The document discusses estimating the intrinsic value of Home Depot stock as of February 1, 2001. It estimates the value as $23379.4 million based on assumptions about ROE remaining constant at 20% and other factors. It then analyzes whether the observed stock price of $48.20 on that date is consistent with assumptions about future growth rates, ROE, and cost of equity.
The document discusses estimating the intrinsic value of Home Depot stock as of February 1, 2001. It estimates the value as $23379.4 million based on assumptions about ROE remaining constant at 20% and other factors. It then analyzes whether the observed stock price of $48.20 on that date is consistent with assumptions about future growth rates, ROE, and cost of equity.
The document discusses estimating the intrinsic value of Home Depot stock as of February 1, 2001. It estimates the value as $23379.4 million based on assumptions about ROE remaining constant at 20% and other factors. It then analyzes whether the observed stock price of $48.20 on that date is consistent with assumptions about future growth rates, ROE, and cost of equity.
The document discusses estimating the intrinsic value of Home Depot stock as of February 1, 2001. It estimates the value as $23379.4 million based on assumptions about ROE remaining constant at 20% and other factors. It then analyzes whether the observed stock price of $48.20 on that date is consistent with assumptions about future growth rates, ROE, and cost of equity.
1. What is your estimate of the intrinsic value of Home Depot’s stock as of February 1,2001?
Assume that the ROE of Home Depot Inc stay constant during the following years as 20%: β=1.09 Re=Rf+β(ROE-Rf)=5.99%+1.09*6.5%=12.97%
By doing this we assume: the Market risk premium during 2001 would be 6.4%.
Abnormal earnings=Net Income – Shareholders’ Equity at the beginning of the year*R e=(20%- 12.76%)BVE0=1086.3M BVE0=15004M Stock Value=BVE0+pv(AE)=15004M+1086.3/12.97%=23379.4M So the intrinsic value of Home Depot’s stock of Feb 1, 2001 is 23379.4 millions
2. Assumptions regarding Home Depot’s future growth rate, return on equity, and cost of equity are consistent with its observed stock price of $48.20 on February 1, 2001?
From the Question 1, we can know that: ROE=17.20%, cost of equity=18.21% .
Dividend=1.11, stock price=48.20, thus g=k-D1/P=18.21%-1.11/48.20=15.91%. So the future growth rate is 15.91%, return on equity is 17.20%, cost of equity is 18.21%.
Introduction of Home Depot’s Service Performance Improvement (SPI) program since 2000 and is planned to implement in every store by the year-end 2001, which simultaneously increased sales productivity and customer satisfaction and is expected to bring out benefits in future, such as lower operating cost and higher sales revenue. Its commitment to rollout best practices is appreciated in investors’ view. Mortgage interest rates will remain at around 8% after the fall from 8.6% in May 2000.
Increasing competition with Lowe’s, Menards and Homebase, which are smaller in size but more geographically focused. This will has a minor impact to Home Depot’s performance in near future.
Its growth initiatives in terms of customer groups, product categories, store formats, store location, and sales channel are also indicators for its expected growth. Also, these initiatives require considerable investment fund capital.
As Salomon Smith Barney report on 8/23/2000, when the stock was trading at $50, he expected a deceleration in the company’s earnings growth to about 25% per year due to macroeconomic environment – higher interest rates and a slowing economy
Assuming a long-term earnings growth rate of 25%
It wasn’t operating in enough stores to have a material impact on earnings growth
