Target Financial Analysis

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Juan A. Torres Rodriguez

Mini Case Assignment

Target Corp. started in 1902 as Dayton’s Dry Goods company. At 1911, Dayton’s Dry Goods is renames as Dayton Company, and commonly known as Dayton’s Department Store. In 1946 Dayton’s Department Stores started giving the community back 5% of their pretax profits, a practice that Target Corp still maintains. During the 1960’s Dayton’s create a new kind of store to appeal the masses called Target, opening the first Target store in the Twin Cities on May 1, 1962. The industry sector in which Target Corporation competes is in the retail sector reaching the $62.87 Billion in sales. As mentioned above, Target competes in the retail sector, which makes the operating risks of the company mainly focused on customer’s perceptions, differentiation of brand, and anticipating consumer preferences to boost their sales, gross margin and profitability. If we take a look at Target’s 10K, the first risk factor they mention is the ability of differentiate the business from other retailers by creating attractive value propositions through a careful combination of price, merchandise assortment, convenience, guest service and marketing efforts. Another risk that all companies in this sector face is the macroeconomic condition of the country and the impact this has in their consumers. This lead us to the financial risk the company might have. One of the financial risks we have to consider in any type of company is the debt to total capitalization ratio. Based on financial information of their 2011 report, we can calculate the debt to total capitalization ratio in the following manner: Total debt: 15,726 million

Total stockholder’s equity: 15,487 million, therefore:
15,726 / 31,213= .50 or 50%
Comparing their debt to total capitalization ratio with industry average, Target’s is too high. The industry debt to total capitalization ratio is 0.36. Comparing the financial information of previous years Target went from 0.58 in 2009 to 0.52 in 2010, to 0.50 in 2011. Overall, Target is improving significantly their debt to capitalization ratio, but still has some work to do. In regards of Target stock, currently they don’t have any preferred stock outstanding, just common stock. Target’s common stock is traded in the NYSE as TGT. The price of it’s common stock as of today is $62.50, going up 0.06 points. Target’s cash dividend yield on the Common Stock is 0.0192 = 1.92% = 2.0: Cash dividends declared per share: $1.20

Current stock price: $62.50
Cash dividend yield= 1.15 dividends declared/ 62.50 stock price = 1.92 = 2.0 Target’s market capitalization is:
668.4 million shares issued and outstanding x $62.50 of stock prices = 41.8 Billion

Continuing with Target’s capital structure, if we look at Target’s liabilities section: Short portion of Long-Term Debt = $3.3 Billion
Long-term debt = $15.2 Billion
Therefore the total debt for Target would be:
3.3 B + 15.2 B = 18. 5 Billion Dollars
Taking the previous calculation of Targets market capitalization of 41.8 the total capitalization would be: 18.5 B + 41.8 B = 60.3 Billion, or:
31% Debt
69% Equity
As of November 18, 2012, Target’s current beta is .48. Now if we would like to calculate what would be Target’s new beta without the long-term debt (unlevered beta) we need to use the Hamada formula for the unlevered beta bu= b/ [1 +(1-T)(D/S)

bu= .48 / [ 1 + (1-34.3%) (18.5/40.6)]
bu= .37
If Target would not have any long-term debt, its beta would be of .37. Moving to Target’s current Marginal Tax Rate, according to the Income Statement found at Target’s annual report, the rate is 34.3%. In order to calculate Target’s Cost of debt before and after taxes, we need to look for the bonds issued by a corporation. Since Target has not issued bonds, I took the cost of a long-term debt due in 2020 as my example. The rate of that long-term debt is 3.875%. This would be the Cost of debt before any taxes...
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