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 student ratio analysis is designed to build intuition with respect to interpreting individual ratios as well as ratio interrelationships (e.g., the DuPont framework). The historical-performance comparison suggests that investors are skeptical of the ability of Home Depot to maintain its performance trajectory, yet they project sustained improvements for Lowe’s. Students are invited to scrutinize the analyst’s five-year income-statement and asset-side balance sheet forecast for Home Depot. The case expressly focuses on the asset side of the balance sheet as a preview for other cases using free-cash-flow forecasting. The Home Depot forecast exercise exposes students to the mechanics of financial-statement modeling and sensitivity analysis, which they can use in building their own forecast for Lowe’s. Finally, the strong-growth assumptions for Home Depot relative to the modest-growth forecast for the industry suggest that the company can be expected to capture massive and perhaps unreasonable market share in the near term. The exercise provides a striking example of the importance of comparing bottom-up business forecasting with top-down industry forecasts.
Authors : Robert F. Bruner, Sean Carr, Robert Hengelbrok
Source : Darden School of Business
Case ID : UV1379
Discipline : Finance
Case Length : 12 pages
Solution Sample availability : YES
Plagiarism : NO (100% Original work)
Description for case is given below :
In early 2002, an analyst, Tom Baumann, must propose terms for leasing one of his company’s advanced factory-automation systems to a major customer. From the lessor’s standpoint, the challenge is simply to design an annuity stream that yields a present value equal to, or greater than, the value of the asset being leased. Certain factors, however, serve to complicate the analysis. The tax exposure and debt rating of the customer are uncertain, leaving the analyst to estimate the impact of alternative lease terms under different tax and interest-rate assumptions. Also, the customer is considering leasing competing systems from companies in Germany and Japan; these competing proposals limit Primus’s flexibility in tailoring its proposal. In short, the student’s task is to design lease terms that exploit the lessee’s tax and interest-rate exposure within constraints set by competitive terms.
Focuses on the key issue of how General Electric Appliances has dealt with the structural evolution of the industry between 1986 and 2001. In contrast to its competitors, it pursued a more financially driven, and less globally oriented, strategy and was perhaps more successful than its two rivals. The open question is how GE Appliances would fare in the future and what its senior managers should do.
Focuses on the key issue of how Whirlpool has dealt with the structural evolution of the industry between 1986 and 2002. In contrast to its competitors, it pursued a more financially driven, and less globally oriented, strategy and was perhaps more successful than its two rivals. The open question is how Whirlpool would fare in the future and what its senior managers should do.
Summarizes the events, decisions, and results at the firm during the period 1986 to 2002. The key issues involve the financial goals of Maytag during this period, its inability to reach them, and the likely reasons for such a failure. Maytag seemed to suffer from both strategy formulation as well as strategy implementation problems. The structural evolution of the industry had not made the strategy task any easier for Maytag during this period. The open question is how Maytag would fare in the future and what its senior managers should do.