Questions for Case Discussion
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
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.
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?
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.
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?
the 2-to-1 minimum interest coverage covenant (earnings before interest and taxes/net interest expense)?
How can Home Depot use leasing to circumvent the debt covenant restrictions? What is the approximate value of property, plant, and equipment that Home Depot is currently using under operating leases? See pages 23 and 24 (Note 5 to the Consolidated Financial Statements) and use present value estimates. How does the total value of PPE used under operating leases compare to the Net Property and Equipment amount reported on the balance sheet?
Consider the pros and cons of the following options for Home Depot regarding 1986:
Go ahead and build the new stores. Borrow the money to do it.
Build the new stores. Issue stock to finance the construction.
Lease the new stores from someone else.
Slow down, don't grow so fast.
Are there any other options???
The questions below require you to work with an Excel spreadsheet; that spreadsheet file will be posted in the Course Documents Blackboard folder.
Using the ratio values in sheet Home Depot A, what is projected Cash Flow From Operations for the 5 years 1986 through 1990?
In sheet Home Depot A, change the sales growth rate to 10%. Now, what is projected Cash Flow From Operations for the 5 years 1986 through 1990? Are the values higher or lower than those in (a)? Why?
In sheet Home Depot A, change the sales growth rate back to 40%. Change the value of the Number of Days’ Sales in Inventory ratio from 107.6 to 66.2. What is projected Cash Flow From Operations for the 5 years 1986 through 1990? Are the values higher or lower than those in (a)? Why?
In sheet Home Depot A, reset Number of Days’ Sales in Inventory to 107.6. Change the value of Fixed Asset Turnover from 3.518 to 6.000. What is projected Cash Flow From Operations for the 5 years 1986 through 1990? Are the values higher or lower than those in (a)? Why?
In sheet Home Depot A, reset Fixed Asset Turnover to 3.518. Change the value of Gross Profit...
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