The Home Depot Case
Home Depot
Questions for Case Discussion
1. Look at page 16 of the case (Selected Financial Data). Note that fiscal 1985 ends on February 2, 1986 (there is a typo on this page; the far left numbers column should be February 2, 1986 instead of February 2, 1985). Evaluate Home Depot 's performance in the following areas:
• Growth in Sales
• Growth in Total Assets
• Change in Net Income
• Growth in Long-term Debt
2. Look at page 17 of the case (Management Discussion). Compare 1985 to 1983. Why has return on sales decreased from 4.0 percent to 1.2 percent? What factors might explain the individual category changes from 1983 to 1985? Remember that these are changes in percentage of sales, not in absolute amount.
3. Look at Exhibit A (page 3 of these case questions). Why is Home Depot 's cash flow from operations negative? Where has Home Depot been getting the money to finance acquisition of stores? What would happen to Home Depot if the cash flows for operating, investing, and financing activities for fiscal 1986 (year ending February 1987) were to be exactly the same as for fiscal 1985?
4. Go back to page 16 and compute debt ratio (total liabilities/total assets) for the most recent five years. Use the accounting equation (Assets = Liabilities + Equities) to compute total liabilities. What do you think about the mix between short-term debt and long-term debt? Note: Total liabilities = Short-term liabilities + long-term liabilities.
5. From the data on page 4, it appears that Home Depot will need approximately $75 million to finance its 1986 expansion plans. Can Home Depot borrow the whole $75 million without violating existing debt covenants? Take a look at their debt covenant on pages 21 and 22 (Note 3 to the Consolidated Financial Statements). As of the end of fiscal 1985, is Home Depot in compliance with:
a) the $150,000,000 minimum tangible net worth covenant?
b) the 2-to-1 minimum interest coverage covenant (earnings before interest
Questions for Case Discussion
1. Look at page 16 of the case (Selected Financial Data). Note that fiscal 1985 ends on February 2, 1986 (there is a typo on this page; the far left numbers column should be February 2, 1986 instead of February 2, 1985). Evaluate Home Depot 's performance in the following areas:
• Growth in Sales
• Growth in Total Assets
• Change in Net Income
• Growth in Long-term Debt
2. Look at page 17 of the case (Management Discussion). Compare 1985 to 1983. Why has return on sales decreased from 4.0 percent to 1.2 percent? What factors might explain the individual category changes from 1983 to 1985? Remember that these are changes in percentage of sales, not in absolute amount.
3. Look at Exhibit A (page 3 of these case questions). Why is Home Depot 's cash flow from operations negative? Where has Home Depot been getting the money to finance acquisition of stores? What would happen to Home Depot if the cash flows for operating, investing, and financing activities for fiscal 1986 (year ending February 1987) were to be exactly the same as for fiscal 1985?
4. Go back to page 16 and compute debt ratio (total liabilities/total assets) for the most recent five years. Use the accounting equation (Assets = Liabilities + Equities) to compute total liabilities. What do you think about the mix between short-term debt and long-term debt? Note: Total liabilities = Short-term liabilities + long-term liabilities.
5. From the data on page 4, it appears that Home Depot will need approximately $75 million to finance its 1986 expansion plans. Can Home Depot borrow the whole $75 million without violating existing debt covenants? Take a look at their debt covenant on pages 21 and 22 (Note 3 to the Consolidated Financial Statements). As of the end of fiscal 1985, is Home Depot in compliance with:
a) the $150,000,000 minimum tangible net worth covenant?
b) the 2-to-1 minimum interest coverage covenant (earnings before interest