STAND-ALONE PROJECT
MF620 Financial Statement Development and Analysis
Stand-Alone Project: Target Corporation
You should begin working on the Stand-Alone Project early in the course. Each lesson provides a benchmark for completing the Stand-Alone Project in a timely manner while working through the course. You will find this information in the “Stand-Alone Project Benchmark” section of each lesson.
Instructions: Target Corporation describes itself as “an upscale discounter that provides high-quality, on-trend merchandise at attractive prices in clean, spacious and guest-friendly stores.” Target has over 350,000 employees and operates over 1,700 stores in the United States. The firm recently opened stores in Canada, and—like Walmart (see chapter 14 in your text)—it has an online business component. Target also offers branded proprietary credit and debit cards.
Part A Target Corporation: ROIC
For the fiscal year ending January 31, 2012, Target’s EBIT was $5,322,* and its tax rate was 34.3 percent. Its short-term borrowings were $3,786, and its long-term debt was $13,697. In addition, the firm’s book value of equity was $15,821.
Estimate Target’s return on invested capital or ROIC.
Solution: ROIC=Net Income/ (Debt+ Equity)
= (5322-5322*0.343)/(3786+13697+15821)
=3496.554/33304
=10.50%
Compare it with Walmart’s. Are you surprised at the difference?
* All amounts related to Target are in millions of dollars, unless otherwise noted.
Part B Target Corporation: ROE
For the fiscal year ending January 31, 2012 (2011), Target had total revenues of (in millions) $69,865 ($67,390) and net earnings of $2,929 ($2,920). Its total assets were $46,630 ($43,705) and its equity was $15,821 ($15,487).
Estimate Target’s return on equity (ROE) for each of these two years, using the DuPont decomposition to indicate the profit margin, the asset turnover, and the firm’s financial leverage.
Solution: Using DuPont, the return on equity is as follows:
2012 (In millions)
2011 (In millions)
Revenues
$ 69,865
$ 67,390
Net Income
$ 2,929
$ 2,920
Assets
$ 46,630
$ 43,705
Equity
$ 15,821
$ 15,487
Profit Margin
4.19%
4.33298709%
(Net Income/Revenues)
Asset Turnover
1.498284366
1.541928841
(Revenues/Assets)
Financial leverage
2.947348461
2.822044295
(Assets/Equity)
ROE
18.5%
18.9%
(PM*AT*FL)
Why has the ROE changed?
How would you compare the ROE drivers for Walmart and Target?
Part C Target Corporation: Cost of Capital
According to its annual report, as of January 31, 2012, Target’s borrowing costs averaged 4.6 percent, and its tax rate was 34.27 percent. A research report estimated Target’s cost of capital at 10.5 percent. The firm had interest-bearing debt of $17,483. Moreover, Target’s stock was trading at $50.81 per share, and there were 679.1 million shares outstanding. Now, let’s assume Target’s amount of debt is also a market value estimate of the debt. Let’s also assume the current debt and equity values are at Target’s optimal capital structure.
Based on market value estimates, what is Target’s cost of capital?
Solution:
Market value of equity=50.81*679.1 million
=34505.071million
Market value of debt=17483
Total market value=51988.071 million
Cost of capital, kc=ke*we+kd*wd
=10.5% *(34505.071/51988.071)+4.6%(1-0.3427)*(17483/51988.071)
=7.99%
How does it compare to Walmart’s, and what explains the difference?
Part D Target Corporation: EVA
Earlier, you were provided with the information necessary to estimate Target’s operating profit (EBIT) after-tax, also known as NOPAT; invested capital (the book value of equity plus interest-bearing debt); cost of capital; and market value of equity. Based on this information,
Estimate Target’s EVA for the year that ended on January 31, 2012.
Solution: EVA=NOPAT-invested capital*kc
=5322(1-0.343)-33304*0.0799
=$835.56 million
Was Target adding value?
Did Target have a positive market value added or MVA?
Solution: MVA=Market value of firm-Invested capital
=51988.071-33304
=$18684.071 million
Yes, Target Corporation did have positive market value added.
How did Target’s EVA and MVA compare with Walmart’s EVA and MVA?
Part E Target Corporation: EV/EBITDA Analysis
Let’s suppose you forecast Target’s EBIT for the year ending January 31, 2013, to be $5,352, and you forecast Target’s depreciation and amortization to be $2,361. A research analyst determines that an appropriate forward-looking EV/EBITDA multiple for Target is 6.9 times. Based on this information,
Estimate Target’s enterprise value, or EV.
Solution:
EBITDA=EBIT+Depreciation and Amortization
=5352+2361
=$7713
EV=EBITDA*(EV/EBITDA multiple)
=7713*6.9
=$53219.7 million
Next, incorporating the value of Target’s debt, estimate the firm’s value of equity.
Solution: Value of equity=EV-Value of debt
=53219.7-17483
=$35736.7 million
Finally, based on 679.1 million shares outstanding, estimate the intrinsic value per share and compare it with Target’s stock price on January 31, 2012, of $50.81.
Solution: Intrinsic value per share=Value of equity/No. of shares outstanding
=35736.7/679.1
=$52.62
The stock as per intrinsic value is worthy of $52.62 per share. However, it is trading at a low price of $50.81.
Considering this, I would recommend buying this stock since it has a potential
Based on this analysis, is Target’s stock overvalued or undervalued?
Solution: Based on this, since the intrinsic value is greater than market price, the stock is currently undervalued.
Grading Rubric
Please refer to the rubric on the following pages for the grading criteria for this assignment.