Running head: Valuation of Home Depot
Valuation of Home Depot
(Final Project Report)
Christine Lee
David
Jieyoung Bang
FINA 4241 Corporate Financing Decisions
Tracy Yue Wang
Dec. 9th, 2008
Valuation of Home Depot
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I. Abstract
II. Major Valuation assumptions
A. Company sales growth rates
1.
Forecasts for competitors
2.
Macroeconomic perspectives (Home Improvement industry growth, overall GDP
growth)
For the purposes of our example, we'll assume that Home Depot is growing faster
than the gross domestic product (GDP) expansion of the economy. It is shown that Home
Depot stock is moving with the Dow Jones U.S. Home Improvement Retailers Index. During
the recent recession period, the company will able to returns on new investments that are less
than its cost of capital. We assume that the company is losing sales in accordance with the
economic recession the housing industry is facing today. However, we assume that in the
next 3 years there will be an unleashing of pent up demand for the home improvement
retailers.
There are may be reasons to downplay revenue growth expectations. While the
company's revenue growth will decrease in the first few years, it could slow to a lower rate
by year 2010, as a result of the recent subprime mortgage crisis in the housing industry and
the economic depression. We should err on the side of caution and conservatism and assume
that Home Depot’s top line growth rate profile will commence at -2% for the first three years,
then increase significantly at 4% for the next three years and finally levels off to 4.66% in
year 2013.
3.
Historical growth rates (Long-term use): avg.4.6%
Home Depot has grown revenues at an average of 4.66% in the past 5 years, so we
III. Main results of the valuation process
A. Future cash flow forecasts
1.
Project the DCFs for 2008 – 2013
2.
Project the terminal value at 2013
B. Earnings and stock prices forecasts
1.
Equity value per share
2.
Share value using APV
IV. Changing the debt ratio of the company
Valuation of Home Depot
V. References
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