2682 WordsFeb 27, 201111 Pages

VALUE LINE PUBLISHING,
OCTOBER 2002
Teaching Note
This case follows the performance-review and financial-statement-forecasting decisions of a Value Line analyst for the retail-building-supply industry in October 2002. The case contrasts the strong operating performance of Home Depot with the strong stock-market performance of Lowe’s. Students examine a financial-ratio analysis for Home Depot that acts as a template to generate a comparable ratio analysis for Lowe’s. The students’ ratio analysis is designed to build intuition with respect to interpreting individual ratios as well as ratio inter-relationships (e.g., the DuPont framework). The historical-performance comparison suggests that investors are skeptical of the ability of*…show more content…*

On the chalkboard, the students can fill out the following analysis, highlighting how the assumptions must vary to reduce 2002 ROC to the WACC of 12.3 percent. The discussion should highlight that ROC can be reduced through a decrease in NOPAT of $707 million or an increase in capital of $5,746 million. It is no surprise that the required increase in cash operating expenses/sales equals the required decrease in gross margin as both changes decrease NOPAT by the same amount. The discussion should also emphasize how the different asset accounts affect total capital differently. The P&E turnover is particularly important, while the receivable-turnover figure has little impact.
| |ROC = 15.1% |ROC = 12.3% |
|Gross margin |32% |30.2% |
|Cash operating exp./sales |21% |22.8% |
|Receivable turnover |55× |9.3× |
|Inventory turnover |5.3× |3.1× |
|P&E

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