Problem: At the time that of its 10-Q filing of financial statements for the first half of its January 2002 fiscal year, Home Depot’s shares traded at $50 per share. The following are summaries from those financial statements.
Balance Sheet, July 29, 2001
(in millions of dollars)
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Financial liabilities
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1,320
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Operating assets
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23, 457
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Operating liabilities
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6,709
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Financial assets
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1,221
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Common equity
(on 2,336 million outstanding shares)
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16,649
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24,678
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24,678
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Statement of Earnings, Six Months Ended, July 29, 2001
(in millions of dollars)
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Net sales
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26,776
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Cost of Merchandise Sold
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18,795
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Gross Profit
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7,981
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Operating Expenses:
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Selling and Store Operating
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4,963
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Pre-Opening
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59
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General and Administrative
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436
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Total Operating Expenses
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5,458
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Operating Income
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2,523
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Interest Income (Expense):
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Interest and Investment Income
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22
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Interest Expense
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(11)
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Interest, Net
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11
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Earnings Before Income Taxes
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2,534
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Income Taxes
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978
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Net Earnings
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1,556
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According to financial statement footnotes, Home Depot’s statutory tax rate (combined Federal and State rates) is 39%. Other comprehensive income (not in net earnings above) is negligible. Use a required six-month return for operations of 4% in calculations below.
(a) Calculate the following from these statements:
1. Financial leverage
2. Operating liability leverage
(b) Home Depot earned a return on beginning net operating assets (RNOA) of 9.3% for the six months ending July 29, 2001.
1. What was the asset turnover during these six months?
2. What was the residual operating income over the six months?
(c) Calculate the free cash flow generated by operations during the six months.
(d) At the current market price of $50 per share, what growth rate for residual operating income does the market forecast for the future?
(e) Calculate Home Depot’s price-to-sales ratio for trailing six-month sales.
(f) If both profit margin and asset turnover are expected to continue at their current levels in the future, what are the sales growth rate forecast implied in the price-to-sales ratio?