Questions you should consider in reviewing the case: 3. What is the NPV of buyin

Question

Questions you should consider in reviewing the case:

3. What is the NPV of buying Sears?

5. How could we find the greatest underperforming area for any of the firms?

Income Statements – January 31, 2004 Wal-Mart Kmart Sears Target Sales 258,681,000 23,253,000 41,124,000 48,163,000 Cost of Sales 198,747,000 17,846,000 26,231,000 31,790,000 Gross_Profit 59,934,000 5,407,000 14,893,000 16,373,000 Administrative_Expenses 44,909,000 4,998,000 9,111,000 11,534,000 EBIT 15,025,000 409,000 5,782,000 4,839,000 Interest 996,000 162,000 1,025,000 559,000 Taxes (@ 35 %) 4,910,150 86,450 1,664,950 1,498,000 Net Income 9,118,850 160,550 3,092,050 2,782,000 Balance Sheets as at January 31, 2004 Wal-Mart Kmart Sears Target Cash_and_cash_equivalents 5,199,000 2,088,000 9,057,000 816,000 Receivables 1,254,000 301,000 3,397,000 5,776,000 Inventory 26,612,000 3,238,000 5,335,000 5,373,000 Total_Current_Assets 33,065,000 5,627,000 17,789,000 11,965,000 Property,_Plant_&_Equip. 58,530,000 153,000 6,788,000 16,969,000 Other_Assets 6,079,000 120,000 908,000 1,495,000 Total_Assets 97,674,000 5,900,000 25,485,000 30,429,000 Accounts_Payable 31,051,000 1,772,000 7,582,000 7,448,000 Other_current_Liabilities 6,367,000 1,050,000 5,194,000 866,000 Total_current_liabilities 37,418,000 2,822,000 12,776,000 8,314,000 Long_term_Debt 20,099,000 2,297,000 4,718,000 10,217,000 Common_stock 431,000 208,000 823,000 96,000 Retained_Earnings 39,726,000 573,000 7,168,000 11,802,000 Total_Liabilities_&_Equity 97,674,000 5,900,000 25,485,000 30,429,000

Explanation / Answer

Ans

NPV of buying sears depends up on the no of years the firm is able to generate cash flow , worked out the same under 1-perpetuiy 2. 10 years Ans 1 NPV of buying sears Perpetual assumtion 10 years Net Income           30,92,050.00     30,92,050.00 Add Interest           10,25,000.00     10,25,000.00 Annual operating cash flow 41,17,050 41,17,050 WACC 6% 7.360087051 Present value of the firm=Annual Operating cash flow *PVAF         686,17,500.00 303,01,846.40 Net worth of the inc long term Debt Plant Propert and equipment 67,88,000 67,88,000 Other_Assets 9,08,000 9,08,000 Current Assets 177,89,000 177,89,000 Less Current Liabilities -127,76,000 -127,76,000 127,09,000 127,09,000 NPV=Present value of the firm         559,08,500.00 175,92,846.40 Ans 2 We can perform a common size statement analysis and compare to industry average

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