Home Depot Case Analysis Essay
A. Analyze the implications of interest rate changes the calculations with the attached spreadsheet. Be sure to substantiate your claims.
The future value of Home Depot is simply the principle time value of money that is calculated to estimate the demand for future payments demand over the risk free rate of interest. The rate of discount is nothing but the summation of time value of money as proposed by the appropriate rate of interest. This aims towards increasing the nominal value of future returns.
At 8% rate of risk, the company expressed an ideal future value of negative 425.78 million while the company would ideally prefer a value that is positive and above. This is because the company prefers to get a value that is higher than the expected future value of the company in the time span of 5 years. …show more content…
A change in the risk free rate changes the present value of the company when the risk free rate increases.
When the risk free rate is reduced to 5%, the company comes up to a future value of -460.69 million. This is lower than what is guaranteed at the present value of 8%. Again, at the risk free rate of 15%, the company has a future value of -359.18 million. In such a scenario, the company would ideally prefer a rate of interest that is causing the present value of the company to increase. The higher the risk, the higher is the rate of interest the company will have to serve and this causes a rise in the present value of the company when it lies in the negative field.
B. How might an issue (negative or positive) within the overall stock market impact Home Depot’s stock valuation numbers, other financial variables, or its overall portfolio management? Be sure your response is supported by
evidence.
A negative event in the stock market will have a negative impact in the stock valuation of numbers and cause the overall value of the company to fall. This is because the present value of the company is negative and the company is not observed to be a positive return gaining company for the future. The negative news will decrease the market capitalization of the firm and hence have a negative impact on stock valuation, and overall portfolio management. On the other hand, a positive event in the stock market would increase the company’s share value in the market. This would rise the overall market capitalization which would have a direct impact on firm value and raise its market position. However, it is anticipated that such a rise would be consequent to all its competitor and so, there would not be any significant change within the competitors in the industry (Investopedia, n.d.).
The positive event would in turn increase the value of the firm and thereby the market capitalization. This would entail a higher valuation of company’s stocks and thereby help it raise company’s value.
C. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on Home Depot’s financial position. Be sure to justify your reasoning.
An external factor like entry of competitors will have a negative impact on the firm position. However, this would not have any direct impact on company’s financial position. The industry within which the company operates is highly competitive and hence entry and exit of competitors is part and parcel of survival within the business. The company claims to be the best in the business in terms of its brand name and service. The have established logistics chain and a strong presence in the market. A new competitor will find it extremely difficult to go past the company within a short time period (Sec.gov, n.d.). For the long run, the company tries to consistently grow and innovate to keep itself at the top of the game. This is because external financial or non-financial factor would not cause any financial impact or changes the company’s financial position in the short run and hence will not reflect in company’s share values and shareholding position.
The future value of Home Depot is simply the principle time value of money that is calculated to estimate the demand for future payments demand over the risk free rate of interest. The rate of discount is nothing but the summation of time value of money as proposed by the appropriate rate of interest. This aims towards increasing the nominal value of future returns.
At 8% rate of risk, the company expressed an ideal future value of negative 425.78 million while the company would ideally prefer a value that is positive and above. This is because the company prefers to get a value that is higher than the expected future value of the company in the time span of 5 years. …show more content…
A change in the risk free rate changes the present value of the company when the risk free rate increases.
When the risk free rate is reduced to 5%, the company comes up to a future value of -460.69 million. This is lower than what is guaranteed at the present value of 8%. Again, at the risk free rate of 15%, the company has a future value of -359.18 million. In such a scenario, the company would ideally prefer a rate of interest that is causing the present value of the company to increase. The higher the risk, the higher is the rate of interest the company will have to serve and this causes a rise in the present value of the company when it lies in the negative field.
B. How might an issue (negative or positive) within the overall stock market impact Home Depot’s stock valuation numbers, other financial variables, or its overall portfolio management? Be sure your response is supported by
evidence.
A negative event in the stock market will have a negative impact in the stock valuation of numbers and cause the overall value of the company to fall. This is because the present value of the company is negative and the company is not observed to be a positive return gaining company for the future. The negative news will decrease the market capitalization of the firm and hence have a negative impact on stock valuation, and overall portfolio management. On the other hand, a positive event in the stock market would increase the company’s share value in the market. This would rise the overall market capitalization which would have a direct impact on firm value and raise its market position. However, it is anticipated that such a rise would be consequent to all its competitor and so, there would not be any significant change within the competitors in the industry (Investopedia, n.d.).
The positive event would in turn increase the value of the firm and thereby the market capitalization. This would entail a higher valuation of company’s stocks and thereby help it raise company’s value.
C. Analyze the impact of any external factor (i.e., external to the company) discussed throughout the course on Home Depot’s financial position. Be sure to justify your reasoning.
An external factor like entry of competitors will have a negative impact on the firm position. However, this would not have any direct impact on company’s financial position. The industry within which the company operates is highly competitive and hence entry and exit of competitors is part and parcel of survival within the business. The company claims to be the best in the business in terms of its brand name and service. The have established logistics chain and a strong presence in the market. A new competitor will find it extremely difficult to go past the company within a short time period (Sec.gov, n.d.). For the long run, the company tries to consistently grow and innovate to keep itself at the top of the game. This is because external financial or non-financial factor would not cause any financial impact or changes the company’s financial position in the short run and hence will not reflect in company’s share values and shareholding position.