Estimate Target’s return on equity (ROE) for each of these two years, using the DuPont decomposition to indicate the profit margin, the asset turnover, and the firm’s financial leverage. Why has the ROE changed? How would you compare the ROE drivers for Walmart and Target?

Target Corporation describes itself as “an upscale discounter that provides high-quality, on-trend merchandise at attractive prices in clean, spacious and guest-friendly stores.” Target has over 350,000 employees and operates over 1,700 stores in the United States. The firm recently opened stores in Canada, and—like Walmart (see chapter 14 in your text)—it has an online business component. Target also offers branded proprietary credit and debit cards.

For the fiscal year ending January 31, 2012, Target’s EBIT was $5,322,* and its tax rate was 34.3 percent. Its short-term borrowings were $3,786, and its long-term debt was $13,697. In addition, the firm’s book value of equity was $15,821.

1. Estimate Target’s return on invested capital or ROIC.
2. Compare it with Walmart’s. Are you surprised at the difference?

* All amounts related to Target are in millions of dollars, unless otherwise noted.

For the fiscal year ending January 31, 2012 (2011), Target had total revenues of (in millions) $69,865 ($67,390) and net earnings of $2,929 ($2,920). Its total assets were $46,630 ($43,705) and its equity was $15,821 ($15,487).

1. Estimate Target’s return on equity (ROE) for each of these two years, using the DuPont decomposition to indicate the profit margin, the asset turnover, and the firm’s financial leverage.
2. Why has the ROE changed?
3. How would you compare the ROE drivers for Walmart and Target?

According to its annual report, as of January 31, 2012, Target’s borrowing costs averaged 4.6 percent, and its tax rate was 34.27 percent. A research report estimated Target’s cost of capital at 10.5 percent. The firm had interest-bearing debt of $17,483. Moreover, Target’s stock was trading at $50.81 per share, and there were 679.1 million shares outstanding. Now, let’s assume Target’s amount of debt is also a market value estimate of the debt. Let’s also assume the current debt and equity values are at Target’s optimal capital structure.

1. Based on market value estimates, what is Target’s cost of capital?
2. How does it compare to Walmart’s, and what explains the difference?