E4-22. Assigning a Long-Term Debt Rating Using Financial Ratios (LO3, 4)

Refer to the Home Depot, Inc. 2013 financial statements shown earlier in the module to answer the

following requirements.

Required

a. Compute the following seven Moodys metrics for Home Depot. See Appendix for definitions.

(Hint: Home Depots amortization expense relates to tangible assets; consequently, treat depreciation and amortization as all depreciation. For a 53-week reporting period, operating cash flows are $6,975 million and dividends are $1,743 million.

EBITA to average assets

Operating margin

EBITA margin

EBITA interest coverage

Debt to EBITDA

Debt to book capitalization

Retained cash flow to debt

b. Use your computations from part a, along with measures in Exhibit 4.7, to estimate the long-term

debt rating for Home Depot

EXHIBIT 4.1

Home Depot Balance Sheet

Amounts in millions, except share and per share dataFebruary 3, 2013January 29, 2012

Assets

Current Assets

Cash and cash equivalents. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 2,494

$ 1,987

Receivables, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,395

1,245

Merchandise inventories. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

10,710

10,325

Other current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

773

963

Total current assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

15,372

14,520

Property and equipment, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

38,491

38,975

Less accumulated depreciation and amortization. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

14,422

14,527

Net property and equipment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

24,069

24,448

Notes receivable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

140

135

Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,170

1,120

Other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

333

295

Total assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$41,084

$40,518

Liabilities and Stockholders Equity

Current Liabilities

Accounts payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$ 5,376

$ 4,856

Accrued salaries and related expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,414

1,372

Sales taxes payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

472

391

Deferred revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,270

1,147

Income taxes payable. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

22

23

Current installments of long-term debt. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,321

30

Other accrued expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

1,587

1,557

Total current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

11,462

9,376

Long-term debt, excluding current installments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

9,475

10,758

Other long-term liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

2,051

2,146

Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

319

340

Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

23,307

22,620

Stockholders equity

Common Stock, par value $0.05; authorized: 10 billion shares; issued: 1.754 billion shares at

February 3, 2013 and 1.733 billion shares at January 29, 2012; outstanding: 1.484 billion shares

at February 3, 2013 and 1.537 billion shares at January 29, 2012. . . . . . . . . . . . . . . . . . . . . . . . . .

88

87

Paid-in capital. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

7,984

6,966

Retained earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

20,038

17,246

Accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

397

293

Treasury Stock, at cost, 270 million shares at February 3, 2013 and 196 million shares at

January 29, 2012

(10,694)

(6,694)

Total stockholders equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

17,777

17,898

Total liabilities and stockholders equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

$41,084

$40,518

EXHIBIT 4.3

Income Statement for Home Depot

HOME DEPOT

Income Statement

(amounts in millions)

February 3, 2013

(Adj. to 52-weeks)February 3, 2013January 29, 2012January 30, 2011

Net sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .$73,344

$74,754

$70,395$67,997

Cost of sales. . . . . . . . . . . . . . . . . . . . . . . . . . . . .47,989

48,912

46,133 44,693

Gross profit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .25,355

25,842

24,262 23,304

Operating expenses

Selling, general and administrative. . . . . . . . . .16,197

16,508

16,028 15,849

Depreciation and amortization . . . . . . . . . . . . . 1,538

1,568 1,573 1,616

Total operating expenses . . . . . . . . . . . . . . .17,735

18,076

17,601 17,465

Operating income. . . . . . . . . . . . . . . . . . . . . . . . . 7,620

7,766

6,6615,839

Interest and other (income) expense . . . . . . . . . .

Interest and investment income . . . . . . . . . . . . (20)

(20)

(13)(15)

Interest expense. . . . . . . . . . . . . . . . . . . . . . . .620

632

606530

Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (66)

(67)51

Interest and other, net. . . . . . . . . . . . . . . . . .534

545

593566

Earnings before provision for income taxes. . . . . 7,086

7,221

6,0685,273

Provision for income taxes. . . . . . . . . . . . . . . . . . 2,635

2,686

2,1851,935

Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,451

$ 4,535

$ 3,883$ 3,338