FIN-321
Homework 6 – Fall 2019
Due: Wednesday, December 4, before 10am via Drexel Learn submission
Please upload your homework as one pdf file. If you include scans or pictures of handwritten work, make sure your handwriting is legible.
- Applying the Gordon Growth Model to Home Depot (HD).a. Go to FactSet click on the company/security tab and enter the symbol for Home Depot (HD). Extract the consensus estimates for HD’s dividend per share (DPS) and earnings per share (EPS) for the next 12 months (NTM)? What payout and plowback ratios does this correspond to?
- In addition to paying dividends, HD also distributes cash to shareholders in the form of share repurchases. Based on the information in its 2018 10-K, come up with a reasonable dollar estimate for share repurchases in 2019. If instead HD were to distribute this amount as a special dividend, what would be the special dividend per share, given the most recent number of shares of common stock outstanding?
- Find HD’s adjusted 3-year beta on FactSet, take a screenshot and paste it below. Compare it to our estimate in the Relative Valuation slide deck (1.29). Given the nature of HD’s business, which estimate do you find more intuitive? Why?
- Assuming a risk-free rate of 3%, a market risk premium of 5%, a perpetual growth rate of 2.5%, and your previous answers what is HD’s intrinsic value according to the Gordon Growth model? Hint: estimate next year’s dividend as the sum of your answers to questions a. and b.
- Try to explain the discrepancy between the intrinsic value you found in e. and the current market price of HD.
2.a. Given HD’s most recent financial statements (which you can access via FactSet’s Company/Security tab or via its 10k) compute HD’s FY 2018 FCFF. Instead of the effective tax rate, use the consensus estimate for HD’s tax rate (25.4%).
2.b. Come up with an estimate for HD’s first-stage FCFF growth (i.e., a rate at which you expect HD’s FCFF to grow for the next five years). Justify your estimate.
2.c. Estimate HD’s weighted average cost of capital (WACC) based on a risk-free rate of 3%, HD’s current 10-year CDS spread (extract it from FactSet), a tax rate of 25.4%, the current book value of short-term and long-term debt, and the market value of equity (see slide 16 of the Relative Valuation slide deck).
3.a. Based on your answers to questions 2a-c, the current number of HD common shares outstanding, and the latest reported cash holdings, estimate HD’s intrinsic value per share in a two-stage DCF model.
3.b. What action would you take based on your answer to 3.a.? Why?