(BQ) Part 2 book "Fundamentals of financial management" has contents: Cash flow estimation and risk analysis, real options and other topics in capital budgeting; capital structure and leverage; capital structure and leverage; financial planning and forecasting, multinational financial management,.and other contents. | ª ALAN SCHEIN/ALAMY 12 Home Depot CHAPTER Cash Flow Estimation and Risk Analysis Home Depot Keeps Growing Home Depot Inc. (HD) has grown phenomenally in recent years, and that growth continues. At the beginning of 1990, HD had 118 stores with annual sales of $ billion. By early 2008, it had 2,234 stores and annual sales of $77 billion. Stockholders have benefited mightily from this growth as the stock’s price has increased from a split-adjusted $ in 1990 to $40 in early 2007, or by 2,039%. However, the more recent news has not been as good. In the face of a declining housing market, the company has struggled. In May 2008, it announced the closing of 12 underperforming stores. Still, despite the poor housing market, the company continues to open new stores in areas it thinks the stores will do well. It costs, on average, over $20 million to purchase land, construct a new store, and stock it with inventory. Therefore, it is critical that the company perform a financial analysis to determine whether a potential store’s expected cash flows will cover its costs. Home Depot uses information from its existing stores to forecast its new stores’ 364 expected cash flows. Thus far, its forecasts have been outstanding, but there are always risks. First, a store’s sales might be less than projected, especially if the economy weakens. Second, some of HD’s customers might bypass the store altogether and buy directly from manufacturers through the Internet. Third, its new stores could “cannibalize,” or take sales away from, its existing stores. To avoid cannibalization while still opening enough new stores to generate substantial growth, HD has been developing complementary formats. For example, it recently rolled out its Expo Design Center chain, which offers one-stop sales and service for kitchen, bath, and other remodeling and renovation work; and in 2007, it acquired a Chinese home improvement chain to jump-start its operations in that nation. Rational expansion
