Company Basics and Financial Ratios – Part 2

Question 1
Using the most recent three years of available data, compute Wal-Mart’s and Target’s
degree of operating leverage. You will have to use the formula, percentage change in
pretax income divided by percentage change in revenues. Show your work.

Question 2
Using the last three years of available data, compute Wal-Mart’s and Target’s degree of
financial leverage. You will have to use the formula, percentage change in net
income divided by percentage change in pretax income (EBIT). Show your work.

Question 3
With each company, multiply the degree of financial leverage times the degree of
operating leverage to determine the degree of combined leverage for the two periods.

Question 4
Compare the leverage ratios. Did the degrees of leverage stay the same? Explain the
differences between the two periods.
Wal-Mart

Target

Question 5
Go to finance.yahoo.com and get the quotes of Target and Wal-Mart. (Type into the “Get
Quotes” box. Click on the “Profile” section on the home page and write a few sentences
of each firm’s activities.
Write down each firm’s P/E ratio. Calculate the PEG ratio (the P/E ratio divided by
annual growth).
a.) Which firm’s ratios are higher?
b.) Is the stock of each company up or down from the prior day? (See “change” on the
home page.)
c.) What is each company’s 52-week range?
d.) Scroll down and click on “Analysts Opinion.” What is the Mean Target, the High
Target, and the Low Target? How many brokers follow each firm?
Wal-Mart

Target

Question 6
a.)With each company, compute the $ change in “Total Assets” over the last two years.
b.) Do the same computation for “Stockholders’ Equity.”
c.) Do the same computation for “Long-Term Debt.”
d.) In a brief paragraph describe the changes in total assets, stockholders’ equity and
long-term obligations. Do these changes appear to affect the firm? Describe.
Wal-Mart

Target

Question 7
Find the long-term debt and total common equity for the last 2 years. Add the two together
to get total capital.
a.) Calculate the weights between long term debt and equity that you would use in a
weighted average cost of capital calculation.
b.) What are the weights for long term debt and equity for the last five years? Have
they remained stable? Comment on the stability or lack of stability and how it
would affect the company’s cost of capital
Wal-Mart