Question: Using Home Depot’s 2010 and 2011
Using Home Depot’s 2010 and 2011 balance sheets in Figure 3.2 and statements of earnings in Figure 3.3 in Chapter 3, set up the ratios presented in Figure 4.4 for Home Depot for 2010 and 2011, indicating the numerator and denominator of each. Confirm the answers presented in Figure 4.4. 
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FIG 4.4 Performance Ratios for Home Depot and Lowe's НОME DEPOT LOWE'S Num.! Den.' Measure 2012 2011 2010 2012 2011 2010 PERFORMANCE MEASURE Return on equity 3,883 17,898 21.7% 17.7% 13.7% 11.1% 11.1% 9.4% Profit margin 3,883 70,395 5.5% 4.9% 4.0% 3.7% 4.1% 3.8% Asset-turnover' data-toggle="tooltip" data-placement="top" title="Click to view definition...">Asset Turnover 70,395 40,518 1.74 1.69 1.62 1.50 1.45 1.43 Financial leverage 40,518 17,898 2.26 2.12 2.11 2.03 1.86 1.73 PROFITABILITY Gross margin 24,262 70,395 34.5% 34.3% 33.9% 34.6% 35.1% 34.9% EBIT margin 6,661 70,395 9.5% 8.6% 7.3% 6.5% 7.3% 6.6% Operating expense ratio 17,601 70,395 25.0% 25.7% 26.6% 28.0% 27.8% 28.3% Return on invested capital? 4,330 30,832 14.0% 12.3% 10.0% 6.5% 6.8% 6.2% RESOURCE MANAGEMENT Fixed asset turnover 70,395 24,448 2.9 2.7 2.6 2.3 2.2 2.1 Age of inventory 10,325 126 81.7 86.8 85.0 92.8 95.9 97.9 Age of receivables 1,245 193 6.5 5.8 5.3 Age of payables 4,856 126 38.4 38.5 40.6 48.3 50.2 50.9 LIQUIDITY Current ratio 14,520 9,376 1.5 1.3 1.3 1.3 1.4 1.3 Quick ratio 3,232 9,376 0.3 0.2 0.2 0.2 0.2 0.1 LEVERAGE Debt-to-assets* 22,620 40,518 55.8% 52.9% 52.5% 50.7% 46.3% 42.2% Debt-to-equity* Long-term debt to capital 5 22,620 17,898 126.4% 112.4% 110.8% 103.0% 86.1% 73.1% 12,934 30,832 41.9% 38.6% 37.9% 33.9% 29.0% 23.9% Interest coverage 6,661 593 11.2 10.3 5.9 8.8 10.7 10.8 Debt service coverage 8,234 3.4 639 12.9 2.7 3.7 13.3 4.2 1 in $millions assumes tax rate of 35% based on cost of sales *debt measured as total liabilities based on all interest-bearing debt |
> Describe the three key cash-related activities of a firm.
> Identify the sources of cash and uses of cash for each year. Create sources and uses statement. Ace Inc. Income Statements ($000s) Year 1 Year 2 Sales $250,000 $290,000 Cost of goods sold 165,000 173,000 Gross margin 85,000 117,000 Selling & admin e
> Explain the difference between real assets and financial assets.
> According to the pecking-order model of capital structure, firms will tend to raise capital in which of the following orders? a. Equity, debt, internal financing b. Internal financing, debt, equity c. Equity, internal financing, debt d. Debt, internal fi
> According to the trade-off model of capital structure, why is there an optimal capital structure for a particular firm?
> Explain why a hotel company might have a higher proportion of debt in its capital structure relative to a drug company.
> What would you expect to happen to the price of Fastest Company’s preferred shares if inflation increased and the Fed increased interest rates, with banks following suit?
> Explain what we mean by diversification and how it relates to firm-specific (unsystematic) risk and market (systematic) risk?
> Based on the chart of betas in Figure 10-16, how would you describe the relative riskiness of investing in Bank of America? Procter & Gamble Co. 0.28 The Home Depot Inc. 1.03 Kraft Foods Inc. 0.30 Chevron Corporation 1.06 McDonald's Corp. 0.30 Americ
> Based on the chart of betas in Figure 10-16, if an investment in the overall stock market was expected to return 10 percent over the next year, what return would you expect if you invested in IBM? Procter & Gamble Co. 0.28 The Home Depot Inc. 1.03 Kr
> Explain how the cash flow cycle works.
> Explain the relationship between the cost of raising funds from the firm’s perspective and the required return on bonds, preferred shares, and common shares from the investor’s perspective.
> What factors would impact the price of preferred shares?
> Historical U.S. market returns tend to approximately follow a normal distribution, which implies that returns are plus or minus one standard deviation from the mean (arithmetic return) two-thirds of the time and are plus or minus two standard deviations
> What is the average arithmetic return over two years for a stock that goes from $10 to $20, then back to $10?
> What is the average annual compound (geometric) return over two years for a stock that goes from $10 to $20, then back to $10?
> Twice Lucky, Inc. was planning a 10-year bond issue with a 6% coupon rate. Just prior to the issue, a major credit rating agency announced a surprise upgrade in its rating. How might this announcement impact the planned bond issue? Explain.
> All things being equal, would you expect to receive a higher or lower interest payment if a bond had a call provision?
> Suppose a firm is involved in major litigation and is expected to lose its case, which would cost the firm millions of dollars. Surprisingly the firm wins the case and immediately the stock price jumps. Is the observation of the price increase consistent
> Suppose an investor uncovers a strategy by which she or he is able to predict future stock prices by observing trends in past prices. What form of the efficient market hypothesis would this be evidence against?
> If research employs an event study, what form of the efficient market hypothesis is it most likely testing?
> Given the “stylized facts” related to IPO performance, if you were able to obtain IPO shares at the issue price, when might be the best time to sell the shares: after the first day of trading or three-to-five years later?
> What type of investor is most likely to purchase a private placement?
> All things being equal, would you expect to receive a higher or lower interest payment if a bond had a sinking fund?
> What is the highest discount rate at which the project would still be acceptable (i.e., a zero NPV)?
> What is the profitability index for the project in question 2? discount rate = 8.0% initial investment = ($12,000) CF1 = $15,000 NPV = $1,889 = -$12,000 + $15,000/(1.08) = -$12,000 + $13,888.89
> Estimate the age of accounts receivable for each year.
> From a lender’s (or an investor’s) perspective, which is safer and why: commercial paper or banker’s acceptances? Ace Inc. Income Statements ($000s) Year 1 Year 2 Sales $250,000 $290,000 Cost of
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> Suppose that the firm in question #1 plans to increase the proportion of debt as part of its capital structure. The projected EPS would then be $2.50. In a world with no financial distress, determine what the stock price should be and explain why in the
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