Final Project

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Business Finance

Description

Learning Objectives:

1. Predicts the effects of he time value of money.

2. Assess the stock valuation process as a viable financial option and application.

3. Assess the bond issuance process as a viable financial option and application.

4. Appraise corporate investment opportunities using capital budgeting estimates.

5. Analyze macroeconomics variables for their impact on financial decision making.

I would recommend that you use the Learning Objectives above a Headers Level One in your paper and provide comments on each of the five areas references in the Learning Objectives.

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Explanation & Answer

Attached.

Answer outline to Financial Analysis of Home Depot

Contents
Time value of money ..................................................................................... Error! Bookmark not defined.
Calculating present time value of money ................................................... Error! Bookmark not defined.
Calculating time value of money based on the given interest rates ....... Error! Bookmark not defined.
Recalculating the present value of the company based on an internal event ........ Error! Bookmark not
defined.
Finding the reasonable amount for selling the company ....................... Error! Bookmark not defined.
The implications of risk on present value .................................................. Error! Bookmark not defined.
Recommendations that I would make on purchasing the company based on future value ............... Error!
Bookmark not defined.
Stock valuation............................................................................................... Error! Bookmark not defined.
Calculating new dividend yield.................................................................. Error! Bookmark not defined.
New dividend yield from increase per share by 1.75 ............................. Error! Bookmark not defined.
New dividend if the firm doubled its outstanding shares ....................... Error! Bookmark not defined.
If the overall rates remained the same ................................................... Error! Bookmark not defined.
Shareholder value....................................................................................... Error! Bookmark not defined.
Dividend policies ....................................................................................... Error! Bookmark not defined.
Bond issuance ................................................................................................ Error! Bookmark not defined.
Calculating new value of bond .................................................................. Error! Bookmark not defined.
New bond value as a result on 5% increase ........................................... Error! Bookmark not defined.
Rates are decreased by 5% ..................................................................... Error! Bookmark not defined.
Company’s decision to raise capital........................................................... Error! Bookmark not defined.
Bond issuance policies ............................................................................... Error! Bookmark not defined.
Capital budgeting data ................................................................................... Error! Bookmark not defined.
Recommendation on whether to pursue the investment ............................ Error! Bookmark not defined.
Difference between NPV and IRR ............................................................. Error! Bookmark not defined.
Macroeconomic items .................................................................................... Error! Bookmark not defined.
Implication of interest rate ......................................................................... Error! Bookmark not defined.
Bonds ......................................................................................................... Error! Bookmark not defined.
Other external factor .................................................................................. Error! Bookmark not defined.
Foreign exchange rate ............................................................................ Error! Bookmark not defined.


Milestone One: Time Value of Money

Amounts
PVIF
PV

FCF1
FCF2
113,000,000.00 111,000,000.00
1.1
1.21
############## ##############

Total PV

##############

Recalculating present value

Amounts
PVIF
PV

FCF1
FCF2
113,000,000.00 111,000,000.00
1.12
1.2544
113,000,000.00 ##############

Total PV

##############

Interest Rate
FCF3
FCF4
FCF5
108,000,000.00 101,000,000.00
97,000,000.00
1.331
1.4641
1.61051
############## ############## $156,219,470.00

FCF3
FCF4
FCF5
108,000,000.00 101,000,000.00
97,000,000.00
1.404928
1.57351936
1.762341683
############## ############## $170,947,143.27

10%

Milestone Two: Stock Valuation and Bond Issuance

Growth
D1= -

Dividend

x-

=

$ 1.16

D2= $

1.16 x

34%

=

$ 1.56

D3= $

1.56 x

21%

=

$ 1.88

Sum

D1=D0*(1+G)
D2=D1*(1+G)
D3=D2*(1+G)

EQUITY

Dividend
$
$
$
$

4.6

PVIF,10%
1.16 0.90909 $ 1.05
1.56 0.82645 $ 1.29
1.88 0.75131 $ 1.41
1.88
$ 18.80
$ 22.56

5,770,925.00 $ 22.56
130,170,562.52

Fiscal Year 2014
First Quarter Ended May 4, 2014
Second Quarter Ended August 3,
2014
Third Quarter Ended November 2,
2014
Fourth Quarter Ended February 1,
2015

High

Low

Dividend

82.91

74.97

0.47

82.05

76.24

0.47

97.52

80.03

0.47

107.62

95.78

0.59

74

63.92

0.39

80.54

73.51

0.39

80.05

72.7

0.39

82.34

75.37

0.47

2

Fiscal Year 2013
First Quarter Ended May 5, 2013
Second Quarter Ended August 4,
2013
Third Quarter Ended November 3,
2013
Fourth Quarter Ended February 2,
2014

1.64

Fiscal Year Ended

Risk-free interest rate
Assumed volatility
Assumed dividend yield
Assumed lives of options

February 1,

February 2,

February 3,

2015

2014

2013

Average rate

1.7

0.8

1.2 1.23333333

22.7

26.3

27 25.3333333

2.3

2.2

2.3 2.26666667

5 years

5 years

5 years

Interest rate

26.5666667

2010 2011 2012 2013 2014 2015

Period

The Home
Depot

100 135.1

170 260.6 303.8 421.7

Nov. 3, 2014 – Nov. 30, 2014

S&P 500 Index

100 121.3 127.7 150.2 180.1 205.7

Dec. 1, 2014 – Dec. 28, 2014

S&P Retail Co
mposite Index

100 127.4 144.7 184.3 230.9 277.3

Dec. 29, 2014 – Feb. 1, 2015

Total Debt

#####

292 3,001 2,150 #####

shares
1,477,359

DPS

price
98.2

2015 $

5,120,208 100.37

First Quarter

1.01

5,770,925 104.07

Second Quarter

1.52

Third Quarter

1.16

Fourth Quarter

1.06

Fiscal Year

4.74

12,368,492 101.84

2014
First Quarter

0.84

Second Quarter

1.25

Third Quarter

0.96

Fourth Quarter

0.73

Fiscal Year

3.78

Milestone Three: Capital Budgeting Data
Interest Rate

Initial Outlay
2013
2014
Initial outlay
$ (1,442.00) $ (1,312.00) (1,389.00)
Net earnings
$ 4,535.00 $ 5,385.00
Depreciation and Amortization $ 1,568.00 $ 1,627.00
Free Cash Flow Amount
$ 6,103.00 $ 7,012.00

NPV
IRR

$24,231.28
17%

$
$
$
$

2015
(1,442.00)
6,345.00
1,651.00
7,996.00

10%

Initial Outlay FCF1
$ (5,585.00) -

FCF2
-

FCF3

FCF4

FCF5

$ (5,585.00) $ 7,196.40 $ 6,476.76 $ 5,829.08 $ 5,246.18 $ 4,721.56

Milestone Four: Microeconomic items

Fiscal Year Ended

Risk-free interest rate
Assumed volatility
Assumed dividend yield
Assumed lives of options

February 1,

February 2,

February 3,

2015

2014

2013

Average rate
1.2 1.23333333
27 25.3333333

1.7

0.8

22.7

26.3

2.3

2.2

2.3

5 years

5 years

5 years

2.26666667

Interest rate 26.5666667


Running head: FINANCIAL ALALYSIS REPORT OF HOME DEPOT

Financial Analysis Report
Name
Institutional affiliation

1

FINANCIAL ALALYSIS REPORT OF HOME DEPOT

2

Contents
Time value of money .................................................................................................................................... 3
Calculating present time value of money .................................................................................................. 3
Calculating time value of money based on the given interest rates ...................................................... 3
Recalculating the present value of the company based on an internal event ........................................ 3
Finding the reasonable amount for selling the company ...................................................................... 4
The implications of risk on present value ................................................................................................. 5
Recommendations that I would make on purchasing the company based on future value ....................... 5
Stock valuation.............................................................................................................................................. 6
Calculating new dividend yield................................................................................................................. 6
New dividend yield from increase per share by 1.75 ............................................................................ 6
New dividend if the firm doubled its outstanding shares ...................................................................... 6
If the overall rates remained the same .................................................................................................. 6
Shareholder value...................................................................................................................................... 6
Dividend policies ...................................................................................................................................... 7
Bond issuance ............................................................................................................................................... 7
Calculating new value of bond ................................................................................................................. 7
New bond value as a result on 5% increase .......................................................................................... 7
Rates are decreased by 5% .................................................................................................................... 7
Company’s decision to raise capital.......................................................................................................... 8
Bond issuance policies .............................................................................................................................. 8
Capital budgeting data .................................................................................................................................. 9
Recommendation on whether to pursue the investment ........................................................................... 9
Difference between NPV and IRR .......................................................................................................... 10
Macroeconomic items ................................................................................................................................. 10
Implication of interest rate ...................................................................................................................... 10
Bonds ..............................................................


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