STAND-ALONE PROJECT<\/p>\n
MF620 Financial Statement Development and Analysis<\/p>\n
Stand-Alone Project: Target Corporation<\/p>\n
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 \u201cStand-Alone Project Benchmark\u201d section of each lesson. <\/p>\n
Instructions: Target Corporation describes itself as \u201can upscale discounter that provides high-quality, on-trend merchandise at attractive prices in clean, spacious and guest-friendly stores.\u201d Target has over 350,000 employees and operates over 1,700 stores in the United States. The firm recently opened stores in Canada, and\u2014like Walmart (see chapter 14 in your text)\u2014it has an online business component. Target also offers branded proprietary credit and debit cards. <\/p>\n
Part A Target Corporation: ROIC<\/p>\n
For the fiscal year ending January 31, 2012, Target\u2019s 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\u2019s book value of equity was $15,821. <\/p>\n
Estimate Target\u2019s return on invested capital or ROIC.<\/p>\n
Solution: ROIC=Net Income\/ (Debt+ Equity)<\/p>\n
= (5322-5322*0.343)\/(3786+13697+15821)<\/p>\n
=3496.554\/33304<\/p>\n
=10.50%<\/p>\n
Compare it with Walmart\u2019s. Are you surprised at the difference?<\/p>\n
* All amounts related to Target are in millions of dollars, unless otherwise noted.<\/p>\n
Part B Target Corporation: ROE<\/p>\n
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). <\/p>\n
Estimate Target\u2019s 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\u2019s financial leverage. <\/p>\n
Solution: Using DuPont, the return on equity is as follows:<\/p>\n
\u00a0<\/p>\n
2012 (In millions)<\/p>\n
2011 (In millions)<\/p>\n
Revenues<\/p>\n
$ 69,865 <\/p>\n
$ 67,390 <\/p>\n
Net Income<\/p>\n
$ 2,929 <\/p>\n
$ 2,920 <\/p>\n
Assets<\/p>\n
$ 46,630 <\/p>\n
$ 43,705 <\/p>\n
Equity<\/p>\n
$ 15,821 <\/p>\n
$ 15,487 <\/p>\n
Profit Margin<\/p>\n
4.19%<\/p>\n
4.33298709%<\/p>\n
(Net Income\/Revenues)<\/p>\n
\u00a0<\/p>\n
\u00a0<\/p>\n
Asset Turnover<\/p>\n
1.498284366<\/p>\n
1.541928841<\/p>\n
(Revenues\/Assets)<\/p>\n
\u00a0<\/p>\n
\u00a0<\/p>\n
Financial leverage<\/p>\n
2.947348461<\/p>\n
2.822044295<\/p>\n
(Assets\/Equity)<\/p>\n
\u00a0<\/p>\n
\u00a0<\/p>\n
ROE<\/p>\n
18.5%<\/p>\n
18.9%<\/p>\n
(PM*AT*FL)<\/p>\n
\u00a0<\/p>\n
\u00a0<\/p>\n
Why has the ROE changed? <\/p>\n
How would you compare the ROE drivers for Walmart and Target?<\/p>\n
Part C Target Corporation: Cost of Capital<\/p>\n
According to its annual report, as of January 31, 2012, Target\u2019s borrowing costs averaged 4.6 percent, and its tax rate was 34.27 percent. A research report estimated Target\u2019s cost of capital at 10.5 percent. The firm had interest-bearing debt of $17,483. Moreover, Target\u2019s stock was trading at $50.81 per share, and there were 679.1 million shares outstanding. Now, let\u2019s assume Target\u2019s amount of debt is also a market value estimate of the debt. Let\u2019s also assume the current debt and equity values are at Target\u2019s optimal capital structure. <\/p>\n
Based on market value estimates, what is Target\u2019s cost of capital? <\/p>\n
Solution: <\/p>\n
Market value of equity=50.81*679.1 million<\/p>\n
=34505.071million<\/p>\n
Market value of debt=17483<\/p>\n
Total market value=51988.071 million<\/p>\n
Cost of capital, kc=ke*we+kd*wd<\/p>\n
=10.5% *(34505.071\/51988.071)+4.6%(1-0.3427)*(17483\/51988.071)<\/p>\n
=7.99%<\/p>\n
How does it compare to Walmart\u2019s, and what explains the difference?<\/p>\n
Part D Target Corporation: EVA<\/p>\n
Earlier, you were provided with the information necessary to estimate Target\u2019s 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, <\/p>\n
Estimate Target\u2019s EVA for the year that ended on January 31, 2012.<\/p>\n
Solution: EVA=NOPAT-invested capital*kc <\/p>\n
=5322(1-0.343)-33304*0.0799<\/p>\n
=$835.56 million<\/p>\n
Was Target adding value? <\/p>\n
Did Target have a positive market value added or MVA? <\/p>\n
Solution: MVA=Market value of firm-Invested capital<\/p>\n
=51988.071-33304<\/p>\n
=$18684.071 million<\/p>\n
Yes, Target Corporation did have positive market value added.<\/p>\n
How did Target\u2019s EVA and MVA compare with Walmart\u2019s EVA and MVA?<\/p>\n
Part E Target Corporation: EV\/EBITDA Analysis<\/p>\n
Let\u2019s suppose you forecast Target\u2019s EBIT for the year ending January 31, 2013, to be $5,352, and you forecast Target\u2019s 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, <\/p>\n
Estimate Target\u2019s enterprise value, or EV. <\/p>\n
Solution:<\/p>\n
EBITDA=EBIT+Depreciation and Amortization<\/p>\n
=5352+2361<\/p>\n
=$7713<\/p>\n
EV=EBITDA*(EV\/EBITDA multiple)<\/p>\n
=7713*6.9<\/p>\n
=$53219.7 million<\/p>\n
Next, incorporating the value of Target\u2019s debt, estimate the firm\u2019s value of equity. <\/p>\n
Solution: Value of equity=EV-Value of debt<\/p>\n
=53219.7-17483<\/p>\n
=$35736.7 million<\/p>\n
Finally, based on 679.1 million shares outstanding, estimate the intrinsic value per share and compare it with Target\u2019s stock price on January 31, 2012, of $50.81. <\/p>\n
Solution: Intrinsic value per share=Value of equity\/No. of shares outstanding<\/p>\n
=35736.7\/679.1<\/p>\n
=$52.62<\/p>\n
The stock as per intrinsic value is worthy of $52.62 per share. However, it is trading at a low price of $50.81.<\/p>\n
Considering this, I would recommend buying this stock since it has a potential<\/p>\n
Based on this analysis, is Target\u2019s stock overvalued or undervalued?<\/p>\n
Solution: Based on this, since the intrinsic value is greater than market price, the stock is currently undervalued.<\/p>\n
Grading Rubric<\/p>\n
Please refer to the rubric on the following pages for the grading criteria for this assignment.<\/p>\n","protected":false},"excerpt":{"rendered":"
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 \u201cStand-Alone Project Benchmark\u201d section of […]<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[10],"class_list":["post-93303","post","type-post","status-publish","format-standard","hentry","category-research-paper-writing","tag-writing"],"_links":{"self":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts\/93303","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/comments?post=93303"}],"version-history":[{"count":0,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/posts\/93303\/revisions"}],"wp:attachment":[{"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/media?parent=93303"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/categories?post=93303"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/papersspot.com\/blog\/wp-json\/wp\/v2\/tags?post=93303"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}