STUDY QUESTIONS Costco B

1.How appropriate are the five factors that Torres chooses to determine the future performance of Costco?

2.What other relevant factors might be included in a forecast of the business?To what extent are they covered in the factors above?

3.Review Torres' assumptions in Exhibit 2.Which assumptions would represent a change from Costco's historical performance?Do you feel her assumptions are appropriate, and if not, which ones would you change?

4.Review Torres' forecasted income statement and common-size income statement.Do you feel these are achievable results for Costco?

5.Review Torres' forecast in Exhibit 5.How does the rate of expansion (i.e. new store openings) affect the balance sheet and free cash flow? Do you agree with her terminal value assumptions?

6.How does Costco's use of the equity method to account for its ownership of the 20 warehouses in Mexico effect the income statement forecast, the balance sheet forecast, and the discounted cash flow model?

7.Review Torres' quantitative checks.Compare her projections with management's forwardlooking comments.Based on these and other constraints (e.g. the effect of competition, historical performance, etc.) do you feel that her forecast is realistic, conservative, or aggressive?What does the theory of reversion to the mean say about Torres' projections?Which do you agree with?

8.Would you recommend that Torres buy, hold, or sell her Costco's shares at the price of $35?