Home Depot Valuation
Home Depot Valuation
Home Depot Valuation
CERTIFICATION OF AUTHORSHIP:
I hereby certify that I am the author of this report. All assistance I have received from
outside sources have been documented in the report, as well as, listed after the
conclusion under “Bibliography”. This report was created exclusively by me specifically
for the course ‘Valuation’ at The Hague University of Applied Sciences.
Mr.Huibers
Market value for liabilities was calculated by sum of five years’ average value of notes payable and market
prices of five issues bonds by Home Depot. Common equity market value is current market capitalization.
As it can be seen in the table above, the difference between BV weights and MV weights is extremely
significant. The difference between book values per share and current shares price is the reason why there
is a significant difference between BV weight and MV weight. Since market value of equity represents
company’s value fairer than book value, for our future calculations we will use weights of market values.
According to Market Insider the most recent issued bond has an 3,5% interest rate. In order to
make this research more logical and realistic, we suggest to 3,5% YTM as the shortest and the
most recent one. Furthermore, the percentage that is being used for our further calculations does
not differ considerably from the average YTM.
To calculate Beta, Adjusted close Prices of Home Depot and S&P 500 of each month from 1st
of January 2013 until 1st of March 2018. In order to get the Risk free rate, 5 years US bonds
were used. The ten year rate on US bonds was obtained for five years as well, and it was
compounded monthly. The reason why we used US bonds, is because Home Depot mostly
operates in North American continent. As it can be seen in the table below, our calculations
gives us a Beta of 1,128.
Coefficients
Standardized
Unstandardized Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) ,008 ,005 1,564 ,123
SP500 1,128 ,167 ,662 6,735 ,000
a. Dependent Variable: HD
In order to check the reliability of our beta, we have decided to compare our result with
the following finance websites:
In order to calculate market return, the price of S&P 500 when HD was first listed was taken
into account. Furthermore, the latest price of S&P 500 was found.
2751,49
Rm= 36√( ) -1 = 8,82%
131,21
For risk free rate (Rf), the latest ten year US treasury Yield was used. For computing the Cost of common
Equity the formula below was used. As it can be seen at the table below, according to our calculations,
the Cost of common equity for Home Depot is 9,58 %.
Ke = Rf + ßi(Rm - Rf)
Cost of Equity = (Next Year's Annual Dividend / Current Stock Price) + Dividend Growth Rate
In order to get next year dividend per share, Home Depo’s website was used to check their dividend per
share price history. Home Depo pays its dividends quarterly, and we multiplied the quarterly dividend by
in four in order to get the yearly dividend per share price. As it can be seen in the table below, next year
dividend per share of Home Depo will be $4,12. We will use the formula below to calculate cost of equity
based on dividend growth model. Furthermore, the last five years dividend per share prices were used to
get the dividend growth rate.
𝐸 𝐷
𝑊𝐴𝐶𝐶 = ∗ 𝑅𝑒 + ∗ 𝑅𝑑 ∗ (1 − 𝑇𝑐)
𝑉 𝑉
The reason why differ so much from each other is because of the high value of Cost of Equity based on
dividend growth. The disadvantages of this model are that it assumes constant growth of dividends and
does not consider risk of investments. Therefore, we decided to choose the first result of 9,58% with Cost
of Equity calculated by CAPM and MV weights. We chose this Ke because it looks at risk compare to other
Ke which uses dividend growth and ignores risks involved in the investments.
Discount Fountain published a report in 2016 about the company's performance. According to this report,
the company's stock price was underestimated at $ 125. According to the author of the report, the target
price for 2018 is 201 dollars. The author has used FCF growth of 20%. He has used this percentage arguing
that Home Depot's dividend payout, and
increased demand for housing in United
States of America, justifies this forecast
(Fountain).
Our valuation of Home Depot is more realistic; therefore the value is smaller than what Discount Fountain
projects. The forecast in our valuation is based on six percent sales growth. Following this method, gave
us lower free cash flows. Furthermore, we used a higher discount rate of 8,77 % compared to Discount
Fountain, who uses seven percent to discount free cash flows. Because, Discount Fountain uses 20%
growth rate, makes his projection more optimistic. Therefore, we use industry growth rate to make our
future projections more realistic.
Bibliography
Ali, Anwar. www.business.financialpost.com. 24 October 2016. 24 October 2016.