Custom Capital Valuation Models essay paper sample
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Target Corporation is the second largest discount retailer company in the U.S., after Wal-Mart. The company headquarters are located in the Minneapolis, Minnesota. In 2010, the Target Corporation was ranked 30th on the Fortune 500 and it’s constitute of the Standard and Poor’s 500 index. Target Corporation kicks off its root by the brand name Dayton Dry Goods Company in 1902. Initially, the company started its preliminary operation in Roseville, Minnesota, 1962. Later, the company developed rapidly in the Target Store until August 2010, where it rebranded to Target Corporation. Moreover, the company went on with its expansion strategies up to Canada, where it launched more than 50 stores in January 2011. This achievement was attained after the procurement of Canadian chain Zellers leaseholds. This paper will critically analyze the Target Corporation cost of debt (bonds), equity (stock price) and the current market price of the debt and equity.
Capital Valuation Models
Capital valuation model is the appraisal of the feasible price that may have been paid for a certain property if it was sold during the last general revaluation. However, a capital value doesn’t include crops, stocks, machinery, chattels, plantation trees or goodwill. Examples of capital valuation models are; security market line, asset-specific required return and asset pricing. These capital valuation models have been applied to come up with various market ratios, which are essential for the success of the Target Corporation.
In many instances, profit has always been the yardstick for measuring the success of any company. However, it is important to compare the company profits earning capacities in relation to the capital employed, with this in mind, financial experts have developed ratios that measures ability of a company to convert the sales to profits and then earn profit on the asset employed.
Gross Profit Ratio
This is the ratio which indicates the margins of sales as compared to bought or factory cost.
Gross profit ratio = (Gross profit/sales) * 100
Gross profit ratio for 2010
Gross profit ratio = (3852500/51,695,000) * 100 = 7.45%
Gross profit ratio for 2009= (3609100/ 49,788,000)* 100 = 6.75%
The profit margin is achieved by dividing the Net profit by the sales. From the company profit and loss account the Net profit for 2010 was 3,082,100, while the annual sales amounted to 51,695,000.
Profit margin = profits after interests and taxations/ sales *100
Profit margin for 2010
Profit margin= 3,082,100/ 51,695,000 * 100
Return on Investments
Return on investments measures the returns on proprietors’ investments in the company.
R.O.I = (profits after tax/ Total share capital plus reserves) * 100
Return on investment for 2010
R.O.I = (2,039,900/3178, 800)* 100= 6.37%
Return on investment for 2009
= (2, 133, 000, /31,229, 000) * 100=6.83%
Return on Equity (ROE)
Return on Equity = net income/Average stockholders Equity
The Average Stockholders Equity = (Beginning stockholders Equity + Ending stock holders Equity) /2
Return on equity for 2010
The average Stock holders Equity = (12323000 +12569000)/ 2 =1244.6
ROE = (2020900/1244600) * 100=16.24%
From the above figure, it is clear that the company is the company is able to convert investment for generating growth earning. ROE, which is between 15-20%, is highly recommendable.
Divided Policy Ratios
Divided Yield= Dividends per share /share price=1.15/25.9=0.87
It is quiet evident that divided yield for the company was quiet high
For the year 2010.The $1.15 Australian dollar divided, represent a 10.7% increase from the previous year. Shareholders continue to be optimistic of the future rise in share prices due to the healthy strategic plans which has been adopted by the business for medium and long term plans.
Debt to Equity ratio
This ratio highly helps the investors to know the extent at which any company pays for its assets.
Debt to Equity Ratio= (Long term debt/share holders Equity) = 674,233/1,456,229
Interest Coverage Ratios
This indicates the number of times over the paid interest can be made with net profit and levels of debt. As noted above Woolworth has a low debt ratio hence this value is expected to be high. From the balance sheet, the money borrowed by Woolworths during the year is $392000 while the net profit is $2020900.
Therefore, Interest coverage ratio= (Net profit / interest expense) = 2020900/3920000=5*interest expense
The figure demonstrates that Woolworth has net pay that can pay 52 times current interests’ payment. To the investors, this indicates that Woolworth has a significant borrowing capacity before they can experience any trouble in making interest payments. Generally, a ratio of above five is highly encouraged for most businesses.
Liquidity ratios help a company to determine whether it can meet the short term financial obligation. These ratios are of great importance to the companies’ creditors since they can be able to determine the credit worthiness in the short run.
Quick ratio= (Current assets –inventory)/ Current liabilities
= (7656900-45700)/ 3461700=2.19
Cash ratio= (Cash+ marketable securities) /Current liabilities
= (5815400+98700)/ 3461700=1.708
From the above calculation it is evident that Woolworths can be able to pay off the current liabilities if immediate payments were called for by creditors.
Current Ratio and Working Capital
Current ratios indicate the ability of the company to pay current liabilities once they fall due. The difference between current assets and current liability of the company is known as working capital. Net working capital determines the companies’ ability to finance its operations, pay the bills and take advantage of any opportunity that may fall due short term. How ever the accepted practice is expressing this is a ratio.
Current Ratio= (Current Asset/Current Liabilities) = 7656900/3561700 = 1.8:1
This shows that Woolworths has $2.21 in the current asset for every one dollar in the current liabilities. The table below briefly indicates the current ratio of the company from 2006 to 2001;
Year Current Ratio
From the various models employed to come up with the ratios above, it one can see that SML (Security Market Line) model plays a vital role in assessing the persistent changes in market environment. As a result of this, it is recommendable to use this model in analyzing market ratios, among other important elements pertaining the market.
In conclusion, it is clear that Target Corporation had an outstanding capital valuation for the past five years. This shows that the company management has been able to contain cash requirements for the company both in short and long run.