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Below shown the show two scenarios: first, sales growth increase by 6% and second salesgrowth drop by 6%. Assuming cells in cream highlight such as cost of sales, cash operatingexpense and depreciation & amortization will increase spontaneously with sales while holdingother variables constant (same as 2002E). For example more sales required more stock and cash on hand therefore cash and inventorywould increase proportionally with sales. And would have to order more products from supplierstherefore account payable would also increase spontaneously and proportionally with sales. As aresulted return on capital of 2002E is at 24%. If sales increase by +6%, ROC is at 25% and ifsales drop by -6%, ROC is at 23%.According to the table above, we can concluded that if sales growth increase, it would has no orlittle effect on return on capital because if sales increases, others variables that related to saleswould also increase spontaneously.12
QUESTION 3: Do you agree with Galeotafiore’s forecast for Home Depot? How would you adjust it?According from the case, Carrie Galeotafiore’s had commented on Home Depot that “Through the program [Service Performance Improvement] is still in the early stages, the do-it yourself giant has already enjoyed labor productivity benefits, and received positive feedback from customers. The Pro-Initiative program, which is currently in place at roughly 55% of HomeDepot’s stores, is aimed at providing services that accommodate the pro customer. Stores that provide these added services have generally outperformed strictly do-it-yourself units in productivity, operating margins, and inventory turnover. Home Depot shares offer compelling price-appreciation potential over the coming 3-to-5- year pull.” We do not agree with Carrie Galeotafiore because we had seen from the financial ratio analysis for Home Depot that the growth level of the company was underperform, this include sales growth for existing stores, sales growth in square footage per store and the management had expected the revenue growth to be 15% - 18% through 2004. Moreover, we think that the assumption is too aggressive because it does not go with the expected macroeconomic factors. Infact we think that the firm had launched might not be successful in the long term, it was too earlyto judge that the program would work well. Q4: How would your forecast assumptions differ for Lowe’s? Complete and recommend a five-year Lowe’s forecast to Galeotafiore. According to the case, Galeotafiore has forecasted Home Depot financial projection in the next five-year as per below figure:13
Galeotafiore’s assumptions can be divided into 3 main areas which are:1)Sales assumptions:Growth in new stores and sales growth for existing stores2)Cost & expense assumptions:Cost of goods sold margin, cash operating expenses over sales, depreciation over sales and income-tax rate3)Other assumptions:Cash & short-term inventory over sales, receivable turnover, inventory turnover, P&E turnover, payables over cost of goods sold and other current liabilities over sales.