the current year now in year-end closing processes, 2 years of data has been selected as the data sample for calculating Home Depot's beta utilizing regression analysis. Table 4.1 Regression Analysis Using slope function to Calculate Beta (Sample of two (2) previous fiscal years of data, total data file contains 506 lines of daily stock data) Dates 2 Fiscal Years (Daily) 31/1/2012 30/1/2012 27/1/2012 26/1/2012 25/1/2012 24/1/2012 23/1/2012 20/1/2012 19/1/2012 18/1/2012 17/1/2012 13/1/2012 12/1/2012 11/1/2012 10/1/2012 9/1/2012 6/1/2012 5/1/2012 4/1/2012 3/1/2012 HD Stock Daily Closing Price 44.39 44.77 44.87 44.95 45.26 44.96 44.88 44.51 45.41 44.88 43.74 43.51 43.39 43.46 43.53 43.23 43.2 43.09 42.74 42.14 % Change -0.849% -0.223% 0.178% -0.685% 0.667% 0.178% 0.831% -1.982% 1.181% 2.606% 0.529% 0.277% -0.161% -0.161% 0.694% 0.069% 0.255% 0.819% 1.424% 0.238% S&P Market (SPX-500) 1312.41 1313.01 1316.33 1318.43 1326.06 1314.65 1316 1315.38 1314.5 1308.04 1293.67 1289.09 1295.5 1292.48 1292.08 1280.7 1277.81 1281.06 1277.3 1277.06 % of Change -0.046% -0.252% -0.159% -0.575% 0.868% -0.103% 0.047% 0.067% 0.494% 1.111% 0.355% -0.495% 0.234% 0.031% 0.889% 0.226% -0.254% 0.294% 0.019% 1.547% The published beta estimates from the recorded sources (i.e. Yahoo Finance published beta) and the regression analysis produced beta drawn from the historic stock and market data analysis do yield figures that do differ, but only slightly by a factor of 0.01 as indicated in the table below. Table 4.2 Home Depot Beta Beta Calculated (506 daily Stock Figures) Beta Posted/Pub* (unlevered) 0.88 0.89 9 *Sources financeyahoo.com/HD The published beta vs. the beta that can calculate using a scatter diagram and regression analysis will depend on the Analyst completing the assessment. In our case, we are using 2 full fiscal years of stock closing prices as our data sample to establish a sample size large enough to be utilized. The published beta is typically calculated against 10 years and in some cases aged historical data even further back in time. The resulting industry calculated/supplied beta figure captures a larger variance sampling of data to establish the beta coefficient factor used in calculating Home Depot's beta vs. the market. The data selected for the regression analysis reflects the most recent 2 fiscal years, which is utilizing historic data since the impact of the global financial crisis, reflecting some of the hardest times since the great depression (though in 2012, we are still not out of the woods) in the calculation of the 0.88 beta figure. Weighted Average Cost of Capital Inputs (Note: Color highlight linkages for data sources & calculations can be followed through the attached tables) Table 4.3 Calculating Home Depot Stock Expected Growth Rate DCF Establishing Inputs for Cost of Equity EPS $2.3 2 Dividend Retention Ratio $1.16 ROE (5 Yr Avg) 17.30% Table 4.4 50% Growth Rate 8.70% Summary of Home Depot Current Market Bonds Bond Symbol HD.GJ HD.GH HD.GL HD.GN HD.GK HD.GM HD.GO Mean Rate for 3x most recent issued Bonds Issuer Name HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC HOME DEPOT INC Coupon 5.25 5.4 3.95 4.4 5.88 5.4 5.95 5.74 Maturity 41624 42430 44089 44287 50025 51394 51592 Price 108.488 114.723 111.54 112.69 123.577 117.5 126.094 (Flat not weighted) 10 The above table illustrates the current Home Depot Bond activity and is being referenced to permit an educated approach in assessing and analyzing the firm's internal cost of debt for today's market and the proposed cost of debt rate to be applied in the WACC calculation. Table 4.5 Summary of Calculation Model \"Inputs\" As indicated in the above inputs table, the cost of equity as calculated using the CAPM model as Table 4.7indicates is 10.16% for the value of rs. The table reflects a debt rate for internal cost of debt estimated to be5.5%. The resulting cost of debt after tax factor applied in the WACC formula as 3.67%; as expected the rate is less than the expected rate of return for cost of equity. Table 4.6 Corporate Tax Deduction Figure Yields an approximate 33% corporate tax rate (T) Table 4.7 Capital Asset Pricing Model - Required Return = rS Expected Market Return of shareholders and future investors has been calculated using actual HomeDepot stock data, growth rate forecasts and ROE figures (as indicated in table 4.5 - \"Inputs\") Table 4.8 Capital Structure Weighting - Debt, Preferred Stock and Equity 11 Depot has not offered nor has any preferred stock in the market; effective FY10 the figures reflect $0.00cost of rps. Table 4.9 The Weighted Cost of Capital (WACC) Calculation Home Depot may actually have a competitive WACC situation; however, opportunities for improvement always exist in today's business marketplace. The ratio of debt is a little light if optimal value in Home depot is to be achieved. The agents could increase the organizations value while decreasing the WACC percentage with a different capital structure. Home Depot's operations could be maximized while reducing their WACC factor by increasing the debt ratio of the firm's capital structure by 20% to 25% to lower the WACC factor by 17%. If the HD's debt ratio was increased to 40%, therefore maximizing the value of operations, then the firm's WACC would drop to 7.57%from the current 9.10%; but this may make the market unsettled with such a dramatic shift. To ensure not too much risk or uncertainty was \"injected in to the business\Tool Kit for Capital Structure Decisions Optimum Capital Structure Problem (Millions of Dollars Except Per Share Data) NUMBERS IN RED MUST BE INPUTTED, NUMBERS IN BLUE ARE CALCULATED Input Data (Millions Except Per Share Data) Tax rate 30.79% Debt (D) $3,457.00 Number of shares (n) 290 Stock price per share (P) $71.91 Capital Structure (Millions Except Per Share Data) Market value of equity (S = P n) Total value (V = D + S) Percent financed with debt k (w Percent financed with stock (ws = S/V) $20,846.71 $24,303.71 14.2% 85.8% Cost of Capital Cost of debt (rd) 3.33% 0.89 Beta (b) Risk-free rate (rRF) 2.20% Market risk premium (RPM) Cost of equity (rs = rRF + b RPM ) 10.30% 11.37% Cost of Equity from Dividend Growth Model Future Dividend Growth Rate Last Dividend $ Share Price $ (4/5/13) 19.05% 0.9000 71.91 $ Cost of Equity from Dividend Growth Model 20.54% Cost of Equity from Bond Plus Markup Cost of debt Risk Markup Cost of Equity from Bond Plus Markup Average rs 3.33% 9.80% 13.13% 15.0% WACC 13.20% ESTIMATING THE OPTIMAL CAPITAL STRUCTURE The optimal capital structure is the one that maximizes the value of the company. Also, that same capital structure m influences the expenses of obligation and value. The consequences for obligation are typically evaluated by chatting demonstrate that Strasburg can acquire diverse sums, yet the more it obtains, the higher the expense of its obligation. Estimating Optimal Capital Structure (Millions of Dollars) Percent of Firm Financed with 30% 40.00% 50.00% 1. ws 70.00% 60.00% 50.00% 2. rd 3. 4. b rs 3.33% 1.04 3.33% 1.17 3.33% 1.35 12.86% 14.22% 16.11% 5. rd (1T) 2.30% 9.70% 2.30% 9.45% 2.30% 9.21% 6. WACC Notes: 1. The percent financed with equity is: ws = 1 wd 2. The interest rate on debt, rd, is obtained from investment bankers. 3. The levered beta is estimated using Hamada's formula, and unlevered beta of bU = x and a tax rate of 30.79%: b = bU [1 + (1-T) (wd/ws)]. 4. The cost of equity is estimated using the CAPM formula with a risk-free rate of 2.20% and a market risk premium of 10.30%: rs = rRF + (RPM)b. 5. The after-tax cost of debt is rd (1T), where T = 30.79%. 6. The weighted average cost of capital is calculated as: WACC = ws rs + wd rd (1-T). THE HAMADA EQUATION Hamada built up his condition by blending the CAPM with the Modigliani-Miller model. We utilize the model to dec betas connected with various obligation proportions to discover the expense of value connected with those obligation b = bU x [1 + (1-T) x (D/S)] b = bU x [1 + (1-T) x (wd/ws)] bU = b / [1 + (1-T) x (wd/ws)] Here b is the leveraged beta, bU is the beta that the firm would have if it used no debt, T is the marginal tax rate, D i Levered beta, b Current wd Current ws Tax rate bU 0.89 14% 86% 30.79% 0.7984 As shown above, beta rises with financial leverage. With beta specified, we can determine the effects of leverage on Data From: Data From http://csimarket.com/stocks/singleydividend.php?code=MAR Also, that same capital structure minimizes the WACC. We start by assessing how capital structure are typically evaluated by chatting with investors and venture brokers. Exchanges with its investors higher the expense of its obligation. Note: the rates depend on business sector values. Percent of Firm Financed with Debt (wd) 60.00% and unlevered beta of bU = x 70.00% 80.00% 90.00% 40.00% 30.00% 20.00% 10.00% 3.33% 1.63 3.33% 2.09 3.33% 3.01 3.33% 5.77 18.96% 23.70% 33.19% 61.64% 2.30% 8.97% 2.30% 8.72% 2.30% 8.48% 2.30% 8.24% a with a risk-free = rRF + (RPM)b. model. We utilize the model to decide beta at various measure of monetary influence, and after that utilization the lue connected with those obligation proportions. Here is the Hamada equation: debt, T is the marginal tax rate, D is the market value of the debt, and S is the market value of the equity. etermine the effects of leverage on the cost of equity. that utilization the he equity. Tool Kit for Capital Structure Decisions Optimum Capital Structure Problem (Millions of Dollars Except Per Share Data) NUMBERS IN RED MUST BE INPUTTED, NUMBERS IN BLUE ARE CALCULATED Input Data (Millions Except Per Share Data) Tax rate 30.79% Debt (D) $3,457.00 Number of shares (n) 290 Stock price per share (P) $71.91 Capital Structure (Millions Except Per Share Data) Market value of equity (S = P n) Total value (V = D + S) Percent financed with debt k (w Percent financed with stock (ws = S/V) $20,846.71 $24,303.71 14.2% 85.8% Cost of Capital Cost of debt (rd) 3.33% 1.15 Beta (b) Risk-free rate (rRF) 2.20% Market risk premium (RPM) Cost of equity (rs = rRF + b RPM ) 10.30% 14.05% Cost of Equity from Dividend Growth Model Future Dividend Growth Rate Last Dividend $ Share Price $ (4/5/13) 19.05% 0.9000 71.91 $ Cost of Equity from Dividend Growth Model 20.54% Cost of Equity from Bond Plus Markup Cost of debt Risk Markup Cost of Equity from Bond Plus Markup Average rs 3.33% 9.80% 13.13% 15.9% WACC 13.97% ESTIMATING THE OPTIMAL CAPITAL STRUCTURE The optimal capital structure is the one that maximizes the value of the company. Also, that same capital structure m influences the expenses of obligation and value. The consequences for obligation are typically evaluated by chatting demonstrate that Strasburg can acquire diverse sums, yet the more it obtains, the higher the expense of its obligation. Estimating Optimal Capital Structure (Millions of Dollars) Percent of Firm Financed with 30% 40.00% 50.00% 1. ws 70.00% 60.00% 50.00% 2. rd 3. 4. b rs 3.33% 1.34 3.33% 1.51 3.33% 1.75 15.98% 17.73% 20.18% 5. rd (1T) 2.30% 11.88% 2.30% 11.56% 2.30% 11.24% 6. WACC Notes: 1. The percent financed with equity is: ws = 1 wd 2. The interest rate on debt, rd, is obtained from investment bankers. 3. The levered beta is estimated using Hamada's formula, and unlevered beta of bU = x and a tax rate of 30.79%: b = bU [1 + (1-T) (wd/ws)]. 4. The cost of equity is estimated using the CAPM formula with a risk-free rate of 2.20% and a market risk premium of 10.30%: rs = rRF + (RPM)b. 5. The after-tax cost of debt is rd (1T), where T = 30.79%. 6. The weighted average cost of capital is calculated as: WACC = ws rs + wd rd (1-T). THE HAMADA EQUATION Hamada built up his condition by blending the CAPM with the Modigliani-Miller model. We utilize the model to dec betas connected with various obligation proportions to discover the expense of value connected with those obligation b = bU x [1 + (1-T) x (D/S)] b = bU x [1 + (1-T) x (wd/ws)] bU = b / [1 + (1-T) x (wd/ws)] Here b is the leveraged beta, bU is the beta that the firm would have if it used no debt, T is the marginal tax rate, D i Levered beta, b Current wd Current ws Tax rate bU 1.15 14% 86% 30.79% 1.0316 As shown above, beta rises with financial leverage. With beta specified, we can determine the effects of leverage on Data From: Data From http://csimarket.com/stocks/singleydividend.php?code=MAR Also, that same capital structure minimizes the WACC. We start by assessing how capital structure are typically evaluated by chatting with investors and venture brokers. Exchanges with its investors higher the expense of its obligation. Note: the rates depend on business sector values. Percent of Firm Financed with Debt (wd) 60.00% and unlevered beta of bU = x 70.00% 80.00% 90.00% 40.00% 30.00% 20.00% 10.00% 3.33% 2.10 3.33% 2.70 3.33% 3.89 3.33% 7.46 23.86% 29.98% 42.24% 79.01% 2.30% 10.93% 2.30% 10.61% 2.30% 10.29% 2.30% 9.98% a with a risk-free = rRF + (RPM)b. model. We utilize the model to decide beta at various measure of monetary influence, and after that utilization the lue connected with those obligation proportions. Here is the Hamada equation: debt, T is the marginal tax rate, D is the market value of the debt, and S is the market value of the equity. etermine the effects of leverage on the cost of equity. that utilization the he equity. The Home Depot Inc Tanushree Bhattacharya Florida Institute of Technology Financial Management - BUS5440 June 7, 2016 Table of Contents Executive Summary..............................3 Company Introduction / Background..............................5 Financial Analysis.......... 8 Weighted Average Cost of Capital (WACC)...........11 Future Cash Flows ...............18 Historical Stock Price.....................27 Security Analyst's Reports................30 Dividend and Capital Structure ...............32 Corporate Governance......................36 Merger and International Strategy ...............37 References .....................................38 1 Executive Summary The attached report analyzes the financial position of The Home Depot. Home Depot (HD) is the largest U.S. home improvement retailer as well as the fastest growing retailer in U.S. history. The company was founded in 1978 by four gentlemen who had a vision for a one stop shop for do-it-yourselfers. The company's headquarters is in Atlanta, Georgia and has stores in all fifty states as well as Canada, Mexico and China. The company is publicly traded on the New York Stock Exchange (NYSE).Home Depot offers many different products for the home improvement enthusiast or the do-it-yourselfer. Some of the products the company offers are: hardware, plumbing, electrical, building materials, lumber, paint and flooring to name a few. They also provide services such as flooring, carpeting and counter tops installation, as well as rental tools. Their customer base includes three different groups: Do-ItYourselfers, Do-I-For-Me Customers as well as Professional Customers. Home Depot is open seven days a week, 24hours a day. Some of Home Depot's largest competitors include companies such as Lowe's, Ace Hardware and Sears. Lowe's of course is Home Depot's biggest competition because the two companies offer similar products and services. The Home Improvement industry has had some ups and downs during the last few years mainly due to tough economic conditions. Home Depot found a decrease in the amount of new construction materials that were purchased but did see increases in the amount of home improvement projects. Customers were not looking to purchase new homes but rather wanted to update and maintain their existing homes. This report summarizes Home Depots financial position from 2010 to 2011. Home Depot increased its sales from last year but was 41.3% lower than industry average. The debt to equity ratio increased by 14.8% from2010 which is still higher than industry average. Home Depot did increase its net profit margin from last year but was 1.3 points higher than the home improvement industry. Home Depot continues to outperform the industry concerning investments with a Return on Equity (ROE) at 17.1% which is nearly double that of the industry. Return on Assets (ROA) also increased by 7.9% which equates to 29% higher than the industry average. An analysis of Home Depot's Weighted Cost of Capital (WACC) shows a rate of 9.10%. This WACC factor shows that Home Depot is competitive and in alignment with today's marketplace. At the end of March, 2011, there were approximately 164,000 shareholders as investors of Home Depot stock. When looking at a trailing 12 month comparison of Home Depot's stock prices, Home Depot outperformed the industry competitors as well as the market indices for this period. Since rebounding from the past financial crisis during the past few years, Home Depot for the last year has had a 52 week high of $48.07 and a 52week low of $28.13. Home 2 Depot prices have certainly in the past year stabilized at high levels making it an attractive investment. I as an Analysts estimate that Home Depot's earnings will raise from a January 2011 EPS of $2.01 to $2.32 in January 2012 and $2.75 in 2013 which is 70% higher than Lowe's. Annualized projected EPS growth rate for Home Depot is to have an EPS growth rate of 14.30% compared to the industry average of 14.00%. When compared to Lowe's, Home Depot has twice the market capitalization. Home Depot has a high gross margin at 34.4% which is comparable to Lowe's at 34.8%. With all things considered, there is a \"bullish\" consensus on Home Depot's stock. In summary, it is our recommendation that investing in Home Depot's stock is a good decision. The company consistently out performs its competition while earning a good return for its investors. The company has a lower risk than the industry and the S&P 500 when it comes to their betas. The company has a slightly higher debt to income ratio which may make it more expensive for the company to borrow. However, its return on equity shows a good use of equity Home Depot has remained successful due to its mission to always know what the customer wants and to provide what the customer wants. Company Introduction Company History The Home Depot was founded in 1978 by Bernie Marcus and Arthur Blank who partnered with Ken Langone, an investment banker, as well as, Pat Farrah, a merchandising guru. All four men had a vision to build stores with one stop shopping for the do-it-yourselfer. The first Home Depot store was opened in Atlanta, Georgia on June 22, 1979. The stores started off smaller than they are today at 60,000 square feet per store, stocking 25,000 SKUs. They even placed empty card board boxes to the ceiling to give the impression of having more merchandise. Home Depot is the fastest growing retailer in U.S. history. The company in 1981 went public on NASDAQ and then in 1984 they moved to the New York Stock Exchange. They realized their fastest growth between 1980and 2000 but are 3 continually finding ways to make their company more favorable with the consumer. They pride themselves in developing their employees and it shows in their product knowledge. Home Depot is the largest home improvement retailer in the United States. They have stores in all fifty (50) states as well as Canada, Mexico and China. Home Depot's corporate headquarters is located in Atlanta, Georgia. Strategy Home Depot proposed in 2010, a three-pronged initiative in order to fuel more business. The three areas that were reviewed are: supply chain transformation, merchandise transformation and customer service. The supply chain initiative includes the roll out of the company's new Rapid Deployment Centers (RDC).These centers should keep the stores serviced faster and more effectively. The merchandise transformation initiative includes the company's commitment to \"great value and re-establishing product authority.\" The customer service strategy is summed up as \"taking care of their associates\" and \"taking care of customers.\" Both of these two parts of the initiative help with easier return process, guaranteed price matching as well as other bonuses. Main Product and Services Home Depot stocks and has available to consumers between 30,000 to 40,000 products during a year. As of January 30, 2011, the product mix was as follows: 30.0% Plumbing, electrical and kitchen items 29.4% Hardware and seasonal 21.7% Building materials, lumber and millwork 18.9% Paint and flooring Home Depot continually strives to offer the products that the do-it-yourselfer is looking for. They continually form strategic alliances and exclusive agreements with their suppliers in order to provide a large variety of recognizable brands for the consumer. Some examples of the brands they carry are Behr Premium Plus paint, Hampton Bay lighting, Vigoro lawn care products, and Husky hand tools. Martha Stewart Living products have been well received by Home Depot customers. Home Depot also offers several different services for the consumer. Some of the services they offer include installation services for carpet, cabinets, flooring, water heaters and countertops. Home Depot also offers toolrentals. Primary Markets and Customers Home Depot characterizes their customers into three groups: The Do-It-Yourself (\"D-I-Y\") Customers - This type of customers are homeowners who purchase their products and go home and do their own projects and installation. 4 The Do-It-For-Me (\"D-I-F-M\") Customers - This type of customers are homeowners who purchase a product but would like for Home Depot to assist them with an installation or just completion of a project. Professional Customers - This type of customers are general contractors, small business owners tradesmen, and repairmen. These customers often take advantage of Home Depot's delivery and will call services. Major Competitors Lowe's, Ace Hardware and Sears are some of Home Depot's major competitors. Lowe's is Home Depot's biggest competition because they offer similar product offerings as Home Depot. Sears is similar to Home Depot because it sells Craftsman Tools as opposed to Home Dep