Financial Reporting, Financial Statement Analysis and Valuation
8th Edition
ISBN: 9781285190907
Author: James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher: Cengage Learning
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Textbook Question
Chapter 10, Problem 9PC
The Home Depot is a leading specialty retailer of hardware and home improvement products and is the second-largest retail store chain in the United States. It operates large warehouse-style stores. Despite declining sales and difficult economic conditions in 20X1 and 20X2, The Home Depot continued to invest in new stores. The following table provides summary hypothetical data for The Home Depot.
REQUIRED
- a. Use the preceding data for The Home Depot to compute average revenues per store, capital spending per new store, and ending inventory per store in 20X2.
- b. Assume that The Home Depot will add 100 new stores by the end of Year +1. Use the data from 20X2 to project Year +1 sales revenues, capital spending, and ending inventory. Assume that each new store will be open for business for an average of one-half year in Year +1. For simplicity, assume that in Year +1, Home Depot’s sales revenues will grow, but only because it will open new stores.
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Identify the activity ratio of a computer shop is its Cost of Goods Sold is P12 million and the Average Inventory is P24 million. Analyze and interpret your answer.
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Megamart, a retailer of consumer goods, provides the following information on two of its departments (each considered an investment center).
Investment Center
Sales
Income
AverageInvested Assets
Electronics
$
39,840,000
$
2,988,000
$
16,600,000
Sporting goods
25,200,000
2,142,000
12,600,000
1. Compute return on investment for each department. Using return on investment, which department is most efficient at using assets to generate returns for the company?2. Assume a target income level of 11% of average invested assets. Compute residual income for each department. Which department generated the most residual income for the company?3. Assume the Electronics department is presented with a new investment opportunity that will yield a 15% return on investment. Should the new investment opportunity be accepted?
Required information
[The following information applies to the questions displayed below.]
Megamart provides the following information on its two investment centers.
Investment Center
Electronics
Income
$ 3,114,000
2,261,000
Average Assets
$ 17,300,000
13,300,000
Sporting goods
Sales
$ 41,520,000
18,088,000
1. Compute return on investment for each center. Using return on investment, which center is most efficient at using assets to generate
income?
2. Assume a target income of 11% of average assets. Compute residual income for each center. Which center generated the most
residual income?
3. Assume the Electronics center is presented with a new investment opportunity that will yield a 14% return on investment. Should the
new investment opportunity be accepted? The target return is 11%.
Complete this question by entering your answers in the tabs below.
Required 1 Required 2 Required 3
Compute return on investment for each center. Using return on investment, which center is most efficient…
Chapter 10 Solutions
Financial Reporting, Financial Statement Analysis and Valuation
Ch. 10 - Prob. 1QECh. 10 - The chapter encourages analysts to develop...Ch. 10 - Prob. 3QECh. 10 - Suppose you are analyzing a firm that is...Ch. 10 - Use the following hypothetical data for Walgreens...Ch. 10 - Prob. 6QECh. 10 - Prob. 7QECh. 10 - Prob. 8QECh. 10 - The Home Depot is a leading specialty retailer of...Ch. 10 - Prob. 10PC
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