At the time that of its 10-Q filing of financial statements for the first half of its January 2002 fiscal year, Home Depot’s shares traded at $50 per share. The following are summaries from those financial statements. Balance Sheet, July 29, 2001(in millions of dollars) Financial liabilities 1,320 Operating assets 23, 457 Operating liabilities 6,709 Financial assets 1,221 Common equity(on 2,336 million outstanding shares) 16,649 24,678 24,678 Statement of Earnings, Six Months Ended, July 29, 2001(in millions of dollars) Net sales 26,776 Cost of Merchandise Sold 18,795 Gross Profit 7,981 Operating Expenses: Selling and Store Operating 4,963 Pre-Opening 59 General and Administrative 436 Total Operating Expenses 5,458 Operating Income 2,523 Interest Income (Expense): Interest and Investment Income 22 Interest Expense (11) Interest, Net 11 Earnings Before Income Taxes 2,534 Income Taxes 978 Net Earnings 1,556 According to financial statement footnotes, Home Depot’s statutory tax rate (combined Federal and State rates) is 39%. Other comprehensive income (not in net earnings above) is negligible. Use a required six-month return for operations of 4% in calculations below. Calculate the following from these statements: Financial leverage Operating liability leverage After-tax profit margin Home Depot earned a return on beginning net operating assets (RNOA) of 9.3% for the six months ending July 29, 2001. What was the asset turnover during these six months? What was the residual operating income over the six months Calculate the free cash flow generated by operations during the six months. At the current market price of $50 per share, what growth rate for residual operating income does the market forecast for the future?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
At the time that of its 10-Q filing of financial statements for the first half of its January 2002 fiscal year, Home Depot’s shares traded at $50 per share. The following are summaries from those financial statements.
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Financial liabilities |
1,320 |
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Operating assets |
23, 457 |
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Operating liabilities |
6,709 |
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Financial assets |
1,221 |
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Common equity |
16,649 |
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24,678 |
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24,678 |
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Statement of Earnings, Six Months Ended, July 29, 2001 |
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Net sales |
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26,776 |
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Cost of Merchandise Sold |
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18,795 |
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Gross Profit |
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7,981 |
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Operating Expenses: |
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Selling and Store Operating |
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4,963 |
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Pre-Opening |
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59 |
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General and Administrative |
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436 |
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Total Operating Expenses |
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5,458 |
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Operating Income |
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2,523 |
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Interest Income (Expense): |
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Interest and Investment Income |
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22 |
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Interest Expense |
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(11) |
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Interest, Net |
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11 |
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Earnings Before Income Taxes |
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2,534 |
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Income Taxes |
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978 |
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Net Earnings |
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1,556 |
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According to financial statement footnotes, Home Depot’s statutory tax rate (combined Federal and State rates) is 39%. Other comprehensive income (not in net earnings above) is negligible. Use a required six-month return for operations of 4% in calculations below.
- Calculate the following from these statements:
- Financial leverage
- Operating liability leverage
- After-tax profit margin
- Home Depot earned a return on beginning net operating assets (RNOA) of 9.3% for the six months ending July 29, 2001.
- What was the asset turnover during these six months?
- What was the residual operating income over the six months
- Calculate the
free cash flow generated by operations during the six months. - At the current market price of $50 per share, what growth rate for residual operating income does the market
forecast for the future?
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