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Bulls Eye Analyst
A Valuation of
Target
As of November 1, 2006
Kyle Barkel
[email protected] Jerry Boroff
[email protected] Ryan Campbell
[email protected] Peter Carini
[email protected] Leslie Mitchell
[email protected] Camille Ricci
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Table of Contents
Executive Summary………………………………3 Business & Industry Analysis Company Overview……………………………………...…5 Five Forces Model ……………………………….….6
Competitive Analysis……………………………………...12 Industry Conclusion……………………………………….15 Accounting Analysis
Key Accounting Policies………………………………….15 Accounting Flexibility…………………………………….17 Accounting Strategy……………………………………...19 Quality of Disclosure……………………………………..19 Screening Ratio Analysis…………………………..……21 Potential Red Flags……………………………..………..25 Undoing Accounting Distortions…………..………...26 Ratio Analysis and Forecast Financials Financial Ratio Analysis……………………….……….27 Time Series Analysis…………………………...……...28 Cross Sectional (Benchmark) Analysis…….……..32 Financial Statement Forecasting Method..……...47 Analysis and Forecasting Solutions………..……...49 Valuation Analysis Method of Comparables……………………………….50 Cost of Capital…………………………………………….51
Discounted Dividend Models………………………...53 Discounted Free Cash Flows………………………...54 Abnormal Earnings Growth Method……………….55
Discounted Residual Income Method….…………56 LR Average RI Perpetuity Method…………….…..57 Altman’s Z-score………………………………………...59 Enterprise Value/ EBITDA……………………………59 Appendixes
Appendix A ………………………………………………..62 Appendix B…………………………………………………63
Appendix C ………………………………………………..69 Appendix D ………………………………………………..74
References……………………………………………………79
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Executive Summary
Investment Recommendation: Over-Valued, Sell 11/1/2006
TGT-NYSE $57.70 EPS Forecast52 Week Range $44.70 - $60.34 FYE 1/28 2005 (A) 2006 (E) 2007 (E) 2008 (E)Revenue (2005) $56.73B EPS 2.98 2.94 3.28 3.66Market Capitalization $49.84 B
Ratio Comparison Target IndustryShares Outstanding $858.9MM Trailing P/E 19.54 20.68
Forward P/E 16.22 16.52Dividend Yield 0.70% Forward PEG 1.08 1.343-Month Avg Daily Trading Volume 5428320 M/B 3.379 3.043Percent Institutional Ownership 86.80%
Valuation EstimatesBook Value Per Share (Mrk) 17.23%ROE 8.14% Actual Current Price $57.70ROA 18.39%Est. 5 Year EPS Growth Ratio Based Valuations
P/E Trailing $61.61Cost of Capital Estimated R2 Beta Ke P/E Forward $49.21Estimated Ke 11.69% PEG Forward $33.5610-Year 0.417317 1.31608 10.86% Dividend Yield $25.265-Year 0.417676 1.31642 10.77% M/B $58.223-Year 0.4181 1.3172 11.37%Published 1.00 Intrinisic Vvaluations
Discounted Dividend $7.45Kd 5.64% Free Cash Flows $3.87WACC 8.096% Residual Income $30.27
Abnormal Earnings Growth $29.33Long-Run Residual Income Perp ($19.22)
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Target Corporation has established itself as a leader in the discount-retail industry.
They provide a unique combination of discount products backed by a strong
differentiation strategy. They differentiate themselves in the industry based on
customer service and higher quality products. Their name and constant commitment
toward consumer needs is what segments them in the discount-retail industry. They
currently compete in the marketplace with Wal-Mart, Costco, and K-Mart. There are
more companies located in this industry but these are the main competitors based on
size and market share. The threat of new entrants into this industry is moderate due to
the fact that legal barriers to entry are low, however it would be nearly impossible for a
new company to come into this industry and compete on Target and Wal-Mart’s level
due to the enormous amount of capital that needs to be put up. Target is susceptible
to threat of substitute products because of internet based sales, and the fact that their
products are easily substitutable. However, the nature and size of their business makes
the power of suppliers low and gives them more power to reinforce prices and
products.
Target’s accounting policies are moderately conservative. They seem to keep all of
their numbers transparent, and the numbers that may seem confusing have strong
explanations disclosed in the 10K’s. Target also has maintained the same accounting
firm, Price Water Coopers, as their audit firm for the past five years of historical data.
This is assuring factor that no exploitation has been present. We also noticed that
Target not only discloses positive outcomes but it has no problem disclosing the
negative outcomes it has achieved throughout the fiscal year. This shows us that
management is not afraid to show negative results, which, in turn makes us believe
that they are not timid about their job security. A strong management team is a good
indicator that manipulation of financial statements is not currently present.
In doing our financial ratios we were able to get values that helped us to compare
Target to the rest of their competitors in the industry. We discovered that that Target’s
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sales diagnostics ratios and core expense ratios did not show anything out of the
ordinary. They remained consistent with the industry and held a sales / cash from sales
ratio close to one, which is a good indication that Target has more liquid assets. The
only change was in 2003, but this was due to the acquisition of other companies, and
every year thereafter has been consistent within the industry.
After forecasting Target’s key financials out ten years we were able to get a better
understanding of what Target was going to look like in the future. We came to the
conclusion that based on the overall growth of the industry and Target’s consistent
growth overtime that this will be a steady continuous process in the next ten years. We
believe that no irregularities will occur, such as acquisitions and mergers in the near
future. Since, these forecasts are the basis for our valuations of the company we
needed to make sure that they were as precise as possible.
When all of our valuations of our company were completed, which included ratio
valuations, and intrinsic valuations, we came to the conclusion that Target is over-
valued. All of our valuation models were consistent to the degree that each model
tested showed a substantial over-valuation in the market place. Out of all the models
we tested the long-run ROE perpetuity was the only outlier. It gave us a negative
value. This is a lot lower then our average from our other models of roughly $17.73.
The rest of our models stayed consistent in showing the firm is over-valued. These
valuations were taken back to the end of 2005 and then were put into a future value to
get the share price at November, 1 2006. With our models averaging out to $17.73
and the current market price listed at $57.70 our conclusion is that Target is highly
over-valued and we recommend selling this stock.
BUSINESS AND INDUSTRY ANALYSIS
Company Overview:
“Expect More. Pay Less.” “Always Thinking Ahead. Always Moving Forward.” These
slogans are the foundation of the high quality, guest friendly, discount retailer Target.
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The Dayton Company introduced and opened its first Target location in Roseville,
Minnesota in 1962. Target focuses on offering a variety of products including clothing,
home furnishings, kitchen ware, patio, gardening, home décor, pets, furniture and bed
& bath. Some of Target’s best selling departments include clothes, electronics, and
health care services. In addition, Target sells more gift cards than any other retailer in
the world. Moreover, over the past five years Target has experienced growing
earnings. In 2005 alone Target recorded earnings of about $2.5 billion dollars. Net
earnings were relatively $1.1 billion in 2001, $1.4 billion in 2002, $1.6 billion in 2003,
and finally $1.9 billion in 2004. The total asset value has also been increasing over the
past five years. In 2001 Target recorded over nineteen billion in total assets. For the
years 2002-2005 assets were recorded as $24.5, $27.4, $32.3, and about $35 billion in
total assets for 2005. Target is the fourth largest retail distributor in the nation. They
have approximately 1300 stores in forty-seven states and hope to expand to 2010
stores by 2010. Targets main customers’ average age is forty one years old. Eighty
percent of the customer base is female. Recently, the younger more educated crowd
has been the main source of revenue for Target. The average income per year for a
Target customer is around fifty seven thousand dollars (10-K) & (Target.com).
Five Forces Model:
The five forces model is the basis of assessing the profit potential of each industry in
which a firm is competing. The factors that affect profitability in the industry are the
degree of actual and potential competition, which is classified by rivalry among existing
firms, threat of new entrants, and threat of substitute products and bargaining power in
input and output markets, which is described by bargaining power of buyers and
suppliers.
Force 1: Rivalry among Existing Firms
Rivalry among existing firms is determined by industry growth, concentration,
differentiation, switching costs, scale/learning economies, fixed-variable costs, excess
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capacity, and exit barriers. These factors will be discussed individually to determine this
force.
Industry Growth
The discount retail industry is a mature industry with a few big name players. Wal-
Mart, K-Mart, and Target are the main three in the discount retail industry. The
potential for growth within the industry is still pretty high. With more and more
discount-retail stores popping up around the globe providing more competition and
Wal-Mart lowering prices by the day, price competition is beginning to become
prevalent.
In the discount-retail industry supply is beginning to become greater then demand.
This is forcing stores to look at other ways to grow. They know have to incorporate
cheaper prices, and stronger supply chain methods to keep growing in this industry.
Although competition within the industry is strong, there is still plenty of opportunity for
this industry to meet demand growth in the future.
Concentration
The number of firms in an industry and their relative sizes determine the degree of
concentration in an industry. The degree of concentration influences the extent to
which firms in an industry can coordinate their pricing and other competitive moves.
Target has three major competitors in the discount retailing industry: Wal-Mart, K-
Mart, and Costco. Target is currently second in respect to revenue with a current
margin of $55.0 MM. They rank second behind Wal-Mart and above K-Mart by roughly
$2.0MM. Since Target is not the leader of this industry they do not necessarily set and
enforce the rules of competition. Considering that Wal-Mart has revenues of two times
of Target, Target has begun to set itself apart from Wal-Mart by providing more name
brands and more upscale products as opposed to products with the lowest cost. Below
is a chart that shows the different market share for each competitor in the industry.
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TGT COST KMART WMT Industry
Market Cap: 48.73B 23.80B N/A 189.65B 2.10B
Employees: 338,000 N/A 133,0001 1,800,000 11.40K
Qtrly Rev Growth (yoy): 11.20% 19.00% N/A 10.70% 10.20%
Revenue (ttm): 56.73B 60.15B 19.09B2 338.80B 4.59B
Gross Margin (ttm): 32.52% 12.31% N/A 23.34% 28.44%
EBITDA (ttm): 6.18B 2.28B N/A 25.05B 280.12M
Oper Margins (ttm): 8.31% 2.71% N/A 5.84% 2.94%
Net Income (ttm): 2.61B 1.10B 1.11B1 11.68B 111.80M
EPS (ttm): 2.984 2.303 N/A 2.622 1.30
P/E (ttm): 19.01 22.55 N/A 17.35 19.39
PEG (5 yr expected): 1.08 1.51 N/A 1.11 1.42
P/S (ttm): 0.88 0.40 N/A 0.57 0.54
This chart shows how the top four competitors in the discount-retail industry are doing
compared to each other. Target is currently the second highest, in terms of market
cap.
Degree of Differentiation and Switching Costs
The extent to which firms in an industry can avoid head-on competition depends on the
extent to which they can differentiate their products and services. Since the discount-
retail industry’s products are relatively the same there is little differentiation between
competitors which means the main form of competition is price based on products.
However, the major switching costs in this industry are service and quality. Although
the products in the industry are the same, some discount-retail stores are beginning to
offer higher quality products to draw customers to them and compete more on services
and higher quality as their competitive advantage.
Scale/Learning Economies
If there is a steep learning curve or other types of scales economies in the industry, size
becomes an important factor for firms. For new firms that try to come into this industry
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and try to gain market share, they it’s a difficult task. With the massive size of the
current firms in the industry and the millions of dollars that need to be raised to begin
competition, gaining new market share is a hard task at hand.
Excess Capacity and Exit Barriers
If capacity in an industry is larger than customer demand, there is a strong incentive for
customers to cut prices to fill capacity. There is excess capacity in the discount-retail
industry which causes some firms to rely solely on price cutting to fill their capacity.
However, since exit barriers are high due to the large amount of money invested in
capital and fixed assets firms are now trying to compete more on differentiation of
products and services as opposed to price to fill capacity.
Force 2: Threat of New Entrants
The potential for earning abnormal profits is a main attraction to new entrants in an
industry. The threat of new firms entering an industry potentially constrains the pricing
of existing firms in the industry. Therefore, the ease to which new firms can enter the
industry is a strong factor that determines a firm’s profitability in the industry.
Economies of Scale: Moderate
If economies of scale are large then new entrants need to decide to invest in large
capacity which will put them at a cost disadvantage with already competing firms. It
would take a substantial amount of money for a new entrant to enter and be
competitive in the discount retail industry. However, in terms of general merchandise
economies of scale can be considered low. In order to compete on terms of
differentiation would be very difficult. Target currently has many contracts with major
designers as well as contracts with certain brands such as Nintendo or Sony which
makes products specialized for Target.
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First Mover Advantage: Moderate
Firms that have been in the industry for a long time can force future entrants to shy
away from trying to compete if there are strong first mover advantages. A first mover
advantage when it comes to lowest price, in this industry belongs to Wal-Mart.
However, when it comes to differentiation the first mover advantage is not that
prominent.
Access to Channels of Distribution and Relationships: High
Limited capacity and high costs of developing new channels are a strong barrier to
entry. Firms within the industry have built strong relationships with designers for their
products in their stores. Firms have many exclusive deals with various designers and
product lines. Most firms have exclusive rights to the channels where they control the
distributor and the relationship within. If a new entrant was to come into the industry
the ability to lure a potential distributor or supplier away from one of the big three
already in the industry is very small. However, other distribution channels concerning
general merchandise can be easily accessed by other competitor’s which in turn can
devalue the supply chain.
Legal Barriers: Low
Patents, copyrights, and licensing regulations can limit entry into an industry. Since the
retail industry is so huge and most products can be considered interchangeable, it is
difficult to place legal barriers of entry such as patents or such because than it can have
a monopoly type of result.
Force 3: Threat of Substitute Products
The threat of substitute products depends on the price and performance of these
products and the willingness of a customer to substitute. A main area that is becoming
increasingly prominent in the discount-retail industry is internet based sales. More and
more customers are turning away from in-store shopping and are moving to internet
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sales. Firms in this industry need to be able to keep up with this trend in technology in
order not to lose market share within the industry.
The threat of substitute products to firms within the industry is a prominent threat.
Many of their products can be purchased at other stores just as easily as theirs.
However, firms whose business focus is that of differentiation can separate itself from
the pack. They believe that people want to come to their store not only for upscale
products but for the ambiance of the store. Firms are beginning to refer to themselves
as discount department stores instead of just a discount store. In order to offset the
threat of substitute products, firms in the industry are beginning to pay special
attention is given to the design of the store environment.
Force 4: Bargaining Power of Buyers
Two factors determine the power of buyers: price sensitivity and relative bargaining
power. These two factors are determined by how much buyers can bargain on price
and how they will succeed in doing so. However, since some firms introduce their
products as being differentiated, customers are not that sensitive to price increases.
However, if the firm is firmly basing its competitive advantage on price, then customers
become more sensitive to price increases. With relative bargaining power the firms in
the discount-retail industry are able to set rules of competition but are extremely aware
that competition is strong and they do not want to risk losing customers because
consumers have such a strong bargaining power.
Force 5: Bargaining Power of Suppliers
The bargaining power of suppliers can be segmented into two types of divisions:
Designer Products and General Merchandise.
Designer Products
Power of Suppliers: Moderate to High
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The bargaining power of companies that sell on a differentiation strategy is moderate to
high. This is due to the fact that some firms in the industry need designer products in
order to keep up with its business model. Firms need these suppliers but on the flip
side these suppliers know they could not handle a loss if one of these firms tried to go
elsewhere. However, if a firm was to lose one of their main designers they could also
lose loyal consumer market share also.
General Merchandise
Power of Suppliers: Low
The bargaining power of general merchandise from a supplier standpoint can be
considered low. This is due to the fact that there are so many different manufacturers
of goods that do not need to be differentiated to make sales.
Competitive Analysis:
A firm’s value is determined by its ability to earn a return on its capital in excess of the
cost of capital. Target has obtained this goal by placing its self among other highly
competitive industries. The magnitude of competition existing between these rivalries
transformed Target with a competitive advantage in differentiation. Target exists within
a mature industry, so the advantage it gains from differentiation is crucial.
Target’s main competitors consist of Wal-Mart, COSTCO, and K-Mart. Its three
competitors operate under the cost leadership competitive advantage. Wal-Mart heavily
exhibits all of the cost leadership strategies. They have economies of scale/scope,
efficiently produce their products at the lowest costs possible, use low-cost inputs, have
simple product designs, own their own trucks and distribution centers, invests in little
research and development, and has a tight cost control system. Although Target will
never encompass all of the cost leadership strategies, such as Wal-Mart does, they do
display some of the characteristics. They are always looking for ways to improve their
supply chain. They have acquired twenty-three regional distribution centers and have
three import warehouses. In addition, they own their own trucks to distribute
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merchandise from warehouses to stores. In addition, they engage in reverse auctions,
as Wal-Mart does, to get customers the most competitive prices. However, since Wal-
Mart is the number one retailer, Target simply does not have the bargaining power with
suppliers as Wal-Mart does.
Target’s differentiation allows them to provide more distinct products and services that
are valued by their customers. They clearly follow all of the differentiation strategies.
They have superior product quality, offer superior product variety, have superior
customer service, have flexible delivery, invest heavily in brand image, invest heavily in
research and development, and focus on creativity and innovation(Target-2005 Annual
Report).
Target is known for supplying quality products at competitive prices. They strive to
carry products that keep up with current trends and are of high quality and value. In
2005 alone, Target introduced five new lines of quality goods to prove to consumers
that they are committed to design. They have implemented Clear Rx, a color-coded,
easy-to-read prescription bottle to help prevent taking the wrong dosage or someone
else’s medicine. Also, they had their largest designer launch to-date made by Thomas
O’Brien who sells exclusively at Target. He has designed more than 500 items in
decorative home, furniture, lighting, and holiday decorations. They introduced Choxie,
a gourmet chocolate, only offered at Target. This quality chocolate line has over 100
items. Smith & Hawken made their exclusive Target debut with a line of garden
accessories and décor. Furthermore, they have introduced a new limited-edition
apparel line. Target will change international designers every three months, and their
clothing line will be under the name GO International. Target also has partnered with
world-class designers that offer form and function. Target focuses on a higher-quality
and a stylish design to attract its customers. Popular designers include: Sonia Kashuk,
Amy Coe, and Isaac Mizrahi. Not only does Target offer fashionable accessories, but it
supplies them at costs that are surprisingly low creating an even stronger competitive
advantage(Target-2005 Annual Report).
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In addition, Target provides customers with superior customer service. They continue
to improve their store prototype to make sure they fill the needs of every customer.
Whether it is a time poor customer who needs to access things quickly and easily, or a
customer who wants to leisurely stroll through the store, Target has the design
elements to do so. Target is dedicated to updating existing stores and hopes to have
2/3 of their existing stores renovated to reflect their current prototype. Upon entering
any Target location, guests can follow the easy and intuitive layout of the store making
shopping more convenient and attractive. Target has followed these standards since it
first opened in 1962. Target has deliberately widened their aisles to produce less traffic
for customers to feel more relaxed while they shop. Also, items are easily found
because of clearly marked departments with related departments placed next to each
other. Target aims to make customers feel important by offering a wide array of
products. Target’s determination to satisfy their customers helped create a clean,
friendly, and fun atmosphere where customers can shop with relative ease. Around the
store, Target has installed guest call buttons. If one is pressed, a Target employee is
guaranteed to be there within 60 seconds to help you. Furthermore, Target stores now
added Starbucks, Pizza Hut, pharmacies, and in-store digital photo labs in order to
enhance customer experiences (Target-2005 Annual Report).
Target’s brand image is the largest way they differentiate themselves from competitors.
When you purchase a product from Target, you know you are buying a quality product
for a reasonable price. As their slogan says, “Expect more. Pay less.” One of the ways
Target has improved their brand image is by taking an active part in many social
organizations. They are dedicated to making the community a better place to live.
They have started the organization, Taking Charge of Education, which has raised over
$183 million since 1997 for schools. They have also developed the, Start Something
Organization, which partners with the Tiger Woods Foundation, which helps children
build character as they achieve their dreams. Since Target has been in business, they
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have donated 5% of their pretax income to different causes and donate $2 million a
week to education, arts, and social services (Target- 2005 Annual Report).
Target’s dedication to design, trend leadership, accessibility, and affordability make it a
truly unique discount retailer.
Industry Conclusion:
From the first establishment in Roseville, Minnesota in 1962, Target has been on the
rise in bettering their competitive strategies. Target has been able to direct their focus
by delivering the best guest service in order to attract their customers. They take this
risk of focusing on brand name quality products at higher costs while delivering
excellent guest service, rather than having the lowest costs in the industry. This focus
has had a positive impact on the company because they are currently operating 1300
stores in over 47 states. Their goal in the future is to being operating 2010 stores by
2010. With this growth, Target has been able to use their competitive strategies of
providing distinct products and delivering excellent guest service which has allowed
them to compete with the low prices of Wal-Mart and other competitors. If Target
continues to deliver great guest service they will remain competitive in the retail
industry.
Target clearly risks having higher prices for brand name products and quality service.
This strategy has keep Target going since 1962 with no end in sight.
ACCOUNTING ANALYSIS Key Accounting Policies:
The five forces model that we have prepared gives us and understanding of the key
accounting policies Target uses to achieve profitability. In order to get the financial
information that is needed to analyze the Target Corporation, an analyst must first look
at the organization’s accounting policies. Target has many aspects to their accounting
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information that one needs to understand before making assumptions about the
numbers they retrieve. To achieve success and profitability, Target uses both the cost
leadership and differentiation strategies. According to the five forces model that we
have provided, Target competes in a variety of ways. Target does not necessarily strive
to be the lowest cost provider for retail merchandise. They strive for low cost and
quality with their differentiated products at the best possible cost. Target has chosen
key accounting policies that relate to their key success factors and risks. Target uses
these key success factors to compete in a number of different ways including “brand
recognition, customer service, store location, differentiated offerings, value, quality,
fashion, price, advertising and depth of selection” (Target 10-K).
According to our key success factors, Target mainly uses upscale merchandise at a low
cost which helps maintain lower inventories. Since Target is part of the retail industry,
Inventory Management is essential and Target watches their inventory controls. This
requires Target to have low input costs in inventory. In addition, Target also uses low
distribution costs to transport their products from manufacturers to consumers. Target
accounts for their inventory using the last in, first out method (LIFO) (Target 10-K).
This enables Target to have little excess inventory lying around. Target also reduces
inventory based upon estimated or assumed losses from their historical losses in the
past.
Since Target manages a tight cost control system, they can reduce their risky
receivables. Target records its receivables with an allowance for losses. This allowance
is minor in comparison to the account receivables due to Target’s tight cost system.
Management watches these risky payments to ensure they are received or written-off.
The value is expected so Target is not caught off-guard when they do not recover some
revenue. Usually the allowance is equal to the estimated future write-offs. Target
records this amount in an account called allowance for doubtful accounts. When a sale
is made on credit for a receivable, an allowance is recognized for the amount in case of
a risky payment and debited to the doubtful account.
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Since Target thrives for high-quality low-cost products, their revenues are substantial.
Consumers are willing to pay a good price for a quality product even if it is more
expensive than a competitor’s, such as Wal-Mart. Investing in brand image is also
crucial for Target’s revenues. The bull’s eye logo is nationally recognized as a good
source of differentiation. “Revenues from the sale of retail items are recognized at the
time of the retail sale. Also commissions earned by employees on sales by leased
departments are included along with sales” (Target 10-K). Target also receives revenue
from credit cards in addition to their number one selling gift cards. These cards are a
good differentiation strategy to use and create value for the firm.
Another key success factor we have identified is the marketing and investing in brand
image which are recorded as General Selling and Administrative Expenses. In addition
to helping Target gain revenues, the investment in the bull’s eye brand image is an
expense to the company as well. Other aspects of marketing such as commercials,
newspapers, television and the like are also expensed in SG&A.
In obtaining the Comprehensive Income, we can assess how well Target is achieving
their key success factors. This account includes revenues, expenses, extraordinary
gains and losses that are excluded from net income on the income statement.
Accounting Flexibility:
Target Corporation has been active in supporting the governance of their financial
statements and making sure they are in accordance with the generally accepted
accounting standards and SEC regulations. In order to maintain that Target
consistently follows these practices, they are maintained through an independent board
in which shareholders can rely on. Included on their financial statements are future
predictions based on where the current market stands and what new innovations they
have for the up-coming year. Target strives in utilizing their flexibility to provide
enough information against their competitors. This will help minimize risks and
uncertainties shareholders may have.
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Target utilizes their flexibility in different areas of the company from inventory to
advertising expenses and property costs. First, Target is able to minimize inventory by
using the LIFO method. This method helps by stating inventory at cost, which is
important for Target to minimize because they are a large retailer. In addition,
inventory is also able to be reduced by eliminating estimated and historical costs from
previous years. Managers are able to use LIFO to help with their costs; however, they
do not have as much flexibility in this area with the different ways to account for
inventory.
Another area of flexibility managers have is through their advertising expense. Target
is known for their marketing ideas and for their bull’s-eye symbol, which brings new
customers to the stores daily. Advertising expenses are filed under selling general and
administrative expense rates. SG&A not only includes advertising expenses but also
operating costs of retail, distribution, and headquarters facilities. In the second quarter
of 2006 filed in their 10-Q, SG&A increased from 22.7 percent to 23 percent (Target 10-
Q). The 10-Q report disclosed that the increase in SG&A expenses was mainly due to
the opening of many new facilities. With the option of disclosing advertising costs
along with operating and distribution costs, managers are able to have more flexibility
when accounting for the expense.
Third, Target has been able to use the increasing revenue to help expand and build
more stores. Target not only owns some of the land they build on but also rents and
leases retail locations, warehouses, and office spaces (Target Annual Report 2005).
Target holds flexibility when it comes to lease renewal options. In the end, some of the
leases include options to purchase the property. Expenses within these leases are then
accounted in SG&A.
Target is able to have enough accounting flexibility to choose their key policies and
estimates, which allows their information to be relative to investors. In order to provide
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investors and shareholders with material information, Target has the ability to look at
past sales, expenses, and predict future forecasts to disclose historical data.
Evaluating Accounting Strategy:
After examining Target’s financial statements, we believe that Target uses a moderately
conservative approach to accounting. This can be shown in numerous ways.
First, Target recognizes all sales net of expected returns as well as their gift card
income. This consists of finance charges, late fees, and other revenues. This is in line
with the industry as a whole since Wal-Mart, a top competitor, recognizes revenues in
the same way. Also, since Target uses defined contribution plans, they have adopted
stock compensation plans that are expensed at fair market value. This type of
accounting will increase expenses and bring down the final net income. Also, due to
the new accounting policy, Target regularly evaluates its assets and goodwill for
impairments and depreciation on a yearly basis (Target 10K 2005). Target also uses
the common LIFO method for their inventory. This is kept in line with the industry in
the United States as a whole. LIFO decreases the bottom line in order to help cut down
on taxes for the year.
A few areas of interest are that Target bases management compensation on the overall
profitability and growth of the company. This could possibly provide incentives for
management to overstate certain areas of the income statement in order to provide
them with a stronger cash flow. Nevertheless, we have not seen any serious indications
of this sort.
Quality of Disclosure:
The quality of disclosure ensures the safety of a company to continue operating without
releasing valuable information, while satisfying shareholders and the public with
adequate information. The amount of disclosure of a company is determined by the
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manager’s willingness to share their accounting qualities based on the usefulness of the
financial statement.
The letter to the shareholders posted in the annual report is intended to summarize and
analyze the foundation of a company and to report the progress of operations and
financial conditions the company is obtaining.
Target’s letter to the shareholders contains a magnitude of information about the
company’s progress. Target clearly lays out the firm’s industry conditions with
supportive information to insure its rapid growth in a competitive industry. Target
reported $50 billion in annual sales through contributions from new stores and strong
growth in comparable-store sales (Target 10K 2005). In addition, Target generated a
31 percent increase in earnings per share from continuing operations. Moreover,
Target ensures the necessary skill and experience to support future growth of their
stores. Target forecasts a net increase in new store square footage of about 8 percent.
Target has an almost consistent revenue growth for the last 3 years consisting of
12.3% in 2005, 11.5% in 2004, and 12.3% in 2003 (Target 10K 2005). Having a
healthy and steady growth in revenue insures a positive outlook for Target to keep
expanding.
Footnotes are an important factor in a financial analysis to adequately explain
accounting policies and the logic behind a company’s statements. Targets’ footnotes
are well defined and give the reader a sense of how certain numbers appear throughout
their operations. Target lacks specific details, but effectively explains how the
circumstances could be affected. For example, Target states that they use hedge funds
by converting interest from a fixed rate to a floating rate. Then fails to give reasoning
for a loss on income, but acknowledges that it could be from different hedge
transactions.
- 21 -
Furthermore, Target’s tendency to embellish their strengths with overwhelming facts
“puffs” up their financial performance by avoiding placing themselves among other
competitors. Target states that they are among the top leaders, but fail to acknowledge
how much advantage they achieve.
Screening Ratio Analysis:
In this section we will be measuring the quality of Target’s financial disclosures with
respect to sales and respect to expenses using sales and expense manipulation
diagnostics. In order to compare Target’s core ratios to the industry, we used its main
competitor, Wal-Mart as a comparison guideline to the industry. Wal-Mart was chosen
as our main competitor as opposed to other discount retail stores for numerous
reasons. One reason being that K-Mart recently merged with Sears Roebuck which
causes them to not compete directly with Target due to various department store
assets not available to Target. Second, Target is sometimes compared to Costco but
we felt that it did not compete directly because Costco focuses more on bulk sales
compared to discount-retail sales. The Net Sales / Unearned Revenues and Net Sales /
Warranty Liabilities ratios are not included because the numbers necessary to compute
these ratios were not available in the financials for Target or Wal-Mart. The Pension
Expenses / SG&A were not found in Wal-Mart’s financials. However, they were found in
Target’s but were such a small percentage that they round down to approximately 0.
Sales Manipulation DiagnosticsTGT 2001 2002 2003 2004 2005Net Sales / Cash from Sales N/A 0.96 1.00 1.02 0.99Net Sales / Net Accounts Receivable 10.40 7.39 7.28 9.24 9.29Net Sales / Unearned Revenue N/A N/A N/A N/A N/ANet Sales / Warranty Liabilities N/A N/A N/A N/A N/ANet Sales / Inventory 8.95 9.23 7.87 8.70 9.01
WAL 2001 2002 2003 2004 2005Net Sales / Cash from Sales 1.00 1.00 1.00 1.00 1.00Net Sales / Net Accounts Receivable 95.66 130.03 183.11 149.46 95.66Net Sales / Unearned Revenue N/A N/A N/A N/A N/ANet Sales / Warranty Liabilities N/A N/A N/A N/A N/ANet Sales / Inventory 8.92 9.02 9.41 9.63 9.58
- 22 -
The Net Sales / Cash from Sales ratio is used to show how much cash is received
compared to total sales. Companies prefer this ratio to be close to one in order to show
that they are being paid with more liquid assets as opposed to credit. The second
diagnostic Net Sales / Net Accounts Receivables show how much money the company is
currently waiting to collect on. The final diagnostic we were able to test Net Sales /
Inventory which shows how much inventory is being held compared to sales. A positive
sign is when you see a bigger number because that shows that inventory on hand is
low.
Net Sales / Cash from Sales
0.00
0.20
0.40
0.60
0.80
1.00
1.20
2001 2002 2003 2004 2005
TargetWal-Mart
Net Sales / Cash from Sales remain constant for both Target and Wal-Mart. The cash
from sales is missing in year 2001 for Target due to the fact that the financials for year
2000 did not contain an accurate measure of accounts receivables.
Net Sales / Net Accounts Receivable
0.00
50.00
100.00
150.00
200.00
2001 2002 2003 2004 2005
TargetWal-Mart
Net Sales / Net Accounts Receivable is another ratio that remains steady for Target.
Wal-Mart’s ratios are much higher ranging up to 183.11 compared to Target at 9.29
due to the fact that Wal-Mart does not make many sales on accounts receivables. Wal-
Mart showed a high increase in 2003 due to increased sales from their domestic and
- 23 -
international expansion programs. Target, however sells more on accounts receivable
due to the fact that they sell the most gift cards and store credit cards than any other
retailer in the world. (target.com)
Net Sales / Inventory
0.00
2.00
4.00
6.00
8.00
10.00
12.00
2001 2002 2003 2004 2005
TargetWal-Mart
Net Sales / Inventory remained relatively steady with a slight increasing trend in the
ladder years due to a higher increase in sales for both companies in retrospect to the
growth of the industry. Wal-Mart had maintained a higher ratio than Target, which
means that Wal-Mart was making more profit on fewer inventories then Target. This
was probably due to the fact that Wal-Mart is more of a low-cost provider which means
they receive their inventory at a lower cost than Target.
Core Expense Manipulation DiagnosticsTGT 2001 2002 2003 2004 2005Sales / Assets 1.65 1.54 1.34 1.45 1.50CFFO / CI 0.59 1.07 1.22 1.26 1.15CFFO / NOA 0.04 0.07 0.06 0.06 0.36Total Accruals / Change in Sales 0.01 -0.01 -0.04 0.07 0.06Pension Expense / SG&A 0.00 0.00 0.00 0.01 0.00Other Employment Expenses / SG&A 0.00 0.00 0.00 0.00 0.00
WAL 2001 2002 2003 2004 2005Sales / Assets 2.45 2.44 2.42 2.44 1.59CFFO / CI 0.85 0.92 1.06 0.88 0.95CFFO / NOA 0.16 0.18 0.20 0.16 0.17Total Accruals / Change in Sales 0.04 0.09 0.07 0.04 0.03Pension Expense / SG&A 0.00 0.00 0.00 0.00 0.00Other Employment Expenses / SG&A 0.00 0.00 0.00 0.00 0.00
Sales / Assets ratio shows how a company is growing their assets in relation to their
sales. CFFO / CI helps to show whether the company is showing income more from
cash or on account. CFFO / NOA is an indicator of how much inventory or property,
- 24 -
plant, and equipment relates to a company's daily operations. The final diagnostic ratio
calculated was Total Accruals / Change in Sales, this ratio shows how much of the
company’s sales relate to obligations created when expenses are incurred but not paid
for yet.
Sales / Assets
0.00
0.50
1.00
1.50
2.00
2.50
3.00
2001 2002 2003 2004 2005
TargetWal-Mart
Sales / Assets remained steady for both companies. Target showed a slight decrease in
2003 due to a decrease in sales for the first time in 3 years. Wal-Mart seems to have
remained steadier in 2003 even though they too decreased slightly due to a substantial
jump in assets from 2002. Wal-Mart’s ratio is higher than Target’s which indicates that
Wal-Mart is making more sales with fewer assets than Target.
CFFO / OI
0.00
0.20
0.40
0.60
0.80
1.00
1.20
1.40
2001 2002 2003 2004 2005
TargetWal-Mart
Cash Flow from Operations / Operating Income remained steady for Wal-Mart but
seems to make an arc type of shape for Target starting in year 2001, when they had a
below normal CFFO. Target, however, has continued to grow their CFFO and OI in
each of the following years compared to Wal-Mart which looks steady. Wal-Mart’s
- 25 -
lower ratio shows that more of the cash flow from operations is being explained by
operating income.
CFFO / NOA
0.000.050.100.150.200.250.300.350.40
2001 2002 2003 2004 2005
TargetWal-Mart
Cash Flow from Operations / Net Operating Assets remained steady for Wal-Mart. This
is a solid sign because it indicates that they are using a steady share of their operating
assets to create their operating cash flow. Target showed an increase at the end of
2005 due to increased investments of PP&E due to expansion and an increase in CFFO.
Total Accruals / Change in Sales
-0.06-0.04-0.020.000.020.040.060.080.10
2001 2002 2003 2004 2005
TargetWal-Mart
Total Accruals / Change in Sales jumps around a lot. It showed a pretty steady arc
curve for Wal-Mart but jumped all over the place for Target. It jumped extremely high
in 2004 when accruals taken from the cash flow statement jumped up to $341MM. This
jump can be due to a change in accounting policy where Target incorporated post-
retirement funds into their accrual costs.
Potential Red Flags:
While reviewing a corporation’s financial statements it is very important to look for any
suspicious accounting practices. When searching for possible ‘red flags’ in Target’s 10-
- 26 -
k, we paid close attention to Target’s cash flow statements, income statements and
balance sheets for the past five years. Target showed sound financial statements with
no potential red flags. There were no unusual increases in accounts receivables,
inventories, or tax income in relation to sales and reported income. Fourth-quarter
sales were much larger every year, but the increase can be attributed to the holiday
season.
One area we decided to look further into was the relationship between a firm’s reported
income and cash flows from operations.
(in millions) 2001 2002 2003 2004 2005
Net Income 1,265 1,368 1,654 1,831 3,198
CFFO 1,905 1,992 1,590 3,160 3,821
(target.com)
Net income and cash flows from operations should have a steady relationship. We
were concerned about the large increase in CFFO from 2003 to 2004. The CFFO
increased by almost two million dollars. However, the net income increased by about
less than $200,000. After examining the cause for this discrepancy, we attributed the
large increase in cash flow from operations to accounts receivable. In 2004, Target
introduced Gift Card Central. Target used a new technique to increase gift card sales
by placing multiple gift card displays around the stores. This made gift cards more
accessible to customers, which increased gift card sales by 30%. The sale of gift cards
is included in accounts receivable. After identifying this information, there were no
more potential ‘red flags’ identified. (target.com)
Undoing Accounting Distortions:
After evaluating Targets accounting practices, no major adjustments took place. As far
as we can tell, Target is not trying to hide or manipulate any numbers to deceive their
shareholders and potential lenders. They do an adequate job describing what they are
- 27 -
doing and why. The “red flag” mentioned previously is slightly suspicious, but Target
contributes the discrepancy to a new gift card selling program. Not only did the
numbers match, but Target explained why there were a few minor increases and
decreases. In their control and procedures section, Target stated they never revised
any past financial statements. Target explained that everything they did was designed
to meet SEC regulations (Target 10-K).
RATIO ANALYSIS AND FORECAST FINANCIALS
The biggest factors that determine value of a firm are efficiency and growth. Analyzing
Target’s financial statements will give us a better look into whether how well Target
utilizes their assets into cash and whether or not their operating, financing, and
investing operations are being constructed in a suitable manner. We will discuss topics
in individual sections. The first discussed section is a trend, or time series analysis.
Here we will perform the basic 14 ratio analysis over the past 5 years for Target. These
ratios will provide us with a good indication of Targets liquidity, profitability, and capital
structure for the past 5 years. Sustainable growth rate and internal growth rate will
also be calculated. A cross sectional, or benchmark analysis, will then be completed
next. This will analyze our competitors as well as the entire industry as a whole. This
will provide us with a comparison of ratios for our company. The final part of this
section will be a financial statement forecasting methodology section. Here, we will
discuss what the techniques we used for forecasting our companies fourth quarter and
future year end financial figures.
Financial Ratio Analysis:
The objective of the financial ratio analysis is to evaluate the effectiveness of the firm’s
management in operating, investing, and financing operations. In this section we will
compare liquidity, leverage, and capital structure / debt service ratios in order to
evaluate the overall effectiveness of Target. In our other comparison of ratios, we will
examine our competitors and the industry as a whole. If we hold our industry level
factors constant, we will be able to gain more insight into how well Target is performing
- 28 -
compared to the industry norms. Conducting these ratio analyses is important because
it will help us to determine the strengths, weaknesses, and trends in Target’s financial
policies. Our goal by the end of this ratio analysis is to gain a better understanding of
Target’s policies and evaluate them based on current and past performance.
Time Series Analysis:
In order to assess the performance of Target, we calculated the basic 14 ratios. These
14 ratios adequately provide insight into the way Target’s financial statements relate to
one another. Therefore, we did not feel the need to use any other ratios in our
analysis. These ratios allowed us to look more closely at Target’s liquidity, and how the
firm is managing its operating, investment, and financing activities.
When assessing Target’s liquidity, we calculated the current ratio, the quick asset ratio,
the inventory turnover, day’s outstanding inventory, receivables turnover, day’s sales
outstanding, and working capital turnover. While assessing Target’s profitability we
calculated the gross profit margin, operating expense ratio, the net profit margin, the
asset turnover, the return on assets, and the return on equity. In addition, we
calculated the debt to equity, times interest earned, and debt service margin when
looking at Target’s capital structure.
- 29 -
Trend Analysis 2002 2003 2004 2005 2006Liquidity: Current Ratio 1.37 1.59 1.56 1.69 1.5Quick Asset Ratio 0.61 0.84 0.78 0.89 0.76Inventory Turnover 6.12 6.15 6.94 6.49 5.98Days Supply 59.64 59.35 52.59 56.24 61.04Receivables Turnover 10.41 7.89 8.34 9.24 9.29Days Sales Outstanding 35.06 46.26 43.77 39.5 39.29Working Capital Turnover 15.38 9.95 10.38 8.21 10.92Profitability: Gross Profit Margin 0.32 0.33 0.34 0.33 0.34Operating Expenses Ratio 0.24 0.24 0.25 0.25 0.25Net Profit Margin 0.03 0.04 0.04 0.07 0.05Asset Turnover 1.65 1.54 1.53 1.45 1.5Return on assets 0.06 0.06 0.06 0.1 0.07Return on Equity 0.17 0.18 0.17 0.25 0.17Capital Structure: Debt to Equity Ratio 2.07 2.03 1.84 1.48 1.46Times Interest Earned Ratio 3.39 2.98 3.12 6.32 9.34Debt Service Margin 2.2 1.63 3.65 7.58 5.91
Liquidity:
Target’s current ratio has increased overall from 2002 to 2006; however, the increase
has not been steady. They experienced their highest current ratio in 2005 of 1.69.
From 2004 to 2005, their current liabilities actually decreased causing the large current
ratio. As of 2006, Target has $1.50 of current assets to pay for every $1 in current
liabilities. The quick asset ratio has also increased since 2002, but again, not
consistently. This ratio recognizes a firm’s ability to cover its current liabilities from
liquid assets. The decrease in the ratio from 2005 to 2006 can be attributed to the
increase in current liabilities with no change in the amount of cash and cash
equivalents. Currently, their quick asset ratio is .76. Target’s inventory turnover has
decreased from 2002 to 2006. When it comes to inventory turnover, bigger is better.
Target should work on increasing this ratio. Effectively, Target’s days’ supply ratio has
- 30 -
increased. If Target can increase its inventory turnover, the day’s supply ratio will
decrease. Target’s receivables turnover has decreased over the past five years. This
means that it takes Target a longer period of time to converts its receivables into cash.
Since their receivables turnover is decreasing, their day’s sales outstanding ratio has
increased. Their current day’s sales outstanding ratio is 39.29 days. Target’s working
capital turnover reveals that they currently have $10.92 in sales for every dollar they
have invested in working capital. This ratio has decreased since 2002 from 15.38 to
10.92. This can be attributed to the increasing difference in current assets and current
liabilities. Overall, Target seems to be in a worse situation than it was five years ago in
regards to liquidity.
Profitability:
Profitability: Gross Profit Margin 0.32 0.33 0.34 0.33 0.34Operating Expenses Ratio 0.24 0.24 0.25 0.25 0.25Net Profit Margin 0.03 0.04 0.04 0.07 0.05Asset Turnover 1.65 1.54 1.53 1.45 1.5Return on assets 0.06 0.06 0.06 0.1 0.07Return on Equity 0.17 0.18 0.17 0.25 0.17
Target’s gross profit margin has essentially not changed from 2002 to 2006. Their
proportions of revenues that exceed direct costs related to sales have increased
together over the years. The operating expense ratio for Target has not varied much
throughout the past five years. It has only increased by .01 and has been consistent at
.25 for the past three years. Although operating expenses and sales have increased
over the years, they are doing so at a rate that allows the operating expenses ratio to
remain rather steady. Target’s net profit margin has increased overall during the past
five years. This is a positive result. However, this ratio did decrease from 2005 to 2006
to .05. Asset turnover has increased overall since 2002, but has decreased from 2005
to 2006. Currently, each dollar of assets produces $1.50 in sales. The ratio for return
on assets measures both profits and resources used. Target’s return on assets has
- 31 -
increased slightly since 2002 to .07. This is a positive result. The return on equity for
Target increased some during the past five years, but is back to the ratio of .17, the
same as it was in 2002. With concern to profitability, Target seems to be in around the
same position as it was in 2002.
Capital Structure:
Capital Structure: Debt to Equity Ratio 2.07 2.03 1.84 1.48 1.46Times Interest Earned Ratio 3.39 2.98 3.12 6.32 9.34Debt Service Margin 2.2 1.63 3.65 7.58 5.91
Target’s debt to equity ratio reveals that their debt has become a smaller proportion of
total financing. Target has $1.46 of liabilities for every dollar of owner’s equity as
opposed to $2.07 of liabilities as it did in 2002. The times interest earned ratio has
increased from 2002 to 2006. This is good news for Target and its stockholders
because Target must have enough income from operations in order to cover the
required interest expense so that stockholders can earn a profit. Target’s debt service
margin ratio has increased since 2002. Currently, $5.91 of cash provided by operations
was produced to cover each $1 of long-term debt that will mature next year. This is a
positive result for Target because they can use their operating cash flows for something
other than to cover their current debt. Target appears to be in a better situation than it
was in 2002 in regards to their capital structure.
Sustainable Growth Rate & Internal Growth Rate: Ratio 2002 2003 2004 2005 2006 Sustainable Growth Rate (SGR) 45.5% 46% 41.1% 55.5% 36% Internal Growth Rate (IGR) 14.8% 15.2% 14.5% 22.4% 14.6% Target has maintained a consistent sustainable and internal growth rate through the
past several years. Through these trends, analysts have noticed a substantial growth in
2005. Target’s return on equity and its dividends payout policy are the key factors that
- 32 -
determine the pool of funds available for Target to grow. However, benchmarks are
created because of spontaneous changes in profitability and financial leverages as in
2005. Consequently, benchmarks make it difficult for a firm’s growth plans to be
evaluated. Therefore, Target may grow at a rate different from its sustainable growth
rate. In hope, Target’s analysts predict they will continually grow around 45% for the
next 10 years if profitability and financial policies stay untouched.
Cross-Sectional (Benchmark) Analysis: Liquidity Analysis:
Current Ratio 2001 2002 2003 2004 2005 2006
Wal-Mart 0.91 0.89 0.89 0.91 0.93 1.03 Costco 0.94 1.04 1.13 1.17 1.22 1.05 Kmart 2.90 12 n/a 3.14 2.54 n/a Target 1.15 1.37 1.59 1.56 1.69 1.50
Industry Avg. 1.47 4.64 1.01 1.73 1.56 1.19
Current Ratio
0
5
10
15
1 2 3 4 5 6
Years
Ratio
WalmartCostocoKmartTargetIndustry Avg.
With the exception of K-Mart, Target and it’s competitors, stayed close to the industry
average of current assets to current liabilities over the last five years. K-Mart’s
exceptionally high current ratio of twelve in 2002 boosted an abnormal industry average
of 4.64. This doesn’t truly reflect the industry average due to K-Marts’ bankruptcy in
2003 and other troubles over the last few years. The accurate current ratio and true
- 33 -
picture of the industry average is below two. Target outperformed the industry average
in years 2003, 2005, and 2006.
Quick Asset Ratio 2001 2002 2003 2004 2005 2006
Wal-Mart 0.17 0.18 0.16 0.17 0.14 0.15 Costco 0.22 0.28 0.45 0.56 0.58 0.59 Kmart 1.91 2.89 n/a 1.34 1.95 n/a Target 0.72 0.61 0.84 0.78 0.89 0.76
Industry Average .75 1.12 0.30 0.69 0.89 0.50
Quick Asset Ratio
01234
1 2 3 4 5 6
Years
Rat
io
Walmart
Costoco
Kmart
Target
IndustryAverage
When looking at the quick asset ratio, you can see that that the accurate industry
average should be below one. This tells us one thing; Target and the industry as a
whole have more assets tied up in inventory due to the lower ratio. The acid test ratio
only takes into account cash, receivables, and marketable securities. Target has
outperformed the industry over the past four years, yet slipping in 2002 due to K-Mart’s
extraordinary high ratio of almost three. Looking at the difference between the current
ratio and acid test ratio for K-Mart tells us that they had a huge amount of assets in
inventory that were not moving. This may explain part of the bankruptcy in the
following year.
- 34 -
Operating Efficiency Analysis: Accounts Receivable Turnover 2001 2002 2003 2004 2005 2006 Wal-Mart 108.21 108.89 115.99 204.41 166.31 117.37Costco 107.13 81.62 76.50 143.51 132.33 153.34Kmart 66.82 65.04 n/a 77.25 30.49 n/a Target 19.01 10.41 7.89 8.34 9.24 9.29 Industry Average 75.29 85.18 96.24 141.72 109.71 93.33
Accounts Recieviable Turnover
0
100
200
300
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
The accounts receivable turnover ratio tells us how many times the accounts
receivables are collected during the year. Looking at this ratio, Target’s numbers seem
very skeptical. This tells us Target may be recording a large sum of bad debt due to
uncollectible accounts. In fact, Target has the lowest ratio of turns in the entire
industry. This may also be caused by relaxed credit policies and poor customer base.
On the contrary, Wal-Mart has by far the highest receivables turnover in the industry
raising the industry average every year. In addition to Wal-Mart, Costco also has a high
turnover rate over the last five years. These two companies have minimal uncollectible
accounts relative to their customer base.
- 35 -
Days Supply of Receivables 2001 2002 2003 2004 2005 2006 Wal-Mart 3.37 3.35 3.14 1.78 2.19 3.10 Costco 3.40 4.47 4.77 2.54 2.75 2.38 Kmart 5.46 5.61 n/a 4.72 11.96 n/a Target 19.20 35.06 46.26 43.76 39.50 39.28 Industry Average 7.85 12.12 18.05 13.2 14.1 14.92
Days Supply of Receivable
01020304050
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
From the receivables turnover, one could only guess that Target would have the highest
day’s sales outstanding in the industry. Target’s average is more than any other
competitor’s average. The industry average and the main competitors’ are all fewer
than ten which tells us that they have good credit policies and Target does not. With
these two in mind it is taking Target a very long time to convert its receivables into
cash.
- 36 -
Inventory Turnover 2001 2002 2003 2004 2005 2006 Wal-Mart 7.00 7.59 7.71 7.47 7.46 7.47 Costco 11.17 10.86 11.15 11.55 11.54 10.76 Kmart 5.15 5.44 n/a 5.51 4.45 n/a Target 5.95 6.12 6.15 6.94 6.49 5.98 Industry Average 7.31 7.96 9.43 8.17 7.81 8.07
Inventory Turnover
05
1015
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
In looking at inventory turnover, it is easy to assess that Costco is the most efficient in
getting their inventory in and out to consumers. This is beneficial to Costco because
they do not have many costs tied up in inventory that they might have to sell at
clearance later on. In comparing Target to the industry and other competitors, Target
ranks third behind Costco and Wal-Mart. The industry average over the past five years
has been around eight turns. Target has fallen below the industry average over the last
five consecutive years implying that they are not getting their inventory in and out the
door as quickly as others. This is detrimental to Target because it is costly to store this
inventory. Furthermore, they may have to discount it at a later date.
- 37 -
Days supply of Inventory 2001 2002 2003 2004 2005 2006 Wal-Mart 52.14 48.10 47.34 48.86 48.93 48.86 Costco 32.67 33.60 32.73 31.60 31.62 33.92 Kmart 70.90 67.00 n/a 66.24 82.02 n/a Target 61.34 59.64 59.35 52.59 56.24 61.04 Industry Average 51.78 49.50 40.03 48.90 54.19 48.46
Days Supply of Inventory
0
50
100
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
Day’s supply of inventory is another way of stating inventory turnover, except it is
stated in days not turns. As one can see it, takes Costco the least amount of days to
get their inventory to consumers. This could be due to great inventory management or
an experienced sales staff. The industry average is around fifty days and Target seems
to consistently exceed the average to around fifty seven to sixty days. This raises our
concern about their inventory management or marketing strategies.
- 38 -
Working Capital Turnover 2001 2002 2003 2004 2005 2006 Wal-Mart -68.92 225.93 -114.58 -85.53 -64.87 -62.46 Costco -148.59 214.39 60.74 43.79 35.11 142.80 Kmart 5.03 7.72 n/a 5.76 3.611 n/a Target 36.79 15.38 9.95 10.38 8.21 10.92 Industry Average n/a 149.34 n/a n/a n/a 30.42
Working capital turnover ratio is a measure of the number of sales an organization has
to cover working capital. Working capital is computed by taking current assets and
subtracting out current liabilities. With the exception of 2002 and 2006, the industry
average has been below zero due mainly to Wal-Mart’s negative turnovers over the past
four years. The industry averages for 2001, 2003, 2004, and 2005 are not applicable
due to negative numbers and ratios. These poor numbers are due to the fact that
these retail organizations are having higher current liabilities than current assets.
Costco has maintained descent numbers over the past four years, though their ratio is
constantly changing. Target, in comparison with the industry, is maintaining above
average turnover only behind Costco meaning they are able to pay their creditors and
debts.
Working Capital Turnover
-200
0
200
400
1 2 3 4 5 6
Years
Ratio
Walmart
Costco
Kmart
Target
IndustryAverage
- 39 -
Profitability Analysis: Gross Profit Margin 2001 2002 2003 2004 2005 2006 Wal-Mart 0.21 0.21 0.21 0.22 0.22 0.23 Costco 0.12 0.12 0.12 0.10 0.10 0.10 Kmart 0.17 0.14 n/a 0.23 0.25 n/a Target 0.31 0.32 0.33 0.34 0.33 0.34 Industry Average 0.20 0.16 0.16 0.22 0.22 0.22
Gross Profit Margin
00.10.2
0.30.4
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
Gross profit margin ratio is simply gross profit over sales. Looking at the percentages
one can see that Target is outperforming the entire industry with their margin
increasing steadily around thirty-four percent. This could be due to the fact of lower
cost of goods sold or higher sales revenue over the past five years. This steady
increase for Target is a positive factor for the industry.
- 40 -
Operating Expense Ratio 2001 2002 2003 2004 2005 2006 Wal-Mart 0.16 0.16 0.16 0.17 0.17 0.18 Costco 0.08 0.09 0.09 0.09 0.09 0.09 Kmart 0.21 0.21 n/a 0.21 0.21 n/a Target 0.22 0.24 0.24 0.25 0.25 0.25 Industry Average 0.16 0.15 0.13 0.16 0.16 0.17
Operating Expense Ratio
00.1
0.20.3
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
Operating expense ratio is computed by taking selling, general, and administrative
expenses over sales. The industry average is around fifteen percent, well above
Costco’s average. Costco has consistently maintained operating expenses below ten
percent indicating that they have known quality products or those they just don’t
advertise. Target has been consistently above average over the past five years but not
by too much. This is probably due to Target’s huge marketing scheme to attract
current and future customers.
- 41 -
Net Profit Margin 2001 2002 2003 2004 2005 2006 Wal-Mart 0.03 0.03 0.03 0.03 0.03 0.03 Costco 0.01 0.01 0.01 0.01 0.02 0.01 Kmart -0.06 -0.01 n/a -0.02 0.05 n/a Target 0.03 0.03 0.04 0.04 0.07 0.05 Industry Average 0.002 0.01 0.02 0.009 0.03 0.03
Net Profit Margin
-0.1-0.05
00.050.1
1 2 3 4 5 6
Years
Rat
io
WalmartCostcoKmartTargetIndustry Average
Once again, compared to the industry, Target is outperforming its competitors largely
due to increases in net income. In 2005 especially, Target had their best year due to
increases in sales and net income. The industry average over the last few years has
fluctuated fewer than four percent. Target’s margin could also be due to reduced
expenses such as interest and taxes.
- 42 -
Asset Turnover 2001 2002 2003 2004 2005 2006 Wal-Mart 2.44 2.61 2.58 2.44 2.37 2.26 Costco 8.96 8.37 7.44 6.61 6.54 3.04 Kmart 2.55 2.74 n/a 4.00 2.61 n/a Target 1.89 1.65 1.54 1.53 1.45 1.50 Industry Average 6.46 4.57 5.01 4.35 3.84 2.26
Asset Turnover
0
5
10
1 2 3 4 5 6
Years
Rat
ioWalmart
Costco
Kmart
Target
IndustryAverage
Asset Turnover is simply sales over total assets. This ratio basically measures asset
productivity. The idea is that resources used generate the support of sales volume.
Over the past four years, the industry average has been right at or around five turns.
Costco is getting good productivity out of their assets as one can see they are
consistently well above average over the past five years. Target on the other hand,
compared to its competitors has not had the success of the industry in relation to
productive assets although they have been consistent.
- 43 -
Return on Assets 2001 2002 2003 2004 2005 2006 Wal-Mart 0.08 0.07 0.08 0.08 0.08 0.08 Costco 0.15 0.15 0.12 0.12 0.13 0.06 Kmart -0.17 -0.28 n/a -0.10 0.14 n/a Target 0.06 0.06 0.06 0.06 0.1 0.07 Industry Average 0.03 n/a 0.10 0.10 0.12 0.07
Return on Assets
-0.4
-0.2
0
0.2
1 2 3 4 5 6
Years
Rat
ioWalmart
Costco
Kmart
Target
IndustryAverage
The return on assets is net profit margin times asset turnover. However, it is much
easier to compute this number by computing net income over total assets. Taking this
into account, one can see it’s important to earn a high net income and turnover ones
assets productively. Over the last four years the industry average has been about nine
percent. Target in relation to the industry has been below average around six and a
half percent. This isn’t due to net income for Target. We feel this is caused by their
below average asset turnover as well which will reduce the ROA ratio.
- 44 -
Return on Equity 2001 2002 2003 2004 2005 2006 Wal-Mart 0.19 0.19 0.20 0.20 0.20 0.21 Costco 0.12 0.12 0.10 0.11 0.11 0.11 Kmart n/a n/a n/a -0.27 0.24 n/a Target 0.17 0.17 0.18 0.17 0.25 0.17 Industry Average 0.16 0.15 0.15 0.014 0.19 0.16
Return on Equity
-0.4-0.2
00.20.4
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
Return on equity is computed by taking net income over owner’s equity. This ratio
measures the profitability of the owner’s interest in total assets. Net profit margin,
asset turnover and financial leverage come into effect to figure ROE. Excluding 2004,
the industry has been consistently returning around sixteen percent. The industry drop
in 2004 is credited to K-Marts’ mishaps in 2003. Target has maintained consistent
return on equity around nineteen percent.
- 45 -
Capital Structure Analysis:
Debt to Equity 2001 2002 2003 2004 2005 2006 Wal-Mart 1.49 1.38 1.41 1.40 1.43 1.60 Costco 1.06 1.04 1.01 0.97 0.85 0.87 Kmart n/a n/a n/a 1.77 0.93 n/a Target 1.98 2.07 2.03 1.84 1.48 1.46 Industry Average 1.51 1.90 1.21 1.38 1.07 1.60
Debt to Equity
01
23
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
The debt to equity industry average is about 1.4. The ratio of total debt to equity is a
measure of how the firm’s assets are financed and how it captures potential capital
structure. Also, the debt to equity ratio is a good indicator of bankruptcy risk. Except
for this last year in 2006, Target has been above industry average indicating they have
more liabilities that they do equity. This poses a problem with credit risk if Target is
unable to pay their debts.
- 46 -
Debt service Margin 2001 2002 2003 2004 2005 2006 Wal-Mart 2.61 3.25 2.41 2.51 1.93 2.03 Costco 5.30 9.80 31.79 6.41 30.95 8.77 Kmart n/a n/a n/a 328 267 n/a Target 2.95 2.20 1.63 3.65 7.58 5.91 Industry Average 3.62 6.52 17.10 112.3 99.96 5.57
Debt Service Margin
0100200300400
1 2 3 4 5 6
Years
Rat
io
Walmart
Costco
Kmart
Target
IndustryAverage
Debt service margin is computed by taking the cash flow from operations and dividing it
by the current notes payable. This ratio measures the ability of a firm to pay their
payments on the current portion of long-term notes with the cash provided by
operating activities. The industry average is distorted in years 2005, 2004, and 2003
due to K-Marts high debt and inability to pay their annual installments. Only in the last
year has Target gone above industry average in their margin, while Wal-Mart is staying
below the average consistently.
- 47 -
Times Interest Earned 2001 2002 2003 2004 2005 2006 Wal-Mart 13.66 14.64 14.75 18.05 17.33 15.81 Costco 88.59 195.74 160.63 92.38 19.73 16.56 Kmart n/a n/a n/a n/a n/a n/a Target 3.31 3.39 2.98 3.12 6.32 9.34 Industry Average 35.18 105.19 87.69 55.21 18.53 41.71
Times Interest Earned
0
50
100
150
200
250
1 2 3 4 5 6
Years
Rat
io
WalmartCostcoTargetIndustry Average
The times interest earned ratio is figured by taking operating income and dividing out
the interest expense. This ratio tells us the ability of a firm to pay the interest expense
with current income from operations. Target is lowest among competitors in this ratio
with an average of around five turns. On the contrary, Costco has a very high times
interest earned ratio during years 2001 to 2004, raising the industry average as well.
This tells us they are very efficient in making their interest expense due to a very high
operating income.
Financial Statement Forecasting Methodology Section:
The most recent 10K that was published for Target was Jan 28, 2006. This was their
2005 fiscal year ended statements. To get the forecasted data for the last 2 quarters of
2006 we took an average of the previous last 5 years financial statements 3rd and 4th
quarter results. We then added a growth rate to that based on previous years and
increased sales and seasonality. This gave us the results for the final 2 quarters. We
- 48 -
feel this is a good indication of what is going to happen for the rest of 2006 based on
the fact that nothing major will happen and that sales will continue to grow at a
constant rate.
Since we have the 10Q for 2006 we forecasted those items separately from the rest.
We used a simple test of looking at past numbers and deciding where there seemed to
be growth and figured out what numbers we felt to be important. This allowed us to
come up with a specific growth rate that suited the certain trend of growth that we
saw. Some line items were omitted due to the fact that we felt they were irrelevant to
the companies reported functions or that we felt that they were not necessary for
forecasting purposes. On our Pro-Forma Cash Flow Statement, we basically focused
mostly on “Cash Flow from Operations” due to the fact that the other sections were not
that important for our forecasting sections. We did however include some forecasting
for dividends and the bottom line numbers because that is where your equity and
ownership is coming from. We forecasted the pro-forma percentages on the Pro-Forma
Statement of Cash Flows using the average of the previous last five years over the
future 10 years. For all of our pro-forma statements, we took the growth rate for one
year and kept it constant for all ten years. We felt that if we changed the ratios for
every year it will be taking away from the accuracy of the forecast. We believed this
because we have the historical concrete data that helped to give us our ratios and if we
changed them in the future years we could be showing distortions in our numbers.
After we forecasted our Pro-Forma ratios, we then calculated common size statements
by calculating a growth rate for the 100% items on these statements. These items
included total assets, total liabilities, net sales, stockholders equity, and net cash from
operating activities. After we looked over all of these ratios, we used another simple
test of looking at previous years and then deciding what seems to be an appropriate
growth rate based on the previous years. Once we figured out our growth rate, we
took our common size forecast 100% line items and used a 1+ the growth rate in order
to get a forecasting solution. We used to type of calculation for the next 10 years.
- 49 -
The limitations of our forecasting methods are that we do not change the ratios for the
next ten years. Although we feel this method gives us the best accuracy, it does not
take into account a substantial future event such as a merger or substantial jumps in
one or any of the line items. Another weakness could be that we used an “eyeball” test
to administer our growth rates. The reason this is considered to be a weakness is
because we did not use a statistical average. However, we feel that using a straight
“eyeball” test based on the fact that it is a constant growing industry gives us the best
accuracy on our forecasts. The strengths of our forecasting method is that because we
did not make many assumptions based on Target’s growth and the industry itself we
believe our forecasting method will be a lot more accurate into the future than
forecasting conclusions based on a lot of assumptions. Although forecasts can not be
perfect, we felt that we have managed to come up with the most accurate conclusions
based on the information that we have been given.
Analysis and Forecasting Conclusion:
In conclusion, after performing all of these ratios and forecasting methods we learned
that forecasting is a very important tool in investing management. Also, we have
discovered that since this is a relatively mature industry Target is still expanding within
it. We also concluded that Target relies heavily on outside investor’s to help fund their
future expansions. Also, although they are expanding, they are increasing in sales
We have performed all operating efficiency, profitability, capital market, and coverage
analyses based on using the industry ratios as a benchmark. We have discovered that
Target is a constantly growing company and is becoming a leader in the industry as a
whole.
VALUATION ANALYSIS
Performing valuation analyses enables us to value the stock of a company and make
conclusions on how we feel the stock should be valued. Many valuation methods were
- 50 -
used to value Target’s stock. The methods include the method of comparables, the
discount dividends, the discounted free cash flow, the abnormal earnings growth, the
discount residual income, the long run residual income, and the enterprise
value/EBITDA. The methods used will provide additional ways to conclude if the
published stock price is the true value.
Valuations:
The following intrinsic methods provide information stating whether Target’s stock is
undervalued, overvalued, or accurately valued. We also compared certain aspects of
the performed valuation models with Target’s competitors, Wal-Mart, Costco, and K-
Mart. With each method we have compared our stock prices we have found with the
prices that were listed on November, 1 2006. After we perform the necessary intrinsic
valuations, we will be able to determine if Target is a sound investment. All valuations
are found in Appendix D.
Method of Comparables:
The method of comparables assists us in obtaining an accurate picture of how Target’s
stock is valued against its competitors, since this method uses industry averages. The
comparable methods include price to earnings (trailing and forward), price to book,
price to sales, price earnings growth, and dividend to price. In order to decide if Target
was appropriately valued using this method, we included Target’s competitors, Wal-
Mart, Costco, and K-Mart.
P/E(trailing) P/E(forward) P/B D/P P/S P.E.G. Target 19.54 16.22 3.379 0.440 0.889 1.08 Wal-Mart 18.13 14.80 3.370 0.650 0.584 1.14 Costco 23.22 18.23 2.715 0.510 0.456 1.54 K-Mart N/A N/A N/A N/A N/A N/A Average 20.68 16.52 3.043 0.580 0.520 1.34
Target Price per method $61.61 $49.21 $58.22 $25.26 $34.04 $33.56
- 51 -
After computing the comparables, we found that the P/E (trailing) and the P/B were the
closest to our actual share price. The P/E (trailing) was $61.61 and the P/B was
$58.22; our stock price is $57.70 as of November 1, 2006. The P/E (forward) was close
behind with a value of $49.21, however the other three were much lower. While
looking at this method, one can see that four out the six methods are below the stock
price of $57.70. According to this analysis, Target stock is over-valued.
Cost of Capital:
(Complete calculations for the cost of capital can be found in Appendix C).
Cost of Equity:
In order to calculate the cost of equity for Target, we used the Capital Asset Price
Model (CAPM). The following formula can be used to calculate the CAPM:
Ke= rf + β (rm-rf)
None of the above components were given, so therefore we had to calculate each
individually. We began by collecting Target’s stock prices, dividends paid, and the S&P
500 close for the past five years. Next, we computed the S&P 500 returns for each
month by dividing the current close by the next periods close and then subtracting that
by one. The risk free rate was found next. The closest example to a risk free rate
could be found on the St. Louis Fed’s website (stlouisfed.com). Here is where our
computations changed. We looked at five different risk free rates: one month, one
year, three year, five year, and ten year. All of these rates were Treasury constant
maturity rates. Treasury rates were used because it is the closest to a risk-less rate you
can find, since it is highly unlikely the government would default on its loans. We also
used the monthly rates for the past five years. In order to change these annual rates
into monthly rates, we divided the current risk-free rate by 12 and then divided that
number by 100. In addition, we had to find the firm return for each month. We did
this by taking the current closing price minus the next month’s closing price and
- 52 -
subtracting the current dividends paid for that month. Then we divided that number by
the next month’s closing price.
From this data, we could calculate the necessary Beta. To do this, we performed a
regression analysis where the Beta equaled the slope of the firm’s returns and the
market risk premiums. We did this four different times for each different risk free rate
taking the full 60 months, 48 months, 36 months, and then 24 months. In order to
decide which Beta was most appropriate to calculate our cost of equity, we used the
value that corresponded with the highest adjusted R squared overall. The beta that
corresponded with the highest R squared was 1.32, and the published Beta for Target
on yahoo!finance is 1.00. So, we believe we have calculated our Ke successfully.
From there, we plugged the necessary numbers into the CAPM formula to end with a Ke
of 11.69%
Cost of Debt:
The cost of debt is an important part in determining the valuations for our company.
Our first step to finding this number is to look at the short-term and long-term debt
amounts and interest rates located on the 10-K. After finding these amounts, we must
then assign weights to each debt categories, by dividing the debt amount by the total
debt, and then multiply it by the interest rates. After finding the individual weights we
then found the total value to get the weighted average cost of debt. The cost of debt
we used in our valuations was 5.64%, which is a component in finding the cost of
capital.
Weighted Average Cost of Capital:
After finding the cost of equity and cost of debt, we can find the weighted average cost
of capital. In order to find the WACC, the following formula was used:
WACC = _Vd_(Kd) + Ve(Ke) Vd + Ve Vd + Ve
- 53 -
WACC = 20,790 (.05641) + 14,205 (.1169) 20,790+14,205 20,790 + 14,205
WACC= .08096
Discounted Dividends:
The discounted dividends valuation model uses the cost of equity and dividends that
are forecasted out ten years. First, we had to calculate the dividend per share by
taking the dividend paid divided by the number of shares outstanding. Then were able
to look at how Target’s dividends have been increasing around $.45, and in our
forecasts our dividends grow by approximately $.04 for the next ten years. Since our
dividends are consistently growing by about $.04 to $.05 per year, we used a growth
rate of .02. In order to find the intrinsic value of the firm, we had to use the cost of
equity and discount it back to year 2006. After following these steps we found that the
value of the firm should be $7.40. However the current share price is listed as $57.70.
After our analysis we can see that the value of the firm is extremely over-valued. This
valuation method may not be the best estimate of the firm’s value because it is solely
based on the dividends and not any other factors.
Sensitivity Analysis g 0 0.01 0.02 0.03 0.04 0.05
0.08 $7.93 $8.51 $9.29 $10.37 $12.00 $14.72 0.1 $7.21 $7.58 $8.04 $8.63 $9.41 $10.52
Ke 0.1169 $6.81 $7.08 $7.40 $7.60 $8.30 $8.95 0.13 $6.58 $6.79 $7.05 $7.36 $7.73 $8.20 0.15 $6.32 $6.48 $6.67 $6.88 $7.14 $7.45
As seen in the sensitivity analysis, the cost of equity would have to be way below .08
and the growth would have to be much large than .05 in order to come close to the
listed share price. With that information this model is not a good representation of how
Target is valued. This valuation should not be used when valuing the company.
- 54 -
Free Cash Flows:
The Free Cash Flow valuation model uses the forecasted cash flows along with the
weighted average cost of capital. First, we took the forecasted cash flows from
operations and subtracted the cash flows from investing. That gives us the free cash
flows from the firm, which must be discounted back using the WACC. After everything
is discounted back, they are then added together to find the present value of annual
cash flows. After looking at the growth in the free cash flows, we determined a good
growth would be .03. We chose this number because each year our cash flows grow at
a steady, constant rate. Once we decided on a growth rate we were able to determine
our continuing terminal value. Next, we found the present value of the terminal value
and used that number to compute the value of the firm. In order to find the value of
equity we must subtract the book value of debt from the value of the firm. After we
find the value of equity we then divide it by the number of shares outstanding. This
gives us the estimated value per share. However, in order to properly value the firm
we must use a future value formula to get the estimated share price as of November 1,
2006, which we found to be $3.87. The estimated price per share is still extremely
below the current share price which is $57.70. This model tells us that the stock is
over-valued. However, this model is not the best representation of what the share price
should be because is primarily based on forecasted numbers in the future.
Sensitivity Analysis
g 0 0.01 0.03 0.05 0.08
0.06 $5.10 $9.36 $26.41 $111.63 n/a 0.07 $0.08 $2.89 $12.75 $42.33 n/a
WACC 0.08096 n/a n/a $3.87 17.66 $1115.54 0.09 n/a n/a n/a 7.41 $83.57 0.10 n/a n/a n/a $0.32 $28.58 0.11 n/a n/a n/a n/a $10.11
According to our Sensitivity Analysis the WACC does not go low enough to depict a
close enough share price. In addition our growth rate shows that a slight change in
- 55 -
growth has a dramatic effect on our share price. This analysis confirms that the stock
price is currently over-valued.
Abnormal Earnings Growth:
Simply put, the abnormal earnings growth estimated for a company is their increase in
residual income. It deals with the concept of investing paid dividends back into the
company. In order to being the calculation of abnormal earnings growth, we had to
start by computing the earnings per share and the dividends per share. Earnings per
share (EPS) is net income divided by number of shares outstanding. Dividends per
share (DPS) is determined by taking the total dividends paid per and dividing that by
the number of shares outstanding. Next, we included our EPS and DPS for the next ten
years using our forecasted financial statements. We then found our DRIP by
multiplying our dividends from the previous year by our cost of capital. After that, we
estimated our cumulative dividends earnings in 2006 by adding the earnings per share
and the DRIP. Normal earnings were found by adding one plus our cost of capital.
After these calculations were made, we were able to find our abnormal earnings growth
for each year. AEG was calculated by subtracting our cumulative dividend earnings
from our normal earnings each year. In order to accurately compare values from
different years, we needed to discount each AEG value. So, we found a present value
factor for each year using the following formula: 1/(1+Ke)^t. Then, the present
values of the abnormal earnings were estimated by multiplying the AEG and the present
value factor. To compute the total present value of AEG, we simply added all of the
present values of the AEG previously found. The terminal value we used was $.09.
This value was used because the growth of our AEG was very small. Subsequently, the
present value of the terminal value was found by taking our terminal value, the
perpetuity divided by the cost of equity minus g, and multiplying it by the present value
factor for year 2015. The total present value of the AEG is computed by adding the
total present value of AEG plus the present value of the terminal value. The total
average perpetuity (t+1) is the sum of the core EPS and the total present value of the
AEG. This leads us to find the value per share because we can then add the total
- 56 -
average perpetuity divided by the capitalization rate (.1169). Finally, to find the share
value as of November 1, 2006 we multiplied the value per share by one plus our cost of
capital raised to the 9/12. Target’s fiscal year ends on January 28th of each year, so
that is why the exponent is 9/12. We ended up with a value of $29.06.
Sensitivity Analysis
g
0 0.01 0.02 0.03 0.04 0.05
0.08 $54.19 $54.19 $54.19 $54.19 $54.19 $54.19
0.10 $37.87 $37.87 $37.87 $37.87 $37.87 $37.87
0.1169 $29.06 $29.06 $29.06 $29.06 $29.06 $29.06
Ke 0.13 $24.11 $24.11 $24.11 $24.11 $24.11 $24.11
0.15 $18.59 $18.59 $18.59 $18.59 $18.59 $18.59
According to our sensitivity analysis, this valuation method is more sensitive to the cost
of equity than the change in growth rates. Since the growth rate we used was
extremely small, it was not very sensitive.
Residual Income Model:
This model involves using your earnings per share and dividends per share in order to
establish your book value of equity. You then use your book value of equity multiplied
by your Ke to estimate the value of the firm. Our first task was to find our BE for the
end of 2005. After we found this number we took our forecasted earnings per share
and added them to the BE at the end of 2005. Then we took our forecasted dividends
per share and subtracted them in order to get our ending BE in 2006. The process of
finding the ending BE based on these tasks continue for the following ten years. Next,
to find our normal income we took our previous year ending BE and multiplied that by
our Ke. Then to find our residual income we simply subtracted our normal income from
our forecasted earnings per share. This process also continued for the next ten years.
After this was completed, we discounted all of these answers back to the end of 2005.
- 57 -
We then assumed that we would have no growth for our terminal value considering
that our answers were slowing down and continually decreasing. To find our estimated
price of $30.27 we added our BE for year ended 2005 plus our total present value of
residual income plus our present value of our terminal value. Then we used a future
value formula to get the current and estimated price for November 1, 2006. This
intrinsic valuation showed that our company is over-valued.
Sensitivity Analysis
g0 0.05 0.1 0.15
Ke 0.08 $54.02 $87.42 N/A $11.070.1 $38.70 $48.34 N/A $9.79
0.1169 $30.27 $33.79 $58.16 $8.91
0.13 $25.45 $26.87 $33.03 $8.380.15 $19.98 $19.96 $19.89 N/A
The Sensitivity Analysis shows that our cost of equity assuming no growth or even a
5% growth is still too high too reach our market price. However, if our cost of equity is
about 8% our market price can be attainable with a small amount of growth.
Long Run ROE Perpetuity:
P=BE+BE ((ROE- Ke)/ ( Ke -g))
This valuation model uses a perpetuity based on the formula used for the residual
income model. In order to find the share price for Target we needed to take the price
to book ratio and match it with a perpetuity based on average growth of ROE. To find
out average growth in BE we simply divide our ending BE by our beginning BE. To find
our average growth in ROE we simply divided our earnings per share by our previous
year ending BE. We did this for the following ten years. Once we have our averages
for each of the following ten years we then took a total average of both numbers. Then
we put in our perpetuity formal using a BE of $16.54, a ROE of 16.02%, and an
average growth rate of 13.78%. We kept our Ke constant at 11.69%. This gave us an
- 58 -
estimated share price of -16.78 as of November 1, 2006. This model relies heavily on
the average ROE, the average growth rate of BE, and the Ke. Giving us a lot of factors
that need to be used together in order to determine the ending share price. Since this
model relies on three different factors we needed to perform three sensitivity analyses
in order to see if our estimated price would change.
Sensitivity Analysisg
0 0.1 0.1378 0.15 0.2 0.250.08 35.10$ n/a n/a 0.06$ 9.31$ 13.63$ 0.1 28.47$ n/a n/a n/a 10.62$ 15.07$
Ke 0.1169 24.63$ 65.86$ n/a n/a 12.19$ 16.61$ 0.13 22.35$ 38.22$ n/a n/a 13.92$ 18.09$ 0.15 19.62$ 23.97$ 36.32$ n/a 18.28$ 21.08$
According to this sensitivity analysis we see that the growth rate is a strong
determinant in estimating our share price. If we lower our growth rate and keep our Ke
constant our market price can be attainable.
Sensitivity AnalysisROE
0.1 0.13 0.1602 0.2 0.25 0.30.08 13.87$ 4.78$ n/a n/a n/a n/a0.1 20.21$ 6.11$ n/a n/a n/a n/a
Ke 0.1169 34.98$ 9.18$ n/a n/a n/a n/a0.13 90.35$ 20.63$ n/a 142.06$ n/a n/a0.15 n/a n/a 36.26$ 96.18$ 171.46$ 246.73$
If we use a sensitivity analysis of changing our Ke and our ROE we still see that our cost
of equity is too low to maintain market price if our ROE grows at our average rate or
lower. If we increase our Ke and increase our ROE growth our market share price is
attainable. However, we feel that we can not grow our ROE any higher then it
currently is.
Sensitivity Analysisg
0 0.1 0.1378 0.15 0.2 0.250.1 12.25$ 1.84$ n/a n/a 40.41$ 32.14$
0.13 15.92$ 12.86$ n/a n/a 29.39$ 26.63$ Roe 0.1602 19.62$ 23.95$ 36.26$ n/a 18.29$ 21.09$
0.2 24.49$ 38.57$ 96.18$ n/a 3.67$ 24.64$ 0.25 4.59$ 56.94$ 171.46$ n/a n/a 4.59$
- 59 -
In our final sensitivity analysis we see that if we keep our Ke constant and only change
our growth and ROE growth our share price is still not that easily attainable. All of
these analyses stay consistent in determining that our company is over-valued.
Altman Z-Score Analysis:
In order to assess the risk for Target Corp. we needed to use the Altman Z-Score. This
formula helps to determine the risk of a company based on the debt valuations that we
have calculated. It will give us a better look as to see the amount of risk and chance of
bankruptcy that Target may have. The Altman Z-Score formula is as follows:
1.2(WC/TA) + 1.4(RE/TA) + 3.3(EBIT/TA) + .6(MVE/BVL) + 1.0(Sales/TA) = Z-Score
In the z-score formula it is stated that if the numbers fall below 1.81 that the company
has a high change of bankruptcy. If the formula is between 1.8 and 2.67 it indicated
that there is some degree of credit risk and that money will be loaned out at a higher
rate. However, if the z-score is above 2.67 it indicates that this company is in good
credit standing and will be loaned money at a lower rate. Our calculated z-score for
Target came out to 2.52 for year end 2005. This shows that Target is of some credit
risk but is extremely close to a high credit ranking of 2.67. We did a previous five-year
history and discovered that Target has been pretty consistent averaging a z-score of
about 2.49.
1.2(WC/TA) + 1.4(RE/TA) + 3.3(EBIT/TA) + .6(MVE/BVL) + 1.0(Sales/TA) = Z-Score2001 0.13 0.39 0.30 0.0016 1.65 2.472002 0.19 0.40 0.31 0.0008 1.54 2.432003 0.18 0.43 0.31 0.0011 1.53 2.452004 0.21 0.48 0.44 0.0015 1.45 2.592005 0.17 0.48 0.36 0.0016 1.50 2.52
Enterprise value/EBITDA:
A newly important valuation method takes a company’s enterprise value and divides it
by EBITDA. The enterprise value of a company is commonly known as it’s take over
price. It is a measure of a company’s value that includes the value of a company’s debt
in the calculation. Many investors are beginning to see the significance of a firm’s
enterprise value and are using it to value companies instead of using their market
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capitalization. The enterprise value of a firm is calculated as the market capitalization
plus debt, minority interest and preferred stock shares. Total cash and cash
equivalents are then subtracted from the previous value.
EBITDA, earnings before interest, taxes, depreciation, and amortization, are a
company’s cash flows. EBITDA is primarily used to see the amount of liquid cash
available. This number is similar to a credit rating in that it is used to determine if a
company can afford the payments on their loans.
Enterprise
Value EBITDA
Enterprise Value/EBITDA
% TARGET $60,930,000,000 $6,180,000,000 9.86
WALMART 233,660,000,000 25,050,000,000 9.33 COSTO 22,290,000,000 2,088,000,000 10.68 KMART N/A N/A N/A
Investors are beginning to take a firm’s enterprise value and dividing it by their EBITDA.
They are basically taking the firm’s value and dividing it by their cash flows to see if the
said firm is a good investment. We compared Target’s enterprise value/EBITDA to Wal-
Mart’s, Costco’s, and K-Mart’s in 2006.
According to the calculations, Costco would be the best investment since its value is
equal to 10.68%. Target’s value is the next highest, 9.86%. Following closely behind
Target is Wal-Mart with a value of 9.33%. K-Mart’s value could not be computed since
it was bought out by Sears and there is no current information on K-Mart.
Conclusion: After computing the valuations for the previous methods we are able to get an accurate
assessment on how Targets stock is valued. All of the models led us to the same
conclusion however the Discounted Free Cash Flow valuation was the least accurate
model with the price per share of $3.87. With the current share price as of November
1, 2006 at $57.70 the shows the gap in the numbers computed in the free cash flow
valuation.
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We were able to take the average of all the numbers we got from the valuation models
and compare it with current listing price. After computing that number we found that
the average was $11.87, which is much lower than the current share price of $57.70.
Although the methods gave us different numbers, every method came to the same
conclusion that our firm is over-valued. With a low stock value we found that the cost
of equity is too high. In addition as found in our sensitivity analysis the growth rate
had the biggest impact on the Discounted Free Cash Flows. In order to match the
current listed Target share price the cost of equity will need to be lower. We have
found an extremely strong conclusion because every valuation model told us the same
conclusion.
The valuation methods all came to the same conclusion stating that our company is
over-valued, however there may be errors contained in these estimates. Many of the
methods used forecasted amounts that could change in the future and may also contain
errors. However, we feel that our conclusion is accurate that Target is over-valued, and
shareholders would be wise to sell their stock.
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Appendix
Appendix A Core Financial Ratios Current Ratio 2001 2002 2003 2004 2005 2006
Wal-Mart 0.91 0.89 0.89 0.91 0.93 1.03 Costco 0.94 1.04 1.13 1.17 1.22 1.05 Kmart 2.90 12 n/a 3.14 2.54 n/a Target 1.15 1.37 1.59 1.56 1.69 1.50
Industry Avg. 1.47 4.64 1.01 1.73 1.56 1.19 Quick Asset Ratio 2001 2002 2003 2004 2005 2006
Wal-Mart 0.17 0.18 0.16 0.17 0.14 0.15 Costco 0.22 0.28 0.45 0.56 0.58 0.59 Kmart 1.91 2.89 n/a 1.34 1.95 n/a
Target 0.72 0.61 0.84 0.78 0.89 0.76 Industry Average .75 1.12 0.30 0.69 0.89 0.50
Accounts Receivable Turnover 2001 2002 2003 2004 2005 2006 Wal-Mart 108.21 108.89 115.99 204.41 166.31 117.37 Costco 107.13 81.62 76.50 143.51 132.33 153.34 Kmart 66.82 65.04 n/a 77.25 30.49 n/a Target 19.01 10.41 7.89 8.34 9.24 9.29 Industry Average 75.29 85.18 96.24 141.72 109.71 93.33
Days Supply of Receivables 2001 2002 2003 2004 2005 2006 Wal-Mart 3.37 3.35 3.14 1.78 2.19 3.10 Costco 3.40 4.47 4.77 2.54 2.75 2.38 Kmart 5.46 5.61 n/a 4.72 11.96 n/a Target 19.20 35.06 46.26 43.76 39.50 39.28 Industry Average 7.85 12.12 18.05 13.2 14.1 14.92 Inventory Turnover 2001 2002 2003 2004 2005 2006 Wal-Mart 7.00 7.59 7.71 7.47 7.46 7.47 Costco 11.17 10.86 11.15 11.55 11.54 10.76 Kmart 5.15 5.44 n/a 5.51 4.45 n/a Target 5.95 6.12 6.15 6.94 6.49 5.98 Industry Average 7.31 7.96 9.43 8.17 7.81 8.07
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Days supply of Inventory 2001 2002 2003 2004 2005 2006 Wal-Mart 52.14 48.10 47.34 48.86 48.93 48.86 Costco 32.67 33.60 32.73 31.60 31.62 33.92 Kmart 70.90 67.00 n/a 66.24 82.02 n/a Target 61.34 59.64 59.35 52.59 56.24 61.04 Industry Average 51.78 49.50 40.03 48.90 54.19 48.46 Working Capital Turnover 2001 2002 2003 2004 2005 2006 Wal-Mart -68.92 225.93 -114.58 -85.53 -64.87 -62.46 Costco -148.59 214.39 60.74 43.79 35.11 142.80 Kmart 5.03 7.72 n/a 5.76 3.611 n/a Target 36.79 15.38 9.95 10.38 8.21 10.92 Industry Average n/a 149.34 n/a n/a n/a 30.42
Gross Profit Margin 2001 2002 2003 2004 2005 2006 Wal-Mart 0.21 0.21 0.21 0.22 0.22 0.23 Costco 0.12 0.12 0.12 0.10 0.10 0.10 Kmart 0.17 0.14 n/a 0.23 0.25 n/a Target 0.31 0.32 0.33 0.34 0.33 0.34 Industry Average 0.20 0.16 0.16 0.22 0.22 0.22
Operating Expense Ratio 2001 2002 2003 2004 2005 2006 Wal-Mart 0.16 0.16 0.16 0.17 0.17 0.18 Costco 0.08 0.09 0.09 0.09 0.09 0.09 Kmart 0.21 0.21 n/a 0.21 0.21 n/a Target 0.22 0.24 0.24 0.25 0.25 0.25 Industry Average 0.16 0.15 0.13 0.16 0.16 0.17
Net Profit Margin 2001 2002 2003 2004 2005 2006 Wal-Mart 0.03 0.03 0.03 0.03 0.03 0.03 Costco 0.01 0.01 0.01 0.01 0.02 0.01 Kmart -0.06 -0.01 n/a -0.02 0.05 n/a Target 0.03 0.03 0.04 0.04 0.07 0.05 Industry Average 0.002 0.01 0.02 0.009 0.03 0.03
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Return on Assets 2001 2002 2003 2004 2005 2006 Wal-Mart 0.08 0.07 0.08 0.08 0.08 0.08 Costco 0.15 0.15 0.12 0.12 0.13 0.06 Kmart -0.17 -0.28 n/a -0.10 0.14 n/a Target 0.06 0.06 0.06 0.06 0.1 0.07 Industry Average 0.03 n/a 0.10 0.10 0.12 0.07 Return on Equity 2001 2002 2003 2004 2005 2006 Wal-Mart 0.19 0.19 0.20 0.20 0.20 0.21 Costco 0.12 0.12 0.10 0.11 0.11 0.11 Kmart n/a n/a n/a -0.27 0.24 n/a Target 0.17 0.17 0.18 0.17 0.25 0.17 Industry Average 0.16 0.15 0.15 0.014 0.19 0.16
Debt to Equity 2001 2002 2003 2004 2005 2006 Wal-Mart 1.49 1.38 1.41 1.40 1.43 1.60 Costco 1.06 1.04 1.01 0.97 0.85 0.87 Kmart n/a n/a n/a 1.77 0.93 n/a Target 1.98 2.07 2.03 1.84 1.48 1.46 Industry Average 1.51 1.90 1.21 1.38 1.07 1.60 Debt service Margin 2001 2002 2003 2004 2005 2006 Wal-Mart 2.61 3.25 2.41 2.51 1.93 2.03 Costco 5.30 9.80 31.79 6.41 30.95 8.77 Kmart n/a n/a n/a 328 267 n/a Target 2.95 2.20 1.63 3.65 7.58 5.91 Industry Average 3.62 6.52 17.10 112.3 99.96 5.57
Asset Turnover 2001 2002 2003 2004 2005 2006 Wal-Mart 2.44 2.61 2.58 2.44 2.37 2.26 Costco 8.96 8.37 7.44 6.61 6.54 3.04 Kmart 2.55 2.74 n/a 4.00 2.61 n/a Target 1.89 1.65 1.54 1.53 1.45 1.50 Industry Average 6.46 4.57 5.01 4.35 3.84 2.26
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Times Interest Earned 2001 2002 2003 2004 2005 2006 Wal-Mart 13.66 14.64 14.75 18.05 17.33 15.81 Costco 88.59 195.74 160.63 92.38 19.73 16.56 Kmart n/a n/a n/a n/a n/a n/a Target 3.31 3.39 2.98 3.12 6.32 9.34 Industry Average 35.18 105.19 87.69 55.21 18.53 41.71
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Appendix B Forecasted Financials I. Balance Sheet
Actual Financial Statements Forecast Financial StatementsAssets 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Cash and Cash Equivalents $356.0 $499.0 $758.0 $716.0 $2,245.0 $1,648.0Accounts Receivable, net $1,941.0 $3,831.0 $5,565.0 $5,776.0 $5,069.0 $5,666.0Inventory $4,248.0 $4,449.0 $4,760.0 $5,343.0 $5,384.0 $5,838.0Other Current Assets $759.0 $869.0 $852.0 $1,093.0 $1,224.0 $1,253.0Total Current Assets $7,304.0 $9,648.0 $11,935.0 $12,928.0 $13,922.0 $14,405.0 $16,319.2 $18,195.9 $20,288.4 $22,621.6 $25,223.0 $28,123.7 $31,357.9 $34,964.1 $38,985.0 $43,468.2Property and Equipment, net $11,418.0 $13,533.0 $15,307.0 $16,969.0 $16,860.0 $19,038.0 $20,981.8 $23,394.7 $26,085.1 $29,084.9 $32,429.6 $36,159.0 $40,317.3 $44,953.8 $50,123.5 $55,887.7Other Long-Term Assets $768.0 $973.0 $1,361.0 $1,495.0 $1,511.0 $1,552.0 $1,748.5 $1,949.6 $2,173.8 $2,423.7 $2,702.5 $3,013.3 $3,359.8 $3,746.2 $4,177.0 $4,657.3Total assets $19,490.0 $24,154.0 $28,603.0 $31,392.0 $32,293.0 $34,995.0 $38,855.2 $43,323.5 $48,305.7 $53,860.9 $60,054.9 $66,961.2 $74,661.7 $83,247.8 $92,821.3 $103,495.8Asset Turnover 1.89 1.65 1.54 1.53 1.45 1.50 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51 1.51
$0.2 $0.2 $0.1 $0.0 $0.1Liabilities and shareholders' investmentAccounts Payable $3,576.0 $4,160.0 $4,684.0 $5,448.0 $5,779.0 $6,268.0Current Long-Term Debt and Notes Payable $857.0 $905.0 $975.0 $866.0 $504.0 $753.0Taxes Payable $361.0 $423.0 $319.0 $382.0 $304.0 $374.0Other Current Liabilities $1,507.0 $1,566.0 $1,545.0 $1,618.0 $1,633.0 $2,193.0Total Current Liabilities $6,301.0 $7,054.0 $7,523.0 $8,314.0 $8,220.0 $9,588.0 $10,560.8 $11,775.3 $13,129.5 $14,639.4 $16,322.9 $18,200.0 $20,293.1 $22,626.8 $25,228.8 $28,130.1Long-Term Debt $5,634.0 $8,088.0 $10,186.0 $10,217.0 $9,034.0 $9,119.0Other Non-Current Liabilities $1,036.0 $1,152.0 $1,451.0 $1,796.0 $2,010.0 $2,083.0Total Liabilities $12,971.0 $16,294.0 $19,160.0 $20,327.0 $19,264.0 $20,790.0 $23,468.5 $26,167.4 $29,176.7 $32,532.0 $36,273.1 $40,444.6 $45,095.7 $50,281.7 $56,064.1 $62,511.4Shareholders Equity $6,519.0 $7,860.0 $9,443.0 $11,065.0 $13,029.0 $14,205.0 $15,386.6 $17,156.1 $19,129.1 $21,328.9 $23,781.7 $26,516.6 $29,566.0 $32,966.1 $36,757.2 $40,984.3Total Liabilities and Shareholders Equity $19,490.0 $24,154.0 $28,603.0 $31,392.0 $32,293.0 $34,995.0 $38,855.2 $43,323.5 $48,305.7 $53,860.9 $60,054.9 $66,961.2 $74,661.7 $83,247.8 $92,821.3 $103,495.8 Pro-Forma Balance Sheet Common Size Balance Sheet
Actual Financial Statements Forecast Financial StatementsAssets 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Cash and Cash Equivalents 1.83% 2.07% 2.65% 2.28% 6.95% 4.71%Accounts Receivable, net 9.96% 15.86% 19.46% 18.40% 15.70% 16.19%Inventory 21.80% 18.42% 16.64% 17.02% 16.67% 16.68%Other Current Assets 3.89% 3.60% 2.98% 3.48% 3.79% 3.58%Total Current Assets 37.48% 39.94% 41.73% 41.18% 43.11% 41.16% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00% 42.00%Property and Equipment, net 58.58% 56.03% 53.52% 54.06% 52.21% 54.40% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00% 54.00%Other Long-Term Assets 3.94% 4.03% 4.76% 4.76% 4.68% 4.43% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50% 4.50%Total assets 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% Liabilities and shareholders' investmentAccounts Payable 27.57% 25.53% 24.45% 26.80% 30.00% 30.15%Current Long-Term Debt and Notes Payable 6.61% 5.55% 5.09% 4.26% 2.62% 3.62%Taxes Payable 2.78% 2.60% 1.66% 1.88% 1.58% 1.80%Other Current Liabilities 11.62% 9.61% 8.06% 7.96% 8.48% 10.55%Total Current Liabilities 48.58% 43.29% 39.26% 40.90% 42.67% 46.12% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00% 45.00%Long-Term Debt 43.44% 49.64% 53.16% 50.26% 46.90% 43.86%Other Non-Current Liabilities 7.99% 7.07% 7.57% 8.84% 10.43% 10.02%Total Liabilities 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%Shareholders Equity 33.45% 32.54% 33.01% 35.25% 40.35% 40.59% 39.60% 39.60% 39.60% 39.60% 39.60% 39.60% 39.60% 39.60% 39.60% 39.60%Total Liabilities and Shareholders Equity 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
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II. Income Statement Actual Financial Statements Forecast Financial Statements
Income (millions) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Net Sales $36,903.0 $39,888.0 $43,917.0 $48,163.0 $46,839.0 $52,620.0 $58,671.3 $65,418.5 $72,941.6 $81,329.9 $90,682.9 $101,111.4 $112,739.2 $125,704.2 $140,160.2 $156,278.6Cost of Goods Sold $25,295.0 $27,246.0 $29,260.0 $31,790.0 $31,445.0 $34,927.0 $38,723.1 $43,176.2 $48,141.5 $53,677.7 $59,850.7 $66,733.5 $74,407.9 $82,964.8 $92,505.7 $103,143.9Gross Profit $11,608.0 $12,642.0 $14,657.0 $16,373.0 $15,394.0 $17,693.0 $19,948.2 $22,242.3 $24,800.2 $27,652.2 $30,832.2 $34,377.9 $38,331.3 $42,739.4 $47,654.5 $53,134.7Sales, General & Administrative $8,190.0 $8,420.0 $9,416.0 $10,696.0 $9,797.0 $11,185.0 $14,667.8 $15,665.1 $16,730.1 $17,867.5 $19,082.3 $20,379.6 $21,765.2 $23,245.0 $24,825.3 $26,513.1Total Operating Expense $9,130.0 $9,499.0 $10,628.0 $12,016.0 $11,793.0 $13,370.0 $14,453.1 $15,623.9 $16,889.5 $18,257.7 $19,736.7 $21,335.5 $23,063.8 $24,932.1 $26,951.8 $29,135.0Total Operating Income $2,478.0 $3,143.0 $4,029.0 $4,357.0 $3,601.0 $4,323.0 $4,763.96 $5,311.82 $5,922.68 $6,603.79 $7,363.22 $8,209.99 $9,154.14 $10,206.87 $11,380.66 $12,689.43Income Before Tax $2,053.0 $2,216.0 $2,676.0 $2,960.0 $3,031.0 $3,860.0 $4,393.1 $4,999.9 $5,690.5 $6,476.5 $7,371.0 $8,389.1 $9,547.8 $10,866.5 $12,367.4 $14,075.6Income Tax Provision $789.0 $842.0 $1,022.0 $1,119.0 $1,146.0 $1,452.0Extraordinary Items $0.0 -$6.0 $0.0 $0.0 $1,313.0 $0.0Net Income $1,264.0 $1,368.0 $1,654.0 $1,841.0 $3,198.0 $2,408.0 $2,527.5 $2,818.2 $3,142.2 $3,503.6 $3,906.5 $4,355.8 $4,856.7 $5,415.2 $6,037.9 $6,732.3 Pro-Forma Income Statement
Actual Financial Statements Forecast Financial StatementsIncome (millions) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Net Sales 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%Cost of Goods Sold 68.54% 68.31% 66.63% 66.01% 67.13% 66.38% 66.00% 66.00% 66.00% 66.00% 66.00% 66.00% 66.00% 66.00% 66.00% 66.00%Gross Profit 31.46% 31.69% 33.37% 33.99% 32.87% 33.62% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00%Sales, General & Administrative 22.19% 21.11% 21.44% 22.21% 20.92% 21.26% 25.00% 23.95% 22.94% 21.97% 21.04% 20.16% 19.31% 18.49% 17.71% 16.97%Total Operating Expense 24.74% 23.81% 24.20% 24.95% 25.18% 25.41% 24.63% 23.88% 23.15% 22.45% 21.76% 21.10% 20.46% 19.83% 19.23% 18.64%Total Operating Income 6.71% 7.88% 9.17% 9.05% 7.69% 8.22% 8.12% 8.12% 8.12% 8.12% 8.12% 8.12% 8.12% 8.12% 8.12% 8.12%Income Before Tax 5.56% 5.56% 6.09% 6.15% 6.47% 7.34% 7.49% 7.64% 7.80% 7.96% 8.13% 8.30% 8.47% 8.64% 8.82% 9.01%Income Tax Provision 2.14% 2.11% 2.33% 2.32% 2.45% 2.76% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Extraordinary Items 0.00% -0.02% 0.00% 0.00% 2.80% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Net Income 3.43% 3.43% 3.77% 3.82% 6.83% 4.58% 4.31% 4.31% 4.31% 4.31% 4.31% 4.31% 4.31% 4.31% 4.31% 4.31%
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III. Statement of Cash Flows
Actual Financial Statements Forecast Financial StatementsOperating activities 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Net earnings $1,368.0 $1,654.0 $1,809.0 $3,198.0 $2,408.0 $2,787.1 $2,784.4 $2,942.9 $3,110.4 $3,287.4 $3,474.5 $3,672.3 $3,881.4 $4,102.3 $4,335.8 $4,582.6Earnings from discontinued operations -$190.0 -$1,313.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0 $0.0Earnings from continuing operations $1,368.0 $1,654.0 $1,619.0 $1,885.0 $2,408.0 $2,787.1 $3,225.8 $3,733.6 $4,321.3 $5,001.5 $5,788.8 $6,700.0 $7,754.7 $8,975.4 $10,388.3 $12,023.5Reconciliation to cash flowDepreciation and amortization $940.0 $1,079.0 $1,098.0 $1,259.0 $1,409.0 $1,560.9 $1,690.5 $1,786.7 $1,888.4 $1,995.9 $2,109.5 $2,229.6 $2,356.5 $2,490.7 $2,632.4 $2,782.3Share-based compensation expense $38.0 $52.0 $57.0 $60.0 $93.0Deferred income taxes $1.0 $49.0 $208.0 $233.0 -$122.0Bad debt provision $230.0 $460.0 $476.0 $451.0 $466.0 $582.5 $546.9 $578.1 $611.0 $645.7 $682.5 $721.3 $762.4 $805.8 $851.7 $900.1Loss on disposal of property and equipment, net $52.0 $67.0 $41.0 $59.0 $70.0 $79.1 $74.6 $78.8 $83.3 $88.1 $93.1 $98.4 $104.0 $109.9 $116.1 $122.7Other non-cash items affecting earnings $160.0 $159.0 $10.0 $73.0 -$50.0Changes in operating accounts providing / (requiring) cash:Accounts receivable originated at Target -$1,193.0 -$2,194.0 -$279.0 -$209.0 -$244.0 -$283.0 -$298.3 -$315.3 -$333.3 -$352.2 -$372.3 -$393.5 -$415.9 -$439.5 -$464.5 -$491.0Inventory -$201.0 -$311.0 -$579.0 -$853.0 -$454.0 -$612.9 -$596.7 -$630.6 -$666.5 -$704.4 -$744.5 -$786.9 -$831.7 -$879.1 -$929.1 -$982.0Other current assets -$91.0 $15.0 -$196.0 -$37.0 -$29.0Other non-current assets -$178.0 -$174.0 -$166.0 -$147.0 -$24.0Accounts payable $584.0 $524.0 $721.0 $823.0 $499.0 $501.6 $546.9 $578.1 $611.0 $645.7 $682.5 $721.3 $762.4 $805.8 $851.7 $900.1Accrued liabilities $29.0 -$21.0 $85.0 $319.0 $351.0 $386.2 $298.3 $315.3 $333.3 $352.2 $372.3 $393.5 $415.9 $439.5 $464.5 $491.0Income taxes payable $0.0 $30.0 $74.0 -$91.0 $70.0Other $2,012.0 $1,590.0 $19.0 -$17.0 $17.0Cash flow provided by operations $3,751.0 $2,979.0 $3,188.0 $3,808.0 $4,451.0 $4,704.4 $4,972.1 $5,255.1 $5,554.3 $5,870.4 $6,204.6 $6,557.7 $6,931.0 $7,325.5 $7,742.5 $8,183.2 -$0.2 $0.1 $0.2 $0.2 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 $0.1 -$1.0Investing activitiesExpenditures for property and equipment -$3,163.0 -$3,221.0 -$2,738.0 -$3,068.0 -$3,399.0Proceeds from disposal of property and equipment $32.0 $32.0 $67.0 $56.0 $59.0Change in accounts receivable originated at third parties -$538.0 -$690.0 -$819.0Other -$179.0 $0.0 $4,881.0Cash flow required for investing activities -$3,310.0 -$3,189.0 -$3,209.0 $1,179.0 -$4,149.0 -$4,279.0 -$4,413.1 -$4,551.3 -$4,694.0 -$4,841.0 -$4,992.7 -$5,149.1 -$5,310.5 -$5,476.9 -$5,648.5 -$5,825.5 Financing activitiesIncrease in notes payable, net -$808.0 $0.0 -$100.0 $0.0 $0.0Additions to long-term debt $3,250.0 $3,153.0 $1,200.0 $10.0 $913.0Reductions of long-term debt -$1,071.0 -$793.0 -$1,179.0 -$1,487.0 -$527.0Dividends paid -$203.0 -$218.0 -$237.0 -$272.0 -$319.0 -$357.3 -$398.3 -$439.3 -$480.3 -$521.3 -$562.3 -$603.3 -$644.3 -$685.3 -$726.3 -$767.3Repurchase of stock -$20.0 -$14.0 -$48.0 -$1,290.0 -$1,197.0Stock option exercises $199.0 $155.0 $36.0 $146.0 $172.0Share-based compensation tax Benefit $79.0 $115.0 $25.0 $69.0 $59.0Other $15.0 $8.0 -$10.0 $0.0 -$1.0Cash flow required for financing activities $1,441.0 $1,858.0 -$313.0 -$2,824.0 -$899.0 -$102.0 -$125.5 -$154.3 -$189.8 -$233.5 -$287.2 -$353.2 -$434.4 -$534.4 -$657.3 -$808.4 $0.3 -$1.2 $8.0 -$0.7 -$0.9 $0.2Net decrease in cash and cash equivalents $143.0 $259.0 -$42.0 $1,537.0 -$597.0
Cash and cash equivalents at beginning of period $356.0 $499.0 $750.0 $708.0 $2,245.0 $1,649.0Cash and cash equivalents at end of period $499.0 $750.0 $708.0 $2,245.0 $1,649.0
Pro-Forma Statement of Cash Flows
Actual Financial Statements Forecast Financial StatementsCash Flows from Operating Activities 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Net earnings 36.47% 55.52% 56.74% 83.98% 54.10% 59.24% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00% 56.00%Reconciliation to cash flowDepreciation and amortization 25.06% 36.22% 34.44% 33.06% 31.66% 33.18% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00% 34.00%Deferred income taxes 0.03% 1.64% 6.52% 6.12% -2.74% 0.00%Bad debt provision 6.13% 15.44% 14.93% 11.84% 10.47% 12.38% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00%Loss on disposal of property and equipment, net 1.39% 2.25% 1.29% 1.55% 1.57% 1.68% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50% 1.50%Other non-cash items affecting earnings 4.27% 5.34% 0.31% 1.92% -1.12% 0.00%Changes in operating accounts providing / (requiring) cash:Accounts receivable originated at Target -31.80% -73.65% -8.75% -5.49% -5.48% -6.02% -6.00% -6.00% -6.00% -6.00% -6.00% -6.00% -6.00% -6.00% -6.00% -6.00%Inventory -5.36% -10.44% -18.16% -22.40% -10.20% -13.03% -12.00% -12.00% -12.00% -12.00% -12.00% -12.00% -12.00% -12.00% -12.00% -12.00%Accounts payable 15.57% 17.59% 22.62% 21.61% 11.21% 10.66% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00% 11.00%Accrued liabilities 0.77% -0.70% 2.67% 8.38% 7.89% 8.21% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00% 6.00%Income taxes payable 0.00% 1.01% 2.32% -2.39% 1.57% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other 53.64% 53.37% 0.60% -0.45% 0.38% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Cash flow provided by operations 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%
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Appendix C Cost of Capital Calculation 1 Month
Date Close Dividend CloseS&PMarket
Return Risk Free Annual
Monthly Risk Free
RateFirm's Return
Market Risk
Premium1-Nov-06 58.27 1396.57 0.01352 -0.0152-Oct-06 59.18 1377.94 0.03151 10/1/2006 4.97 0.0041 0.071 0.027371-Sep-06 55.25 1335.85 0.02457 9/1/2006 4.77 0.0040 0.142 0.020591-Aug-06 48.39 0.12 1303.82 0.02127 8/1/2006 5.16 0.0043 0.056 0.016973-Jul-06 45.92 1276.66 0.00509 7/1/2006 4.90 0.0041 -0.060 0.00100
1-Jun-06 48.87 1270.2 0.00009 6/1/2006 4.71 0.0039 -0.001 -0.003841-May-06 48.92 0.1 1270.09 -0.03092 5/1/2006 4.70 0.0039 -0.077 -0.034833-Apr-06 53.1 1310.61 0.01216 4/1/2006 4.61 0.0038 0.021 0.008311-Mar-06 52.01 1294.87 0.01110 3/1/2006 4.55 0.0038 -0.044 0.007301-Feb-06 54.4 0.1 1280.66 0.00045 2/1/2006 4.38 0.0037 -0.005 -0.003203-Jan-06 54.75 1280.08 0.02547 1/1/2006 4.12 0.0034 -0.004 0.022031-Dec-05 54.97 1248.29 -0.00095 12/1/2005 3.69 0.0031 0.027 -0.004031-Nov-05 53.51 0.1 1249.48 0.03519 11/1/2005 3.91 0.0033 -0.037 0.031933-Oct-05 55.69 1207.01 -0.01774 10/1/2005 3.51 0.0029 0.072 -0.020671-Sep-05 51.93 1228.81 0.00695 9/1/2005 3.23 0.0027 -0.034 0.004261-Aug-05 53.75 0.1 1220.33 -0.01122 8/1/2005 3.34 0.0028 -0.083 -0.014011-Jul-05 58.75 1234.18 0.03597 7/1/2005 3.10 0.0026 0.080 0.03338
1-Jun-05 54.41 1191.33 -0.00014 6/1/2005 2.83 0.0024 0.013 -0.002502-May-05 53.7 0.08 1191.5 0.02995 5/1/2005 2.65 0.0022 0.159 0.027741-Apr-05 46.41 1156.85 -0.02011 4/1/2005 2.64 0.0022 -0.072 -0.022311-Mar-05 50.02 1180.59 -0.01912 3/1/2005 2.65 0.0022 -0.016 -0.021331-Feb-05 50.82 0.08 1203.6 0.01890 2/1/2005 2.36 0.0020 0.003 0.016943-Jan-05 50.77 1181.27 -0.02529 1/1/2005 2.05 0.0017 -0.022 -0.027001-Dec-04 51.93 1211.92 0.03246 12/1/2004 1.96 0.0016 0.014 0.030821-Nov-04 51.22 0.08 1173.82 0.03859 11/1/2004 1.92 0.0016 0.026 0.036991-Oct-04 50.02 1130.2 0.01401 10/1/2004 1.63 0.0014 0.105 0.012661-Sep-04 45.25 1114.58 0.00936 9/1/2004 1.55 0.0013 0.015 0.008072-Aug-04 44.58 0.08 1104.24 0.00229 8/1/2004 1.37 0.0011 0.024 0.001151-Jul-04 43.6 1101.72 -0.03429 7/1/2004 1.19 0.0010 0.027 -0.03528
1-Jun-04 42.47 1140.84 0.01799 6/1/2004 1.05 0.0009 -0.050 0.017113-May-04 44.7 0.07 1120.68 0.01208 5/1/2004 0.91 0.0008 0.032 0.011331-Apr-04 43.37 1107.3 -0.01679 4/1/2004 0.91 0.0008 -0.037 -0.017551-Mar-04 45.04 1126.21 -0.01636 3/1/2004 0.96 0.0008 0.025 -0.017162-Feb-04 43.96 0.07 1144.94 0.01221 2/1/2004 0.92 0.0008 0.160 0.011442-Jan-04 37.96 1131.13 0.01728 1/1/2004 0.85 0.0007 -0.011 0.016571-Dec-03 38.4 1111.92 0.05077 12/1/2003 0.89 0.0007 -0.008 0.050023-Nov-03 38.72 0.07 1058.2 0.00713 11/1/2003 0.94 0.0008 -0.024 0.006351-Oct-03 39.74 1050.71 0.05496 10/1/2003 0.91 0.0008 0.056 0.054202-Sep-03 37.63 995.97 -0.01194 9/1/2003 0.91 0.0008 -0.073 -0.012701-Aug-03 40.6 0.07 1008.01 0.01787 8/1/2003 0.95 0.0008 0.061 0.017081-Jul-03 38.32 990.31 0.01622 7/1/2003 0.90 0.0008 0.013 0.01547
2-Jun-03 37.84 974.5 0.01132 6/1/2003 0.97 0.0008 0.033 0.010511-May-03 36.63 0.06 963.59 0.05090 5/1/2003 1.08 0.0009 0.097 0.050001-Apr-03 33.44 916.92 0.08104 4/1/2003 1.16 0.0010 0.143 0.080083-Mar-03 29.26 848.18 0.00836 3/1/2003 1.18 0.0010 0.021 0.007373-Feb-03 28.65 0.06 841.15 -0.01700 2/1/2003 1.20 0.0010 0.018 -0.018002-Jan-03 28.21 855.7 -0.02741 1/1/2003 1.17 0.0010 -0.060 -0.028392-Dec-02 30 879.82 -0.06033 12/1/2002 1.20 0.0010 -0.137 -0.061331-Nov-02 34.78 0.06 936.31 0.05707 11/1/2002 1.26 0.0011 0.157 0.056021-Oct-02 30.12 885.76 0.08645 10/1/2002 1.62 0.0014 0.020 0.085103-Sep-02 29.52 815.28 -0.11002 9/1/2002 1.67 0.0014 -0.137 -0.111421-Aug-02 34.2 0.06 916.07 0.00488 8/1/2002 1.68 0.0014 0.027 0.003481-Jul-02 33.35 911.62 -0.07900 7/1/2002 1.72 0.0014 -0.125 -0.08044
3-Jun-02 38.1 989.82 -0.07246 6/1/2002 1.72 0.0014 -0.081 -0.073891-May-02 41.45 0.06 1067.14 -0.00908 5/1/2002 1.74 0.0015 -0.049 -0.010531-Apr-02 43.65 1076.92 -0.06142 4/1/2002 1.72 0.0014 0.012 -0.062851-Mar-02 43.12 1147.39 0.03674 3/1/2002 1.79 0.0015 0.029 0.035251-Feb-02 41.9 0.06 1106.73 -0.02077 2/1/2002 1.74 0.0015 -0.055 -0.022222-Jan-02 44.41 1130.2 -0.01557 1/1/2002 1.68 0.0014 0.082 -0.016973-Dec-01 41.05 1148.08 0.00757 12/1/2001 1.72 0.0014 0.094 0.006141-Nov-01 37.54 0.055 1139.45 0.07518 11/1/2001 1.99 0.0017 0.207 0.073521-Oct-01 31.15 1059.78 0.01810 10/1/2001 2.27 0.0019 -0.019 0.016214-Sep-01 31.75 1040.94 -0.08172 9/1/2001 2.68 0.0022 -0.084 -0.083961-Aug-01 34.65 0.055 1133.58 #DIV/0! 8/1/2001 3.53 0.0029
3.67
Months Beta R^2 Ke60 1.330 0.425 0.10448 1.540 0.365 0.11836 1.019 0.138 0.09524 1.607 0.236 0.121
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Date Close Dividend CloseMarket Return Risk Free Annual
Monthly Risk Free
RateFirm's Return
Market Risk
Premium1-Nov-06 58.27 1396.57 0.013522-Oct-06 59.18 1377.94 0.03151 10/1/2006 5.01 0.0042 0.0711 0.027331-Sep-06 55.25 1335.85 0.02457 9/1/2006 4.97 0.0041 0.1418 0.020421-Aug-06 48.39 0.12 1303.82 0.02127 8/1/2006 5.08 0.0042 0.0564 0.017043-Jul-06 45.92 1276.66 0.00509 7/1/2006 5.22 0.0044 -0.0604 0.00074
1-Jun-06 48.87 1270.2 0.00009 6/1/2006 5.16 0.0043 -0.0010 -0.004211-May-06 48.92 0.1 1270.09 -0.03092 5/1/2006 5.00 0.0042 -0.0768 -0.035083-Apr-06 53.1 1310.61 0.01216 4/1/2006 4.90 0.0041 0.0210 0.008071-Mar-06 52.01 1294.87 0.01110 3/1/2006 4.77 0.0040 -0.0439 0.007121-Feb-06 54.4 0.1 1280.66 0.00045 2/1/2006 4.68 0.0039 -0.0046 -0.003453-Jan-06 54.75 1280.08 0.02547 1/1/2006 4.45 0.0037 -0.0040 0.021761-Dec-05 54.97 1248.29 -0.00095 12/1/2005 4.35 0.0036 0.0273 -0.004581-Nov-05 53.51 0.1 1249.48 0.03519 11/1/2005 4.33 0.0036 -0.0373 0.031583-Oct-05 55.69 1207.01 -0.01774 10/1/2005 4.18 0.0035 0.0724 -0.021221-Sep-05 51.93 1228.81 0.00695 9/1/2005 3.85 0.0032 -0.0339 0.003741-Aug-05 53.75 0.1 1220.33 -0.01122 8/1/2005 3.87 0.0032 -0.0834 -0.014451-Jul-05 58.75 1234.18 0.03597 7/1/2005 3.64 0.0030 0.0798 0.03293
1-Jun-05 54.41 1191.33 -0.00014 6/1/2005 3.36 0.0028 0.0132 -0.002942-May-05 53.7 0.08 1191.5 0.02995 5/1/2005 3.33 0.0028 0.1588 0.027181-Apr-05 46.41 1156.85 -0.02011 4/1/2005 3.32 0.0028 -0.0722 -0.022881-Mar-05 50.02 1180.59 -0.01912 3/1/2005 3.30 0.0028 -0.0157 -0.021871-Feb-05 50.82 0.08 1203.6 0.01890 2/1/2005 3.03 0.0025 0.0026 0.016383-Jan-05 50.77 1181.27 -0.02529 1/1/2005 2.86 0.0024 -0.0223 -0.027671-Dec-04 51.93 1211.92 0.03246 12/1/2004 2.67 0.0022 0.0139 0.030231-Nov-04 51.22 0.08 1173.82 0.03859 11/1/2004 2.5 0.0021 0.0256 0.036511-Oct-04 50.02 1130.2 0.01401 10/1/2004 2.23 0.0019 0.1054 0.012161-Sep-04 45.25 1114.58 0.00936 9/1/2004 2.12 0.0018 0.0150 0.007602-Aug-04 44.58 0.08 1104.24 0.00229 8/1/2004 2.02 0.0017 0.0243 0.000601-Jul-04 43.6 1101.72 -0.03429 7/1/2004 2.10 0.0018 0.0266 -0.03604
1-Jun-04 42.47 1140.84 0.01799 6/1/2004 2.12 0.0018 -0.0499 0.016223-May-04 44.7 0.07 1120.68 0.01208 5/1/2004 1.78 0.0015 0.0323 0.010601-Apr-04 43.37 1107.3 -0.01679 4/1/2004 1.43 0.0012 -0.0371 -0.017981-Mar-04 45.04 1126.21 -0.01636 3/1/2004 1.19 0.0010 0.0246 -0.017352-Feb-04 43.96 0.07 1144.94 0.01221 2/1/2004 1.24 0.0010 0.1599 0.011182-Jan-04 37.96 1131.13 0.01728 1/1/2004 1.24 0.0010 -0.0115 0.016241-Dec-03 38.4 1111.92 0.05077 12/1/2003 1.31 0.0011 -0.0083 0.049673-Nov-03 38.72 0.07 1058.2 0.00713 11/1/2003 1.34 0.0011 -0.0239 0.006011-Oct-03 39.74 1050.71 0.05496 10/1/2003 1.25 0.0010 0.0561 0.053922-Sep-03 37.63 995.97 -0.01194 9/1/2003 1.24 0.0010 -0.0732 -0.012981-Aug-03 40.6 0.07 1008.01 0.01787 8/1/2003 1.31 0.0011 0.0613 0.016781-Jul-03 38.32 990.31 0.01622 7/1/2003 1.12 0.0009 0.0127 0.01529
2-Jun-03 37.84 974.5 0.01132 6/1/2003 1.01 0.0008 0.0330 0.010481-May-03 36.63 0.06 963.59 0.05090 5/1/2003 1.18 0.0010 0.0972 0.049921-Apr-03 33.44 916.92 0.08104 4/1/2003 1.27 0.0011 0.1429 0.079993-Mar-03 29.26 848.18 0.00836 3/1/2003 1.24 0.0010 0.0213 0.007323-Feb-03 28.65 0.06 841.15 -0.01700 2/1/2003 1.30 0.0011 0.0177 -0.018092-Jan-03 28.21 855.7 -0.02741 1/1/2003 1.36 0.0011 -0.0597 -0.028552-Dec-02 30 879.82 -0.06033 12/1/2002 1.45 0.0012 -0.1374 -0.061541-Nov-02 34.78 0.06 936.31 0.05707 11/1/2002 1.49 0.0012 0.1567 0.055831-Oct-02 30.12 885.76 0.08645 10/1/2002 1.65 0.0014 0.0203 0.085073-Sep-02 29.52 815.28 -0.11002 9/1/2002 1.72 0.0014 -0.1368 -0.111461-Aug-02 34.2 0.06 916.07 0.00488 8/1/2002 1.76 0.0015 0.0273 0.003411-Jul-02 33.35 911.62 -0.07900 7/1/2002 1.96 0.0016 -0.1247 -0.08064
3-Jun-02 38.1 989.82 -0.07246 6/1/2002 2.20 0.0018 -0.0808 -0.074291-May-02 41.45 0.06 1067.14 -0.00908 5/1/2002 2.35 0.0020 -0.0490 -0.011041-Apr-02 43.65 1076.92 -0.06142 4/1/2002 2.48 0.0021 0.0123 -0.063481-Mar-02 43.12 1147.39 0.03674 3/1/2002 2.57 0.0021 0.0291 0.034601-Feb-02 41.9 0.06 1106.73 -0.02077 2/1/2002 2.23 0.0019 -0.0552 -0.022622-Jan-02 44.41 1130.2 -0.01557 1/1/2002 2.16 0.0018 0.0819 -0.017373-Dec-01 41.05 1148.08 0.00757 12/1/2001 2.22 0.0019 0.0935 0.005721-Nov-01 37.54 0.055 1139.45 0.07518 11/1/2001 2.18 0.0018 0.2069 0.073361-Oct-01 31.15 1059.78 0.01810 10/1/2001 2.33 0.0019 -0.0189 0.016164-Sep-01 31.75 1040.94 -0.08172 9/1/2001 2.82 0.0024 -0.0837 -0.084071-Aug-01 34.65 0.055 1133.58 -0.06411 8/1/2001 3.47 0.0029 -0.06700
Months Beta Adjusted R Squared Ke
60 1.3205 0.4288 0.116948 1.3198 0.3126 0.116936 1.0179 0.1139 0.101624 1.6022 0.2358 0.1312
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3 Year
Date Close Dividend CloseMarket Return Risk Free Annual
Monthly Risk Free
RateFirm's Return
Market Risk
Premium1-Nov-06 58.27 1396.57 0.013522-Oct-06 59.18 1377.94 0.03151 10/1/2006 4.72 0.0039 0.0711 0.027571-Sep-06 55.25 1335.85 0.02457 9/1/2006 4.69 0.0039 0.1418 0.020661-Aug-06 48.39 0.12 1303.82 0.02127 8/1/2006 4.85 0.0040 0.0564 0.017233-Jul-06 45.92 1276.66 0.00509 7/1/2006 5.07 0.0042 -0.0604 0.00086
1-Jun-06 48.87 1270.2 0.00009 6/1/2006 5.09 0.0042 -0.0010 -0.004161-May-06 48.92 0.1 1270.09 -0.03092 5/1/2006 4.97 0.0041 -0.0768 -0.035063-Apr-06 53.1 1310.61 0.01216 4/1/2006 4.89 0.0041 0.0210 0.008081-Mar-06 52.01 1294.87 0.01110 3/1/2006 4.74 0.0040 -0.0439 0.007151-Feb-06 54.4 0.1 1280.66 0.00045 2/1/2006 4.64 0.0039 -0.0046 -0.003413-Jan-06 54.75 1280.08 0.02547 1/1/2006 4.35 0.0036 -0.0040 0.021841-Dec-05 54.97 1248.29 -0.00095 12/1/2005 4.39 0.0037 0.0273 -0.004611-Nov-05 53.51 0.1 1249.48 0.03519 11/1/2005 4.43 0.0037 -0.0373 0.031493-Oct-05 55.69 1207.01 -0.01774 10/1/2005 4.29 0.0036 0.0724 -0.021321-Sep-05 51.93 1228.81 0.00695 9/1/2005 3.96 0.0033 -0.0339 0.003651-Aug-05 53.75 0.1 1220.33 -0.01122 8/1/2005 4.08 0.0034 -0.0834 -0.014621-Jul-05 58.75 1234.18 0.03597 7/1/2005 3.91 0.0033 0.0798 0.03271
1-Jun-05 54.41 1191.33 -0.00014 6/1/2005 3.69 0.0031 0.0132 -0.003222-May-05 53.7 0.08 1191.5 0.02995 5/1/2005 3.72 0.0031 0.1588 0.026851-Apr-05 46.41 1156.85 -0.02011 4/1/2005 3.79 0.0032 -0.0722 -0.023271-Mar-05 50.02 1180.59 -0.01912 3/1/2005 3.91 0.0033 -0.0157 -0.022381-Feb-05 50.82 0.08 1203.6 0.01890 2/1/2005 3.54 0.0030 0.0026 0.015953-Jan-05 50.77 1181.27 -0.02529 1/1/2005 3.39 0.0028 -0.0223 -0.028121-Dec-04 51.93 1211.92 0.03246 12/1/2004 3.21 0.0027 0.0139 0.029781-Nov-04 51.22 0.08 1173.82 0.03859 11/1/2004 3.09 0.0026 0.0256 0.036021-Oct-04 50.02 1130.2 0.01401 10/1/2004 2.85 0.0024 0.1054 0.011641-Sep-04 45.25 1114.58 0.00936 9/1/2004 2.83 0.0024 0.0150 0.007012-Aug-04 44.58 0.08 1104.24 0.00229 8/1/2004 2.88 0.0024 0.0243 -0.000111-Jul-04 43.6 1101.72 -0.03429 7/1/2004 3.05 0.0025 0.0266 -0.03683
1-Jun-04 42.47 1140.84 0.01799 6/1/2004 3.26 0.0027 -0.0499 0.015273-May-04 44.7 0.07 1120.68 0.01208 5/1/2004 3.10 0.0026 0.0323 0.009501-Apr-04 43.37 1107.3 -0.01679 4/1/2004 2.57 0.0021 -0.0371 -0.018931-Mar-04 45.04 1126.21 -0.01636 3/1/2004 2.00 0.0017 0.0246 -0.018032-Feb-04 43.96 0.07 1144.94 0.01221 2/1/2004 2.25 0.0019 0.1599 0.010332-Jan-04 37.96 1131.13 0.01728 1/1/2004 2.27 0.0019 -0.0115 0.015381-Dec-03 38.4 1111.92 0.05077 12/1/2003 2.44 0.0020 -0.0083 0.048733-Nov-03 38.72 0.07 1058.2 0.00713 11/1/2003 2.45 0.0020 -0.0239 0.005091-Oct-03 39.74 1050.71 0.05496 10/1/2003 2.26 0.0019 0.0561 0.053082-Sep-03 37.63 995.97 -0.01194 9/1/2003 2.23 0.0019 -0.0732 -0.013801-Aug-03 40.6 0.07 1008.01 0.01787 8/1/2003 2.44 0.0020 0.0613 0.015841-Jul-03 38.32 990.31 0.01622 7/1/2003 1.93 0.0016 0.0127 0.01462
2-Jun-03 37.84 974.5 0.01132 6/1/2003 1.51 0.0013 0.0330 0.010061-May-03 36.63 0.06 963.59 0.05090 5/1/2003 1.75 0.0015 0.0972 0.049441-Apr-03 33.44 916.92 0.08104 4/1/2003 2.06 0.0017 0.1429 0.079333-Mar-03 29.26 848.18 0.00836 3/1/2003 1.98 0.0017 0.0213 0.006713-Feb-03 28.65 0.06 841.15 -0.01700 2/1/2003 2.05 0.0017 0.0177 -0.018712-Jan-03 28.21 855.7 -0.02741 1/1/2003 2.18 0.0018 -0.0597 -0.029232-Dec-02 30 879.82 -0.06033 12/1/2002 2.23 0.0019 -0.1374 -0.062191-Nov-02 34.78 0.06 936.31 0.05707 11/1/2002 2.32 0.0019 0.1567 0.055141-Oct-02 30.12 885.76 0.08645 10/1/2002 2.25 0.0019 0.0203 0.084573-Sep-02 29.52 815.28 -0.11002 9/1/2002 2.32 0.0019 -0.1368 -0.111961-Aug-02 34.2 0.06 916.07 0.00488 8/1/2002 2.52 0.0021 0.0273 0.002781-Jul-02 33.35 911.62 -0.07900 7/1/2002 3.01 0.0025 -0.1247 -0.08151
3-Jun-02 38.1 989.82 -0.07246 6/1/2002 3.49 0.0029 -0.0808 -0.075361-May-02 41.45 0.06 1067.14 -0.00908 5/1/2002 3.80 0.0032 -0.0490 -0.012251-Apr-02 43.65 1076.92 -0.06142 4/1/2002 4.01 0.0033 0.0123 -0.064761-Mar-02 43.12 1147.39 0.03674 3/1/2002 4.14 0.0035 0.0291 0.033291-Feb-02 41.9 0.06 1106.73 -0.02077 2/1/2002 3.55 0.0030 -0.0552 -0.023722-Jan-02 44.41 1130.2 -0.01557 1/1/2002 3.56 0.0030 0.0819 -0.018543-Dec-01 41.05 1148.08 0.00757 12/1/2001 3.62 0.0030 0.0935 0.004561-Nov-01 37.54 0.055 1139.45 0.07518 11/1/2001 3.22 0.0027 0.2069 0.072491-Oct-01 31.15 1059.78 0.01810 10/1/2001 3.14 0.0026 -0.0189 0.015484-Sep-01 31.75 1040.94 -0.08172 9/1/2001 3.45 0.0029 -0.0837 -0.084601-Aug-01 34.65 0.055 1133.58 -0.06411 8/1/2001 4.04 0.0034 -0.06748
Months R^2 BETA Ke
60 0.4181 1.3172 0.113748 0.3129 1.3212 0.113936 0.1142 1.0200 0.098724 0.2356 1.6003 0.1280
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Year 5
Date Close Dividend CloseMarket Return Risk Free Annual
Monthly Risk Free
Rate Firm's ReturnMarket Risk Preminum
1-Nov-06 58.27 1396.57 0.013522-Oct-06 59.18 1377.94 0.03151 10/1/2006 4.69 0.00391 0.071 0.027601-Sep-06 55.25 1335.85 0.02457 9/1/2006 4.67 0.00389 0.142 0.020671-Aug-06 48.39 0.12 1303.82 0.02127 8/1/2006 4.82 0.00402 0.056 0.017263-Jul-06 45.92 1276.66 0.00509 7/1/2006 5.04 0.00420 -0.060 0.00089
1-Jun-06 48.87 1270.2 0.00009 6/1/2006 5.07 0.00423 -0.001 -0.004141-May-06 48.92 0.1 1270.09 -0.03092 5/1/2006 5.00 0.00417 -0.077 -0.035083-Apr-06 53.1 1310.61 0.01216 4/1/2006 4.9 0.00408 0.021 0.008071-Mar-06 52.01 1294.87 0.01110 3/1/2006 4.72 0.00393 -0.044 0.007161-Feb-06 54.4 0.1 1280.66 0.00045 2/1/2006 4.57 0.00381 -0.005 -0.003363-Jan-06 54.75 1280.08 0.02547 1/1/2006 4.35 0.00363 -0.004 0.021841-Dec-05 54.97 1248.29 -0.00095 12/1/2005 4.39 0.00366 0.027 -0.004611-Nov-05 53.51 0.1 1249.48 0.03519 11/1/2005 4.45 0.00371 -0.037 0.031483-Oct-05 55.69 1207.01 -0.01774 10/1/2005 4.33 0.00361 0.072 -0.021351-Sep-05 51.93 1228.81 0.00695 9/1/2005 4.01 0.00334 -0.034 0.003611-Aug-05 53.75 0.1 1220.33 -0.01122 8/1/2005 4.12 0.00343 -0.083 -0.014661-Jul-05 58.75 1234.18 0.03597 7/1/2005 3.98 0.00332 0.080 0.03265
1-Jun-05 54.41 1191.33 -0.00014 6/1/2005 3.77 0.00314 0.013 -0.003282-May-05 53.7 0.08 1191.5 0.02995 5/1/2005 3.85 0.00321 0.159 0.026741-Apr-05 46.41 1156.85 -0.02011 4/1/2005 4.00 0.00333 -0.072 -0.023441-Mar-05 50.02 1180.59 -0.01912 3/1/2005 4.17 0.00348 -0.016 -0.022591-Feb-05 50.82 0.08 1203.6 0.01890 2/1/2005 3.77 0.00314 0.003 0.015763-Jan-05 50.77 1181.27 -0.02529 1/1/2005 3.71 0.00309 -0.022 -0.028381-Dec-04 51.93 1211.92 0.03246 12/1/2004 3.60 0.00300 0.014 0.029461-Nov-04 51.22 0.08 1173.82 0.03859 11/1/2004 3.53 0.00294 0.026 0.035651-Oct-04 50.02 1130.2 0.01401 10/1/2004 3.35 0.00279 0.105 0.011221-Sep-04 45.25 1114.58 0.00936 9/1/2004 3.36 0.00280 0.015 0.006562-Aug-04 44.58 0.08 1104.24 0.00229 8/1/2004 3.47 0.00289 0.024 -0.000601-Jul-04 43.6 1101.72 -0.03429 7/1/2004 3.69 0.00308 0.027 -0.03737
1-Jun-04 42.47 1140.84 0.01799 6/1/2004 3.93 0.00328 -0.050 0.014713-May-04 44.7 0.07 1120.68 0.01208 5/1/2004 3.85 0.00321 0.032 0.008881-Apr-04 43.37 1107.3 -0.01679 4/1/2004 3.39 0.00283 -0.037 -0.019621-Mar-04 45.04 1126.21 -0.01636 3/1/2004 2.79 0.00233 0.025 -0.018682-Feb-04 43.96 0.07 1144.94 0.01221 2/1/2004 3.07 0.00256 0.160 0.009652-Jan-04 37.96 1131.13 0.01728 1/1/2004 3.12 0.00260 -0.011 0.014681-Dec-03 38.4 1111.92 0.05077 12/1/2003 3.27 0.00273 -0.008 0.048043-Nov-03 38.72 0.07 1058.2 0.00713 11/1/2003 3.29 0.00274 -0.024 0.004391-Oct-03 39.74 1050.71 0.05496 10/1/2003 3.19 0.00266 0.056 0.052302-Sep-03 37.63 995.97 -0.01194 9/1/2003 3.18 0.00265 -0.073 -0.014591-Aug-03 40.6 0.07 1008.01 0.01787 8/1/2003 3.37 0.00281 0.061 0.015061-Jul-03 38.32 990.31 0.01622 7/1/2003 2.87 0.00239 0.013 0.01383
2-Jun-03 37.84 974.5 0.01132 6/1/2003 2.27 0.00189 0.033 0.009431-May-03 36.63 0.06 963.59 0.05090 5/1/2003 2.52 0.00210 0.097 0.048801-Apr-03 33.44 916.92 0.08104 4/1/2003 2.93 0.00244 0.143 0.078603-Mar-03 29.26 848.18 0.00836 3/1/2003 2.78 0.00232 0.021 0.006043-Feb-03 28.65 0.06 841.15 -0.01700 2/1/2003 2.90 0.00242 0.018 -0.019422-Jan-03 28.21 855.7 -0.02741 1/1/2003 3.05 0.00254 -0.060 -0.029962-Dec-02 30 879.82 -0.06033 12/1/2002 3.03 0.00253 -0.137 -0.062861-Nov-02 34.78 0.06 936.31 0.05707 11/1/2002 3.05 0.00254 0.157 0.054531-Oct-02 30.12 885.76 0.08645 10/1/2002 2.95 0.00246 0.020 0.083993-Sep-02 29.52 815.28 -0.11002 9/1/2002 2.94 0.00245 -0.137 -0.112471-Aug-02 34.2 0.06 916.07 0.00488 8/1/2002 3.29 0.00274 0.027 0.002141-Jul-02 33.35 911.62 -0.07900 7/1/2002 3.81 0.00318 -0.125 -0.08218
3-Jun-02 38.1 989.82 -0.07246 6/1/2002 4.19 0.00349 -0.081 -0.075951-May-02 41.45 0.06 1067.14 -0.00908 5/1/2002 4.49 0.00374 -0.049 -0.012821-Apr-02 43.65 1076.92 -0.06142 4/1/2002 4.65 0.00388 0.012 -0.065291-Mar-02 43.12 1147.39 0.03674 3/1/2002 4.74 0.00395 0.029 0.032791-Feb-02 41.9 0.06 1106.73 -0.02077 2/1/2002 4.30 0.00358 -0.055 -0.024352-Jan-02 44.41 1130.2 -0.01557 1/1/2002 4.34 0.00362 0.082 -0.019193-Dec-01 41.05 1148.08 0.00757 12/1/2001 4.39 0.00366 0.094 0.003921-Nov-01 37.54 0.055 1139.45 0.07518 11/1/2001 3.97 0.00331 0.207 0.071871-Oct-01 31.15 1059.78 0.01810 10/1/2001 3.91 0.00326 -0.019 0.014844-Sep-01 31.75 1040.94 -0.08172 9/1/2001 4.12 0.00343 -0.084 -0.085161-Aug-01 34.65 0.055 1133.58 -0.06411 8/1/2001 4.57 0.00381 -0.06792 Months beta R^2 Ke
60 1.316418 0.417676 0.10771948 1.322845 0.312932 0.10801536 1.020311 0.113872 0.09403824 1.599586 0.235128 0.120801
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Year 10
Date Close Dividend CloseMarket Return Risk Free Annual
Monthly Risk Free
RateFirm's Return
Market Risk
Premium1-Nov-06 58.27 1396.57 0.013522-Oct-06 59.18 1377.94 0.03151 10/1/2006 4.73 0.0039 0.0711 0.027571-Sep-06 55.25 1335.85 0.02457 9/1/2006 4.72 0.0039 0.1418 0.020631-Aug-06 48.39 0.12 1303.82 0.02127 8/1/2006 4.88 0.0041 0.0564 0.017213-Jul-06 45.92 1276.66 0.00509 7/1/2006 5.09 0.0042 -0.0604 0.00084
1-Jun-06 48.87 1270.2 0.00009 6/1/2006 5.11 0.0043 -0.0010 -0.004171-May-06 48.92 0.1 1270.09 -0.03092 5/1/2006 5.11 0.0043 -0.0768 -0.035183-Apr-06 53.1 1310.61 0.01216 4/1/2006 4.99 0.0042 0.0210 0.008001-Mar-06 52.01 1294.87 0.01110 3/1/2006 4.72 0.0039 -0.0439 0.007161-Feb-06 54.4 0.1 1280.66 0.00045 2/1/2006 4.57 0.0038 -0.0046 -0.003363-Jan-06 54.75 1280.08 0.02547 1/1/2006 4.42 0.0037 -0.0040 0.021781-Dec-05 54.97 1248.29 -0.00095 12/1/2005 4.47 0.0037 0.0273 -0.004681-Nov-05 53.51 0.1 1249.48 0.03519 11/1/2005 4.54 0.0038 -0.0373 0.031403-Oct-05 55.69 1207.01 -0.01774 10/1/2005 4.46 0.0037 0.0724 -0.021461-Sep-05 51.93 1228.81 0.00695 9/1/2005 4.20 0.0035 -0.0339 0.003451-Aug-05 53.75 0.1 1220.33 -0.01122 8/1/2005 4.26 0.0036 -0.0834 -0.014771-Jul-05 58.75 1234.18 0.03597 7/1/2005 4.18 0.0035 0.0798 0.03248
1-Jun-05 54.41 1191.33 -0.00014 6/1/2005 4.00 0.0033 0.0132 -0.003482-May-05 53.7 0.08 1191.5 0.02995 5/1/2005 4.14 0.0035 0.1588 0.026501-Apr-05 46.41 1156.85 -0.02011 4/1/2005 4.34 0.0036 -0.0722 -0.023731-Mar-05 50.02 1180.59 -0.01912 3/1/2005 4.50 0.0038 -0.0157 -0.022871-Feb-05 50.82 0.08 1203.6 0.01890 2/1/2005 4.17 0.0035 0.0026 0.015433-Jan-05 50.77 1181.27 -0.02529 1/1/2005 4.22 0.0035 -0.0223 -0.028811-Dec-04 51.93 1211.92 0.03246 12/1/2004 4.23 0.0035 0.0139 0.028931-Nov-04 51.22 0.08 1173.82 0.03859 11/1/2004 4.19 0.0035 0.0256 0.035101-Oct-04 50.02 1130.2 0.01401 10/1/2004 4.10 0.0034 0.1054 0.010601-Sep-04 45.25 1114.58 0.00936 9/1/2004 4.13 0.0034 0.0150 0.005922-Aug-04 44.58 0.08 1104.24 0.00229 8/1/2004 4.28 0.0036 0.0243 -0.001281-Jul-04 43.6 1101.72 -0.03429 7/1/2004 4.50 0.0038 0.0266 -0.03804
1-Jun-04 42.47 1140.84 0.01799 6/1/2004 4.73 0.0039 -0.0499 0.014053-May-04 44.7 0.07 1120.68 0.01208 5/1/2004 4.72 0.0039 0.0323 0.008151-Apr-04 43.37 1107.3 -0.01679 4/1/2004 4.35 0.0036 -0.0371 -0.020421-Mar-04 45.04 1126.21 -0.01636 3/1/2004 3.83 0.0032 0.0246 -0.019552-Feb-04 43.96 0.07 1144.94 0.01221 2/1/2004 4.08 0.0034 0.1599 0.008812-Jan-04 37.96 1131.13 0.01728 1/1/2004 4.15 0.0035 -0.0115 0.013821-Dec-03 38.4 1111.92 0.05077 12/1/2003 4.27 0.0036 -0.0083 0.047213-Nov-03 38.72 0.07 1058.2 0.00713 11/1/2003 4.30 0.0036 -0.0239 0.003551-Oct-03 39.74 1050.71 0.05496 10/1/2003 4.29 0.0036 0.0561 0.051392-Sep-03 37.63 995.97 -0.01194 9/1/2003 4.27 0.0036 -0.0732 -0.015501-Aug-03 40.6 0.07 1008.01 0.01787 8/1/2003 4.45 0.0037 0.0613 0.014161-Jul-03 38.32 990.31 0.01622 7/1/2003 3.98 0.0033 0.0127 0.01291
2-Jun-03 37.84 974.5 0.01132 6/1/2003 3.33 0.0028 0.0330 0.008551-May-03 36.63 0.06 963.59 0.05090 5/1/2003 3.57 0.0030 0.0972 0.047921-Apr-03 33.44 916.92 0.08104 4/1/2003 3.96 0.0033 0.1429 0.077743-Mar-03 29.26 848.18 0.00836 3/1/2003 3.81 0.0032 0.0213 0.005183-Feb-03 28.65 0.06 841.15 -0.01700 2/1/2003 3.90 0.0033 0.0177 -0.020252-Jan-03 28.21 855.7 -0.02741 1/1/2003 4.05 0.0034 -0.0597 -0.030792-Dec-02 30 879.82 -0.06033 12/1/2002 4.03 0.0034 -0.1374 -0.063691-Nov-02 34.78 0.06 936.31 0.05707 11/1/2002 4.05 0.0034 0.1567 0.053691-Oct-02 30.12 885.76 0.08645 10/1/2002 3.94 0.0033 0.0203 0.083173-Sep-02 29.52 815.28 -0.11002 9/1/2002 3.87 0.0032 -0.1368 -0.113251-Aug-02 34.2 0.06 916.07 0.00488 8/1/2002 4.26 0.0036 0.0273 0.001331-Jul-02 33.35 911.62 -0.07900 7/1/2002 4.65 0.0039 -0.1247 -0.08288
3-Jun-02 38.1 989.82 -0.07246 6/1/2002 4.93 0.0041 -0.0808 -0.076561-May-02 41.45 0.06 1067.14 -0.00908 5/1/2002 5.16 0.0043 -0.0490 -0.013381-Apr-02 43.65 1076.92 -0.06142 4/1/2002 5.21 0.0043 0.0123 -0.065761-Mar-02 43.12 1147.39 0.03674 3/1/2002 5.28 0.0044 0.0291 0.032341-Feb-02 41.9 0.06 1106.73 -0.02077 2/1/2002 4.91 0.0041 -0.0552 -0.024862-Jan-02 44.41 1130.2 -0.01557 1/1/2002 5.04 0.0042 0.0819 -0.019773-Dec-01 41.05 1148.08 0.00757 12/1/2001 5.09 0.0042 0.0935 0.003331-Nov-01 37.54 0.055 1139.45 0.07518 11/1/2001 4.65 0.0039 0.2069 0.071301-Oct-01 31.15 1059.78 0.01810 10/1/2001 4.57 0.0038 -0.0189 0.014294-Sep-01 31.75 1040.94 -0.08172 9/1/2001 4.73 0.0039 -0.0837 -0.085671-Aug-01 34.65 0.055 1133.58 -0.06411 8/1/2001 4.97 0.0041 -0.06825 Months Beta R^2 Ke
60 1.316076 0.417317 0.10862948 1.324385 0.312585 0.10901636 1.019277 0.113149 0.09479824 1.598516 0.234253 0.121791
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Appendix D Valuation Models: Discounted Dividends Model for Target
1 2 3 4 5 6 7 8 9 10(Amounts in millions except per share data) 28-Jan-06 Forecast Years
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 PERPDividends per share 0.42$ 0.46$ 0.51$ 0.56$ 0.61$ 0.65$ 0.70$ 0.75$ 0.80$ 0.85$ 0.89$ 0.93$ Present Value Factor 0.90 0.80 0.72 0.64 0.58 0.52 0.46 0.41 0.37 0.33Present Value of Future Dividends 0.41$ 0.41$ 0.40$ 0.39$ 0.37$ 0.36$ 0.35$ 0.33$ 0.31$ 0.29$ Total Present Value of Forecast Future Dividends 3.63$ Continuing (Terminal) Value 0.93$ 9.60 0.31$ Present Value of Continuing (Terminal) Value 3.18$
Estimated Value per Share (end Jan 2006) 6.81$ Estimated Share Price end Oct 2006 7.40$ Earnings Per Share 2.94$ 3.28$ 3.66$ 4.08$ 4.55$ 5.07$ 5.65$ 6.30$ 7.03$ 7.84$ Dividends per share 0.46$ 0.51$ 0.56$ 0.61$ 0.65$ 0.70$ 0.75$ 0.80$ 0.85$ 0.89$ Book Value Per Share 16.54$
Actual Price per share (As of November 1, 2006) 57.70$
Cost of Equity 0.1169 Sensitivity Analysisgrowth rate 0.02 g
0 0.01 0.02 0.03 0.04 0.050.08 7.93$ 8.51$ 9.29$ 10.37$ 12.00$ 14.72$ 0.1 7.21$ 7.58$ 8.04$ 8.63$ 9.41$ 10.52$
Ke 0.1169 6.81$ 7.08$ 7.40$ 7.60$ 8.30$ 8.95$ 0.13 6.58$ 6.79$ 7.05$ 7.36$ 7.73$ 8.20$ 0.15 6.32$ 6.48$ 6.67$ 6.88$ 7.14$ 7.45$
Free Cash Flows
WACC 0.08096 Kd 0.0564 Ke 0.1169 g 0.03
1 2 3 4 5 6 7 8 9 10(Amounts in millions except per share data) Forecast Years
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 PERPCash Flow from Operations $4,972.12 $5,255.14 $5,554.26 $5,870.41 $6,204.55 $6,557.72 $6,930.98 $7,325.49 $7,742.46 $8,183.16Cash Provided (Used) by Investing Activities ($4,455.29) ($4,638.85) ($4,829.97) ($5,028.97) ($5,236.16) ($5,451.89) ($5,676.51) ($5,910.38) ($6,153.89) ($6,407.43)Free Cash Flow (to firm) $516.83 $616.28 $724.29 $841.44 $968.39 $1,105.82 $1,254.47 $1,415.11 $1,588.57 $1,775.73 $1,829.00discount rate (0.08096% WACC) $0.93 $0.86 $0.79 $0.73 $0.68 $0.63 $0.58 $0.54 $0.50 $0.46Present Value of Free Cash Flows $478.12 $527.43 $573.43 $616.29 $656.15 $693.15 $727.43 $759.13 $788.35 $815.23Total Present Value of Annual Cash Flows $6,634.71
Continuing (Terminal) Value 1,829.00$ Sensitivity AnalysisPresent Value of Continuing (Terminal) Value 17,292.66$ g 34845.64Value of the Firm (end of 2005) 23,927.37$ 0 0.01 0.03 0.05 0.08Book Value of Debt 20,790.00$ 0.06 $5.10 $9.36 $26.41 $111.63 n/aValue of Equity (end of 2005) 3,137.37$ 0.07 $0.08 $2.89 $12.75 $42.33 n/aNumber of Shares 858.90$ WACC 0.08096 n/a n/a $3.87 $17.66 $1,115.54Estimated Value per Share 3.65$ 0.09 n/a n/a n/a $7.41 $83.57Estimated Share Price 3.87$ 0.10 n/a n/a n/a $0.32 $28.58Earnings Per Share $2.94 0.11 n/a n/a n/a n/a $10.11Dividends per share $0.46Book Value Per Share 16.54$ Present Value of FCF (As of November 1, 2006) 3.90$ Actual Price per share (As of November 1, 2006) 57.70$
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AEG 1 2 3 4 5 6 7 8 9 10
28-Jan-06 Forecast Years2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 PERP
EPS 2.80$ 2.94$ 3.28$ 3.66$ 4.08$ 4.55$ 5.07$ 5.65$ 6.30$ 7.03$ 7.84$ DPS 0.42$ 0.46$ 0.51$ 0.56$ 0.61$ 0.65$ 0.70$ 0.75$ 0.80$ 0.85$ 0.89$ DPS invested (Drip) 0.05$ 0.05$ 0.06$ 0.07$ 0.07$ 0.08$ 0.08$ 0.09$ 0.09$ 0.10$ Cum-Dividend Earnings 2.99$ 3.34$ 3.72$ 4.14$ 4.62$ 5.15$ 5.74$ 6.39$ 7.12$ 7.94$ Normal Earnings 3.13$ 3.29$ 3.66$ 4.09$ 4.56$ 5.08$ 5.66$ 6.32$ 7.04$ 7.85$ Abnormal Earning Growth (AEG) (0.14)$ 0.05$ 0.05$ 0.06$ 0.06$ 0.07$ 0.07$ 0.08$ 0.08$ 0.09$ 0.09$
Shares Outstanding
PV Factor 0.895 0.802 0.718 0.643 0.575 0.515 0.461 0.413 0.370 0.331 858.9
PV of AEG (0.13)$ 0.04$ 0.04$ 0.04$ 0.04$ 0.03$ 0.03$ 0.03$ 0.03$ 0.03$
Core EPS 2.94$
Total PV of AEG 0.18$ Sensitivity AnalysisContinuing (Terminal) Value gPV of Terminal Value -$ 0 0.01 0.02 0.03 0.04 0.05Total PV of AEG 0.08 $61.49 $62.48 $63.80 65.65$ 68.43$ 73.06$ Total EPS 3.13$ 0.10 $41.93 $42.35 $42.87 43.54$ 44.44$ 45.69$ AEG Share Price (At end of 2005) 26.75$ Ke 0.1169 $31.72 $29.06 $32.22 32.55$ 32.97$ 33.51$ PV of AEG Share Price (At November 1, 2006) 29.06$ 0.13 $26.10 $26.24 $26.41 $26.62 26.87$ 27.18$
0.15 $19.92 $20.00 $20.09 $20.20 20.33$ 20.48$
Ke 0.1169g 0.01
Residual Income
0.05 0.06 0.06 0.06 0.06 0.07 0.08 0.09 0.001 2 3 4 5 6 7 8 9 10 perp
Forecast Years2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015
Beginning BE (per share) 16.54 19.02 21.79 24.89 28.36 32.26 36.63 41.53 47.03 53.21Earnings Per Share $2.94 $3.28 $3.66 $4.08 $4.55 $5.07 $5.65 $6.30 $7.03 7.84Dividends per share $0.46 $0.51 $0.56 $0.61 $0.65 $0.70 $0.75 $0.80 $0.85 0.89Ending BE (per share) 16.54 19.02 21.79 24.89 28.36 32.26 36.63 41.53 47.03 53.21 60.16Ke 0.1169"Normal" Income 1.93 2.22 2.55 2.91 3.32 3.77 4.28 4.85 5.50 6.22Residual Income (RI) 1.01 1.06 1.11 1.17 1.23 1.30 1.37 1.45 1.53 1.53Discount Factor 0.895 0.802 0.718 0.643 0.575 0.515 0.461 0.413 0.370 0.331Present Value of RI 0.90 0.85 0.80 0.75 0.71 0.67 0.63 0.60 0.57 0.51
ValuePercentBV Equity (per share) 2005 16.54 59.37%Total PV of RI (11/1/2006) 6.98 25.05%Continuation (Terminal) Value Sensitivity Analysis 13.11PV of Terminal Value (End 2005) Assume No Growth 4.34 15.57% gEstimated Value End of 2005 $27.86 100.00% 0 0.05 0.1 0.15
Estimated Price Per share as of November 1, 2006 $30.27 Ke 0.08 54.02$ 87.42$ n/a 11.07$
0.1 38.70$ 48.34$ n/a 9.79$ 0.1169 30.27$ 33.79$ 58.16$ 8.91$
Actual Price per share as of November 1, 2006 $57.70 0.13 25.45$ 26.87$ 33.03$ 8.38$ Growth 0 0.15 19.98$ 19.96$ 19.89$ n/a
LR ROE
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1 2 3 4 5 6 7 8 9 108-Jan-06 Forecast Years
Years 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015Beginning BE (per share) 16.54$ 19.02$ 21.79$ 24.89$ 28.36$ 32.26$ 36.63$ 41.53$ 47.03$ 53.21$ Earnings Per Share 2.94$ 3.28$ 3.66$ 4.08$ 4.55$ 5.07$ 5.65$ 6.30$ 7.03$ 7.84$ Dividends per share 0.46$ 0.51$ 0.56$ 0.61$ 0.65$ 0.70$ 0.75$ 0.80$ 0.85$ 0.89$ Ending BE (per share) 16.54$ 19.02$ 21.79$ 24.89$ 28.36$ 32.26$ 36.63$ 41.53$ 47.03$ 53.21$ 60.16$ Ke 0.1169
ROE 17.78% 17.25% 16.80% 16.39% 16.04% 15.72% 15.42% 15.17% 14.95% 14.73%Growth inBVE 14.99% 14.56% 14.23% 13.94% 13.75% 13.55% 13.38% 13.24% 13.14% 13.06%Actual Price per share $57.70
Average ROE 16.02% 16.54Average Growth in BVE 13.78%
LRResInc Perp Value -17.73Estimiated Price End of 2005 -15.4479 Sensitivity AnalysisEstimated Price as of 11/1/2006 -16.78 g
0 0.1 0.1378 0.15 0.2 0.250.08 35.10$ n/a n/a 0.06$ 9.31$ 13.63$ 0.1 28.47$ n/a n/a n/a 10.62$ 15.07$
Ke 0.1169 24.63$ 65.86$ n/a n/a 12.19$ 16.61$ 0.13 22.35$ 38.22$ n/a n/a 13.92$ 18.09$ 0.15 19.62$ 23.97$ 36.32$ n/a 18.28$ 21.08$
Sensitivity AnalysisROE
0.1 0.13 0.1602 0.2 0.25 0.30.08 13.87$ 4.78$ n/a n/a n/a n/a0.1 20.21$ 6.11$ n/a n/a n/a n/a
Ke 0.1169 34.98$ 9.18$ n/a n/a n/a n/a0.13 90.35$ 20.63$ n/a n/a n/a n/a0.15 n/a n/a 36.26$ 96.18$ 171.46$ 246.73$
Sensitivity Analysisg
0 0.1 0.1378 0.15 0.2 0.250.1 12.25$ 1.84$ n/a n/a 40.41$ 32.14$
0.13 15.92$ 12.86$ n/a n/a 29.39$ 26.63$ Roe 0.1602 19.62$ 23.95$ 36.26$ n/a 18.29$ 21.09$
0.2 24.49$ 38.57$ 96.18$ n/a 3.67$ 24.64$ 0.25 4.59$ 56.94$ 171.46$ n/a n/a 4.59$
Z-Score
YearSales/Revenue(
Mills) Total Assets RE Working Capital (CA-CL) EBIT Liab2001 39888 24154 6687 CA CL WC 2210 162942002 43917 28603 8107 9648 7054 2594 2676 191602003 48163 31392 9645 11935 7523 4412 2960 203272004 46839 32293 11148 12928 8314 4614 4344 192642005 52620 34995 12013 13922 8220 5702 3860 20790
14406 9588 4818
1.2(WC/TA) + 1.4(RE/TA) + 3.3(EBIT/TA) + .6(MVE/BVL) + 1.0(Sales/TA) = Z-Score2001 0.13 0.39 0.30 0.0016 1.65 2.472002 0.19 0.40 0.31 0.0008 1.54 2.432003 0.18 0.43 0.31 0.0011 1.53 2.452004 0.21 0.48 0.44 0.0015 1.45 2.592005 0.17 0.48 0.36 0.0016 1.50 2.52
Method of Comparables
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EPS BPS DPS PPS SPSTARGET 2.98 17.231 0.44 58.22 65.47WALMART 2.62 14.095 0.65 47.50 81.30COSTCO 2.30 19.665 0.51 53.40 117.21KMART N/A N/A N/A N/A N/A
TRAILING P/ETARGET 19.54 (not included in average)WALMART 18.13COSTCO 23.22KMART N/AAVERAGE 20.68TGT EPS 2.98Share Price 61.61
FORWARD P/ETARGET 16.22 (not included in average)WALMART 14.80COSTCO 18.23KMART N/AAVERAGE 16.52TGT EPS 2.98Share Price 49.21
P/BTARGET 3.379 (not included in average)WALMART 3.370COSTCO 2.715KMART N/AAVERAGE 3.043TGT BPS 17.231Share Price 58.22
D/PTARGET 0.440 (not included in average)WALMART 0.650COSTCO 0.510KMART N/AAVERAGE 0.580TGT PPS 58.22Share Price 25.62
P/STARGET 0.889 (not included in average)WALMART 0.584COSTCO 0.456KMART N/AAVERAGE 0.520TGT SPS 65.47Share Price 34.04
P.E.GTARGET 1.08 (not included in average)WALMART 1.14COSTCO 1.54KMART N/AAVERAGE 1.34TGT EPS 2.98 1.34 pegGrowth rate 11.90% 0.119Share Price 33.56 11.2605
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Enterprise Value/EBITDA
Enterprise Value EBITDA
Enterprise Value/EBITDA
%TARGET $60,930,000,000 $6,180,000,000 9.86WALMART 233,660,000,000 25,050,000,000 9.33COSTO 22,290,000,000 2,088,000,000 10.68KMART N/A N/A N/A
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References www.target.com www.edgarscan.pwc.com www.yahoofinance.com www.wikipedia.com www.morningstar.com www.about.com www.investorpedia.com
