Home Depot Valuation

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Home Depot Valuation Analysis The group calculated a per share valuation of $42.21 for Home Depot’s stock. This required certain assumptions regarding various growth rates, and based upon a sensitivity analysis, a declining sales growth rate is anticipated up to 2011. By this point Home Depot’s store expansion program will slow down, if not cease all together, due to market saturation. The inclusion of a maximum constant sales growth rate of 5% seemed to be a good benchmark for Home Depot. While this is a bit aggressive, we feel that as expansion wanes same store sales will increase marginally from the projected 3.5% growth primarily due to the strength of the brand. As the new store openings will begin to wind down, 2006’s projected ROIC of 25% is expected to decline steadily until reaching approximately 16% by 2011. We also assumed that the WACC would be stable at 10% since we did not foresee any material changes in the capital structure. We also believe the explicit period should be longer than 5 years, but due to the lack of concrete information, we decided not to forecast past 5 years. This assumption has most likely reduced our estimated valuation by neglecting some years with potential growth rates of more than 5%. However, in the long run we felt that the amount would have an immaterial affect on our findings. Arguably the most important assumption in this calculation is the sales growth rate associated with the terminal value. Since this number is the present value of perpetuity it represents the largest piece of our free cash flow. As mentioned earlier, we feel that Home Depot’s expansion will be at an end or close to it by 2011, and any continued growth beyond that date will most likely be fueled by existing store sales. Same store sales have been declining recently due to cannibalization from newly opened locations (5.4% in FY ending in

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