likely to attract new buyers which can give Costco competitive advantage

Likely to attract new buyers which can give costco

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likely to attract new buyers, which can give Costco competitive advantage against industry giants like Amazon and Wal-Mart. The final strategy is market penetration. Here, Costco ought to enhance the market share of its products in the current market in which the firms operates via marketing efforts such as e- retailing and loyalty programs. A digital retailing platform makes shopping easy for persons who do not like visiting physical stores (Nagle & Müller, 2017). Besides, it can appeal to the younger generation who use the internet for virtually all aspects of their daily lives from purchasing clothes to ordering meals. Adopting an Amazon-like e-commerce platform coupled with loyalty rewards can increase the number of customers buying products from Costco thereby producing long-term benefits. Pro-Forma Financial Statements As the historical financial statements outline, Costco is performing well in the market despite stiff competition. However, it is forecast that with the new strategies, the company is likely to double or triple its profit margins and surpass its market rivals. Most operations are
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COSTCO 11 likely to progress efficiently or better than before and the large market focus is capable of improving Costco’s financial trends. The historical ratios show that the company’s current ratio was 0.99 in 2017 and 1.02 in 2018 while the quick ratio was 1.0 in 2018. The company still remains robust and is capable of using its assets to meet debt obligations, which is anticipated to improve with the new stratagems. Net Present Value Analysis Costco’s EBIT reveals that the new strategy is likely to enhance the company’s net present value. The predicted five year cash flow estimates are provided in the table below (all figures are in millions except the share prices) with the value of the coming five years’ cash flow computed at $10,499. 2019 2020 2021 2022 2023 Levered FCF (millions) $2,963 $2,053 $2,488 $2,793 $3,082 Source Analyst x11 Analyst x11 Analyst x5 Analyst x2 Analyst x2 Current Discounted Value @ 8.47% $2,732 $1,745 $1,950 $2,018 $2,052 Additionally, the terminal value (cash flow to the firm after the 1st stage) is also computed. For various reasons, a conservative rate, which cannot surpass that of the GDP, is utilized. In the case of Costco, the 10-year federal bond rate (2.3%) is utilized to calculate the value. Similar to the 5- year forecast timeline, this is discounted to the current value. Terminal Value = FCF 2021 × (1 + g) ÷ (Discount Rate – g) Terminal Value = $3,082 × (1 + 2.3%) ÷ (8.5% – 2.3%) Terminal value using the Perpetuity framework whereby growth (g) = 2.3%: $51,398 This gives the present terminal value of $34,236. Besides, the terminal value, equity value (total of the current value of cash flow) is computed. The result of the Total Value = Terminal value + current value of upcoming 5 years’ cash flow = $10,499 + $34,236 = $44,735. The final step is
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COSTCO 12 the division of the equity value by the outstanding shares. Value = Total value / Shares Outstanding ($44,735.35 / 436.74), which gives Value per share of $102.43.
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