Valuation Grid and Reverse Engineering for Home Depot, Inc. (Medium) a. Using the information in Exercise 14.13,

Question:

Valuation Grid and Reverse Engineering for Home Depot, Inc. (Medium)

a. Using the information in Exercise 14.13, calculate the implied growth rate in residual operating income that is implicit in the market price of $42 per share.

b. If you forecast that the growth rate in residual earnings after fiscal year 2006 will be the GDP growth rate of 4 percent, what is the expected return to buying the stock at $42?

c. Prepare a valuation grid showing what the stock is worth for alternative forecasts of return on net operating assets and growth in net operating assets.

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...