Budget analysis

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here is home depot case study to help with the assignment :

https://www.sec.gov/Archives/edgar/data/354950/000...

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Running​ ​head:​ ​MILESTONE​ ​4(SECTION​ ​5) Milestone​ ​4:​ ​Section​ ​5 Seynabou​ ​Dicko SNHU 1 MILETSONE​ ​4(SECTION​ ​5) 2 Macroeconomic​ ​Analysis Home​ ​Depot​ ​is​ ​the​ ​largest​ ​retail​ ​home​ ​improvement​ ​store​ ​in​ ​the​ ​United​ ​States.​ ​It​ ​has 55%​ ​of​ ​the​ ​market​ ​cap​ ​in​ ​the​ ​home​ ​improvement​ ​industry.​ ​The​ ​company​ ​recorded​ ​revenue​ ​of $94,595​ ​million​ ​in​ ​Jan​ ​2017​​ ​("HD​ ​Income​ ​Statement​ ​|​ ​Home​ ​Depot,​ ​Inc.​ ​(The)​ ​Stock​ ​-​ ​Yahoo Finance",​ ​2017). Investor’s​ ​decision​ ​about​ ​investing​ ​in​ ​a​ ​project​ ​is​ ​determined​ ​by​ ​the​ ​value​ ​of​ ​the​ ​stock of​ ​the​ ​company.​ ​The​ ​stock​ ​price​ ​of​ ​the​ ​company​ ​is​ ​significantly​ ​affected​ ​by​ ​the​ ​overall market​ ​of​ ​the​ ​economy.​ ​In​ ​other​ ​words,​ ​the​ ​higher​ ​the​ ​stock​ ​price​ ​of​ ​the​ ​company,​ ​the​ ​higher is​ ​it’s​ ​growth​ ​prospects.​ ​One​ ​of​ ​the​ ​ways​ ​to​ ​measure​ ​company’s​ ​stock​ ​valuation​ ​is​ ​to​ ​use​ ​the PE​ ​ratio.​ ​It​ ​is​ ​the​ ​price​ ​to​ ​earnings​ ​ratio​ ​representing​ ​the​ ​ratio​ ​between​ ​company’s​ ​stock​ ​price and​ ​it’s​ ​earning​ ​per​ ​share.​ ​A​ ​positive​ ​issue​ ​from​ ​the​ ​stock​ ​market​ ​has​ ​a​ ​positive​ ​effect​ ​on company’s​ ​PE​ ​ratio.​ ​For​ ​example,​ ​during​ ​the​ ​economic​ ​recession​ ​of​ ​2008,​ ​the​ ​PE​ ​ratio​ ​of Home​ ​Depot​ ​decreased.​ ​However,​ ​when​ ​the​ ​economy​ ​recovered​ ​the​ ​PE​ ​ratio​ ​also​ ​increased as​ ​shown​ ​in​ ​the​ ​below​ ​figure. Fig​ ​1​.Home​ ​Depot​ ​PE​ ​ratio​ ​from​ ​2006​ ​to​ ​2017.Retrieved​ ​from​ ​macrotrends.net MILETSONE​ ​4(SECTION​ ​5) 3 The​ ​overall​ ​market​ ​conditions​ ​can​ ​be​ ​represented​ ​by​ ​the​ ​S&P​ ​share​ ​price​ ​which​ ​is​ ​shown below. Fig​ ​2​.S&P​ ​Share​ ​price.​ ​Retrieved​ ​from​ ​finance.google.com Cost​ ​of​ ​equity​ ​is​ ​defined​ ​as​ ​the​ ​rate​ ​of​ ​return​ ​investors​ ​require​ ​from​ ​a​ ​stock​ ​before searching​ ​for​ ​other​ ​opportunities.The​ ​cost​ ​of​ ​equity​ ​is​ ​inversely​ ​related​ ​to​ ​the​ ​value​ ​of​ ​the stock.​ ​Thus,​ ​when​ ​the​ ​share​ ​price​ ​goes​ ​up​ ​the​ ​cost​ ​of​ ​equity​ ​goes​ ​down.​ ​For​ ​HD,​ ​we​ ​can​ ​say that​ ​higher​ ​value​ ​of​ ​HD’s​ ​common​ ​stock​ ​would​ ​result​ ​in​ ​a​ ​decrease​ ​in​ ​cost​ ​of​ ​capital​ ​in​ ​its WACC.When​ ​a​ ​company​ ​borrows​ ​money​ ​in​ ​a​ ​promise​ ​to​ ​pay​ ​back​ ​at​ ​a​ ​future​ ​date​ ​with interest,​ ​it​ ​is​ ​called​ ​debt​ ​financing.​ ​A​ ​company​ ​may​ ​use​ ​loans,​ ​bonds​ ​and​ ​other​ ​forms​ ​of​ ​debt which​ ​gives​ ​the​ ​company​ ​an​ ​idea​ ​of​ ​overall​ ​rate​ ​to​ ​be​ ​paid​ ​by​ ​the​ ​company​ ​to​ ​use​ ​debt financing.​ ​Small​ ​business​ ​firms​ ​only​ ​use​ ​debt​ ​financing​ ​for​ ​their​ ​business​ ​activities,​ ​whereas other​ ​may​ ​use​ ​only​ ​equity​ ​finance​ ​if​ ​they​ ​are​ ​funded​ ​by​ ​equity​ ​investors.​ ​With​ ​the​ ​growth​ ​of these​ ​small​ ​business​ ​firm,​ ​it​ ​is​ ​likely​ ​that​ ​they​ ​will​ ​use​ ​a​ ​combination​ ​of​ ​equity​ ​and​ ​debt financing.​ ​The​ ​cost​ ​of​ ​debt​ ​is​ ​normally​ ​less​ ​than​ ​the​ ​cost​ ​of​ ​equity​ ​(r​s​).Cost​ ​of​ ​debt​ ​is​ ​equal​ ​to rd​ ​(1-T),​ ​where​ ​T​ ​is​ ​the​ ​tax​ ​rate​ ​and​ ​r​d​​ ​is​ ​the​ ​borrowing​ ​rate.Thus,​ ​as​ ​long​ ​as​ ​the​ ​company​ ​is not​ ​debt-financed,​ ​the​ ​WACC​ ​will​ ​be​ ​greater​ ​than​ ​r​d​(1-T). WACC​ ​is​ ​the​ ​rate​ ​used​ ​by​ ​the​ ​firm​ ​to​ ​discount​ ​cash​ ​flows​ ​in​ ​the​ ​net​ ​present​ ​value (NPV)​ ​calculation​ ​at​ ​the​ ​firm​ ​level.​ ​They​ ​are​ ​inversely​ ​related​ ​to​ ​one​ ​another.​ ​In​ ​other​ ​words, MILETSONE​ ​4(SECTION​ ​5) 4 increase​ ​in​ ​WACC​ ​will​ ​cause​ ​NPV​ ​to​ ​decrease,​ ​and​ ​a​ ​decrease​ ​in​ ​WACC​ ​would​ ​cause​ ​NPV to​ ​increase. External​ ​factors​ ​can​ ​significantly​ ​affect​ ​company’s​ ​financial​ ​position.​ ​When​ ​the​ ​US economy​ ​expands,​ ​it’s​ ​GDP​ ​increases​ ​which​ ​represent​ ​the​ ​value​ ​of​ ​the​ ​economic​ ​output​ ​of the​ ​country.​ ​Increase​ ​in​ ​GDP​ ​will​ ​cause​ ​an​ ​increase​ ​in​ ​production,​ ​and​ ​hence​ ​more​ ​people would​ ​buy​ ​HD​ ​products​ ​causing​ ​an​ ​increase​ ​in​ ​net​ ​profit​ ​or​ ​sales.​ ​Thus,​ ​market​ ​expansion would​ ​have​ ​a​ ​positive​ ​impact​ ​on​ ​company’s​ ​performance. Nominal​ ​and​ ​real​ ​GDP​ ​are​ ​considered​ ​as​ ​a​ ​financial​ ​metric​ ​for​ ​evaluating​ ​company’s economic​ ​growth​ ​and​ ​development.​ ​However,​ ​there​ ​exists​ ​difference​ ​between​ ​nominal​ ​and real​ ​GDP.Real​ ​GDP​ ​is​ ​the​ ​GDP​ ​made​ ​at​ ​a​ ​constant​ ​price,​ ​whereas​ ​nominal​ ​GDP​ ​is​ ​the​ ​GDP at​ ​the​ ​current​ ​price​​ ​(Mankiw,​ ​2017).​ ​Nominal​ ​GDP​ ​is​ ​the​ ​GDP​ ​without​ ​the​ ​effect​ ​of​ ​inflation, whereas​ ​real​ ​GDP​ ​is​ ​inflation-adjusted​ ​GDP.As​ ​HD’s​ ​CEO,​ ​I​ ​would​ ​prefer​ ​real​ ​GDP compared​ ​to​ ​nominal​ ​GDP​ ​as​ ​real​ ​GDP​ ​monitor​ ​the​ ​growth​ ​of​ ​output​ ​in​ ​an​ ​economy.​ ​Real GDP​ ​use​ ​the​ ​method​ ​of​ ​constant​ ​price​ ​to​ ​track​ ​the​ ​total​ ​value​ ​produced.​ ​When​ ​GDP​ ​is adjusted​ ​for​ ​inflation,​ ​a​ ​lower​ ​GDP​ ​indicates​ ​a​ ​decrease​ ​in​ ​output,​ ​whereas​ ​nominal​ ​GDP decrease​ ​may​ ​be​ ​due​ ​to​ ​a​ ​decrease​ ​in​ ​price​ ​or​ ​output.​ ​Thus,​ ​I​ ​would​ ​prefer​ ​real​ ​GDP​ ​to measure​ ​the​ ​output​ ​of​ ​an​ ​economy. The​ ​FED​ ​can​ ​use​ ​three​ ​tools​ ​to​ ​either​ ​increase​ ​or​ ​decrease​ ​the​ ​interest​ ​rate​ ​to​ ​achieve its​ ​monetary​ ​policy.​ ​These​ ​are​ ​open​ ​market​ ​operations,​ ​reserve​ ​requirement​ ​and​ ​the​ ​discount rate.​ ​Among​ ​the​ ​three​ ​monetary​ ​policy​ ​tools,​ ​FED​ ​mostly​ ​uses​ ​open​ ​market​ ​operation​ ​as​ ​it​ ​is flexible.​ ​The​ ​Federal​ ​Open​ ​market​ ​Committee​ ​purchase​ ​and​ ​sell​ ​government​ ​securities through​ ​open​ ​market​ ​operations.​ ​Home​ ​Depot​ ​Inc.​ ​will​ ​be​ ​significantly​ ​influenced​ ​by increase​ ​in​ ​overall​ ​interest​ ​rates.​ ​Lower​ ​rates​ ​for​ ​home​ ​financing​ ​will​ ​boost​ ​HD’s​ ​sale​ ​as people​ ​have​ ​to​ ​pay​ ​less​ ​interest​ ​to​ ​buy​ ​HD​ ​products.However,​ ​if​ ​the​ ​interest​ ​rate​ ​is​ ​increased, MILETSONE​ ​4(SECTION​ ​5) 5 the​ ​sale​ ​of​ ​HD’s​ ​products​ ​will​ ​get​ ​reduced​ ​as​ ​loans​ ​for​ ​home​ ​financing​ ​will​ ​be​ ​offered​ ​by​ ​the bank​ ​at​ ​higher​ ​interest​ ​rate. MILETSONE​ ​4(SECTION​ ​5) 6 References HD​ ​Income​ ​Statement​ ​|​ ​Home​ ​Depot,​ ​Inc.​ ​(The)​ ​Stock​ ​-​ ​Yahoo​ ​Finance​. (2017). ​Finance.yahoo.com​.​ ​Retrieved​ ​29​ ​October​ ​2017,​ ​from https://finance.yahoo.com/quote/HD/financials?p=HD Home​ ​Depot​ ​(HD)​ ​EPS​ ​&​ ​PE​ ​Ratio​ ​History.​ ​(2017). Macrotrends.net.​ ​Retrieved​ ​28​ ​October 2017,​ ​from http://www.macrotrends.net/stocks/charts/HD/pe-ratio/home-depot-pe-ratio-history Mankiw,​ ​N.​ ​(2017). ​Macroeconomics​.​ ​New​ ​York:​ ​Worth​ ​Publishers. ​S&P​ ​500:​ ​INDEXSP:.INX​ ​historical​ ​prices​ ​-​ ​Google​ ​Finance.​ ​(2017). Finance.google.com. Retrieved​ ​29​ ​October​ ​2017,​ ​from https://finance.google.com/finance/historical?cid=626307&startdate=Aug+1%2C+20 08&enddate=Oct+29%2C+2017&num=30&ei=eCz2WdGMAcmZuQTBzIPAAQ Instructions for Milestone #4 (Section 5) & Final Project Submission The following additional information should be used when you write up your Milestone #4 (Section 5) assignment and your Final Project Submission. The CEO of the company is convinced that a financial analysis should hinge only on what is happening internally within HD. Using the Home Depot balance sheet on page 32 and the income statement on page 33, conduct the following financial analysis by computing the ratios below: Macroeconomic Items to Cover for Milestone #4 (Section 5): 1. How might a positive issue from the stock market impact the company’s stock valuation numbers? For example, since the November 2016 election, there has been a considerable increase in all major stock market indices. Would higher values for HD’s common stock result in an increase or decrease in cost of equity capital in its WACC as we discussed in class and in Chapter 9 (i.e., the value of rs in the DCF model for the cost of equity)? In addition, explain how such a change in the cost of rs might lead the firm to use more or less debt financing in its WACC? Finally, briefly explain how a change in HD’s WACC would impact (increase or decrease) the NPV of the capital budgeting project you analyzed in Milestone #3 (Section 4) of your term project. 2. Suppose the US economy continues to expand as it has most recently. How might this external event impact HD (in terms of its sales, net income, etc.)? Briefly distinguish between nominal GDP versus real GDP. As the firm’s CEO, if you were to analyze changes in nominal GDP versus real GDP data briefly explain which of the two would you argue is most relevant. Furthermore, it has been widely speculated that the FED will continue to increase interest rates in the future. Based on our macroeconomics discussions in class on 10/16, what are the three (3) tools of monetary policy which the FED can use to change interest rates? Which of these three monetary policy tools is most often used by FED policymakers? How might an increase in overall market interest rates impact HD? Explain your answer. For your Final Project Submission and Financial Analysis, Please Cover the Following Items: 1. Determine the current and quick ratios for 2015 and 2014 and briefly comment on the changes between these two years. 2. Determine days sales outstanding (DSO) for 2015 and 2014 and briefly comment on the changes between these two years. Note: Here use Net Receivables and Net Sales as well as a 365-day year. 3. Determine the total asset turnover ratios (TATO) for 2015 and 2014 and briefly comment on the changes between these two years. 4. Determine the Operating Cycle for HD in 2015 and 2014 as well as HD’s Cash Conversion Cycle in both 2014 and 2015. Based on your CCC for Home Depot, has operating liquidity increased or decreased over these two years? Briefly explain. Note: Use Merchandise Inventories from the balance sheet on page 32 and Accounts Payable from the balance sheet when you determine the turnover ratios and the Operating Cycle for HD. Similarly, use Net Sales and Cost of Sales (as cost of goods sold) from the income statement on page 33 when you determine DSO (question #2 above) and payables turnover for HD and then its Payables Deferral Period. 5. Determine the profit margin (PM) for 2015 and 2014 and briefly comment on the changes between these two years. Note: Here use the value of Net Earnings for each of the two years and the values of Net Sales for the two years as well. 6. Determine the value of return on assets (ROA) for 2015 and 2014 and briefly comment on the changes between these two years. Once again, rely on the value of Net Earnings (from the income statement and Total Assets from the balance sheet). 7. Determine the value of return on equity (ROE) for 2015 and 2014 and briefly comment on the changes between these two years. In your calculation of ROE, once again rely on the value of Net Earnings (from the income statement) and Total Stockholders’ Equity (in the next-to-last line of the balance sheet on page 32 of the 10-K report). ...
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drclarrisj
School: University of Virginia

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Running head: HOME DEPOT CASE STUDY FINANCIAL ANALYSIS

Final Project Submission:
Home Depot Case Study Financial Analysis
Student’s Name
Institutional Affiliation

HOME DEPOT CASE STUDY FINANCIAL ANALYSIS

2

1. Current and quick ratios
Whereas current ratio is used to determine the liquidity of a company and its ability to pay shortterm liabilities using its short term assets, quick ratio measures the quantity of the most liquid
current assets available to cover current liabilities. Quick ratios give a more detailed view of the
company’s ability to meet its short term assets si...

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