HOME DEPOT FINANCIAL ANALYSIS | UK Essay Assignment

such as Lowe’s. The financial analysis of the company presents information on how to determine
the time value of money, bond valuation as well as the capital budgeting techniques used by the
corporation. The analysis of the aforementioned helps in determining the company’s long-term
survival and success.

The Home Depot Inc. present value is calculated by first determining the free cash flow
of the business and relates it to the present value. The free cash flow is defined as the cash
generated from operation less the cash outlays capital expenditures and dividend. (Turner,
2011).The present value is obtained by discounting the cash flow using the rate of return of 8%.
The total cumulative present value for the Home Depot Inc. is $421.7M. The respective cash
flow for the company during the period includes 113M, 111M, 108M, 101M and 91M. To
ascertain the feasibility of the company an NPV analysis, the company uses sensitivity analysis
to explain the extent to which the present value changes. (Brigham, & Houston, 2013)

The changes in the rate of return from 8% to 10% will have an impact on the Present
value since the Home Depot Inc. present value will decrease to $401.09M.The reduction in the
company’s value makes it unwise to invest in Home deposit Inc. when the rate of return is 10%..
therefore the should the company require selling the Home Depot Inc. in the next five years
based on computation, it would be prudent to be sold when the rate of return is 8% since the
company would recoup maximum investment assuming the risk and other factors are held
constant.

The relationship between the present value and the risk is explained by the time value of
money concept. A safe dollar is worth more than a risky dollar. The change in the risk element of
the as attributed by the rate of return have a negative implication to the company’s’ present
value. The Home Depot Inc. value of the company decreased when the company rate of return
changes to 10%. The company’s value drops from 421.7 million to 401.09 million. It implies that
the company would be undervalued if sold when the rate of return is 10% as opposed to when the
rate of return is 8%.

Under the Capital asset pricing model CAPM, it is important to balance risk and return
since it enables the investor to determine how aggressive the investor would value its asset. The
investor has to consider the risk element. (Shim, & Siegel, 2008).The lower levels of risk are
associated with the lowest return. Conversely, higher risk is associated with higher returns. The
risk-return trade-off concept highlights the balance between the desire for lowest possible risk
element and the highest return. The standard deviation can measure the level of risk. However, it
is a misconception that increased risk is associated with higher returns; it only gives a possibility
of higher returns and hence could also imply higher losses.it does not guarantee safety at greater
risk.

In conclusion, the level of risk varies from one individual to another since some people
are risk averse while others are love risk. Therefore, the degree of risk tolerance difference from
one person to the other. I would purchase the company’s Investment using the future value when
the rate of return is 8% since it will be less costly and yield the maximum return.

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