FNCE100 Corporate Finance : Garden and Lawn Products

Using the Home Depot's Pro Forma Statements and Sustainable Growth Case Study in Chapter 6 of your text as a guide, compose a 3 pages paper discussing the following based on Home Depot's 2017 and 2016 financials:

a) calculated sustainable growth rate,

b) A 2018 pro-forma income statement, and your assessment of the company's ability to achieve the projected growth based on their year-to-date actuals. 

Answer to Question A

Calculation of Sustainable Growth Rate

Formula:

Sustainable Growth Rate= Profit margin* Asset turnover * financial leverage * retention ratio

Profit margin= Net Income/Revenues

Profit margin= 7957/94595

Profit margin= 0.0841

Asset turnover= Revenue/Asset

Asset turnover= 94595/42966

Asset turnover= 2.2016

Financial leverage= Asset/Equity

Financial leverage= 42966/4333

Financial leverage= 9.9159

Retention ratio= Net Income- Dividends/ Net Income

Retention ratio= 7957-3404/7957

Retention ratio= 0.5722

According to the given data of Home Depot, the sustainable growth rate is computed as:

Sustainable Growth Rate= 0.0841* 2.2016 * 9.9159 *0.5722

Sustainable Growth Rate= 1.0505

Answer to Question B 

Pro-forma Income Statement for the year 2018

The Home depot Inc is a firm that concentrates as a house improvement retailer. The firm sells an assortment of the building materials, products that improves the house and the garden and lawn products. The company was incorporated in the year 1978 and with time the company has been developing their operations due to the rise in the customer base. The financial statement of the firm has been evaluated and it is seen the firm has been improving in leaps and bounds for the last few years. It has been observed that year for year the revenue of the company increased by 6.86%, while the net income of the company got raised to 13.53%. The gross margin of the firm has been found to be 34.14% and the net profit has been accounted for 8.53%.

The company has a higher level of return on equity as the value has been accounted for 158.65%, which has been significantly higher than the industrial benchmark. In the year 2017, the company raised their cash reserve by 14.53%, while the company earned from their operations and this had an impact on the cash flow margin that had an increase of 10.34%. The company exploited 1.58 billion over the investing activities and even paid a significant amount of 7.87 billion in the financing of the cash flows.  The debt to total capital ratio of the firm had a value of 85.27%, which is way lower than the previous year, which had a value of 329.98%. Year on year, the earnings per share and the dividends per share increased to 18.03% and 16.95%. The positive movement in the payment of the dividend is a significant factor as there are certain firms who pay an amount as dividend. After the evaluation of the earnings per share and the dividend per share it has been observed that the growth of the firm has been positioned to be the highest in relation to the industrial peers.  

By analyzing the  the financial trends and the financial position of the firm, it has been observed that the company has the potential for projected growth as the revenue of the firm has been increasing with respect to the previous years. The growth of the company has been observed as the net profit of the firm has been increasing from time to time and therefore, by looking at the financial performance of the firm, it can be suggested that the company has the ability for projected growth with respect to the year to year actuals.

Reference List and Bibliography 

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