Return on Capital: Corporate Finance Class

25

20

15

10

0
0­5% 5­10% 10­15% 15­20% 20­25% 25­30% >30%
 NPV: Finite Case

18
16
14
12
10
8
6
4
2
0
Negative 0-100 100-200 200-300 300-400 400-500 500-750 750-1000 >1000
 NPV: Infinite Life Case

25

20

15

10

0
e 0 0 0 0 0 0 0 0 0 0 0
ativ 100 150 200 250 300 350 400 450 500 000 000
eg 0- 00
-
00
-
00
-
00
-
00
-
00
-
00
-
00
-
0-
1
>
1
N 0 5 0 5 0 5 0 5 0
1 1 2 2 3 3 4 4 50
Group ROC NPV- finite NPV - infinite Accept/Reject
1 23.41% 553 3807 A
2 13.20% 122 3107 A
3 33.40% 185 2900 A
4 7.51% 16 3450 A
5 25.27% 437 5067 A
6 24.20% 315 965 A
7 14.10% 963 5079 A
8 40.05% -749 1215 A
9 27.40% 405 3476 A
10 30% 105 2187 A
11 11.80% 188 2320 A
12 17.80% 484 2829 A
13 24.30% 891 3380 A
14 33.20% -289 3036 A
15 28.55% 65 3634 A
16 1.12% 3580 3760 A
17 10.60% 258 3594 A
18 8.66% 3690 11602 A
19 19.08% 105 2865 A
20 12.64% -163 1047 A
21 32.17% 55 2270 A
22 26.30% -36 3590 A
23 13.42% 159 2766 A
24 28.30% -211 2912 A
25 44.93% 241 1912 A
26 33.11% 481 4134 A
27 17.10% 951 5076 A
28 28.57% 98 3207 A
29 17.79% 903 5389 A
30 26.80% 433 4514 A
31 25% 87 3589 A
32 27.90% 43 2268 A
33 29.72% 8 3612 A
34 15.30% 693 4002 A
35 37.22% -133 1941 A
36 24.51% 443 3761 A
37 14.41% 372 3720 A
38 11.31% 215 3286 A
39 28.99% 185 3514 A
40 22.02% 489 3061 A
41 29.80% 267 3608 A
42 23.90% -344 4584 A
43 11.01% -557 2249 A
44 12.40% -305 2390 A
 5% 0 0
10% 100 1000
15% 200 1500
20% 300 2000
25% 400 2500
30% 500 3000
600 3500
700 4000
800 4500
900 5000
1000 10000

ROC Number NPV_ finite Frequency NPV-infinite

0-5% 2 Negative 18 Negative
5-10% 4 0-100 14 0-1000
10-15% 20 100-200 8 1000-1500
15-20% 10 200-300 8 1500-2000
20-25% 14 300-400 4 2000-2500
25-30% 24 400-500 14 2500-3000
>30% 14 500-750 4 3000-3500
750-1000 8 3500-4000
>1000 4 4000-4500
4500-5000
5000-10000
>10000
Frequency
0
2
4
4
12
10
16
22
4
4
8
2
 Operating Leases

Pre-tax cost of debt = 4.00%

Year Present Value
Operating lease commitments
1 $868.00 $834.62
2 $804.00 $743.34
3 $708.00 $629.41
4 $624.00 $533.40
5 $543.00 $446.31
6 - 11 $591.17 $2,547.13 ! $3547 million spread out over 6 years
$5,734.21

Page 7
 Summary of Inputs / Cost of Capital Computation
Revenues per Store $ 40.00 Book value of Debt = 21397
EBITDA/Sales 20% Interest Expenses = 972
Tax Rate = 40.00% Maturity of the debt = 14.75
Riskless Rate = 4.00%
Pre-tax ost of debt = 5.25%
Inflation Rate = 2% Increased revenues at HD stores = 100
Capital cost/store $ 15.00 Growth rate in revenues = 2%
Operating margin (from 2016) = 14.19%
Share Price = $ 145.00
Number of Shares Outsta $ 1,220.00 (in millions)
Market Value of Equity = $ 176,900.00Aswath Damodaran:
Market Value of Debt = $ 22,672.18I used only ST and LT
Market Value of Oper. Lea $ 5,734.21borrowing from the
balance sheet. Given
Total Market Value of Deb $ 28,406.39their interest expenses
MV Debt/Equity Ratio = 16.06%of $ 70 million, this
MV Debt/Capital Ratio = 13.84%seemed to be the most
reasonable
Unlevered Beta for Busine $ 1.26assumption.
Levered Beta = $ 1.38 Levered Beta for HD Building Retail = 1.08
Equity Risk Premium 6.43% Equity Risk Premium for HD Building Retai 5.69%
Cost of Equity HD furnitur 11.38% Cost of Equity for HD Building Retail = 8.65%
After-tax Cost of Debt = 2.40% After-tax cost of debt = 2.40%
Cost of Capital HD Furnitu 10.13% Cost of Capital for HD Building Retail = 7.78%

Incremental Cash Flows when Project has Infinite life

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16
Number of Stores - - - 50.00 60.00 70.00 80.00 90.00 100.00 110.00 120.00 130.00 140.00 150.00 150.00 150.00 150.00
Revenues per Store $ - $ - $ - $ 40.00 $ 40.80 $ 41.62 $ 42.45 $ 43.30 $ 44.16 $ 45.05 $ 45.95 $ 46.87 $ 47.80 $ 48.76 $ 49.73 $ 50.73 $ 51.74

Revenues $ - $ - $ 2,000 $ 2,448 $ 2,913 $ 3,396 $ 3,897 $ 4,416 $ 4,955 $ 5,514 $ 6,093 $ 6,693 $ 7,314 $ 7,460 $ 7,609 $ 7,762
- Oper. Exp. $ - $ - $ 1,600 $ 1,958 $ 2,330 $ 2,717 $ 3,117 $ 3,533 $ 3,964 $ 4,411 $ 4,874 $ 5,354 $ 5,851 $ 5,968 $ 6,088 $ 6,209
- Deprec'n on new investment $ - $ - $ 150 $ 165 $ 180 $ 251 $ 267 $ 283 $ 300 $ 317 $ 334 $ 352 $ 156 $ 141 $ 126 $ 128
- Deprecn: Cap Mtnce $ - $ 15 $ 31 $ 46 $ 67 $ 87 $ 108 $ 127 $ 147 $ 166 $ 186 $ 183 $ 179 $ 183
- Allocated & Incrm. G&A $ - $ - $ 83 $ 91 $ 100 $ 109 $ 119 $ 129 $ 140 $ 150 $ 162 $ 173 $ 186 $ 192 $ 199 $ 206
- Advertising Exp. $ - $ - $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ 183 $ 187 $ 190 $ 194 $ 198 $ 202 $ 206
EBIT $ - $ - $ 8 $ 56 $ 106 $ 104 $ 154 $ 208 $ 265 $ 325 $ 389 $ 457 $ 741 $ 778 $ 816 $ 829
Taxes $ - $ - $ 3 $ 22 $ 42 $ 42 $ 62 $ 83 $ 106 $ 130 $ 156 $ 183 $ 297 $ 311 $ 326 $ 332
EBIT(1-t) $ - $ - $ 5 $ 33 $ 64 $ 62 $ 92 $ 125 $ 159 $ 195 $ 234 $ 274 $ 445 $ 467 $ 490 $ 498

+ Deprec'n $ - $ - $ 150 $ 180 $ 211 $ 297 $ 334 $ 371 $ 407 $ 444 $ 481 $ 518 $ 342 $ 324 $ 305 $ 311
+ Fixed Allocated Exp (1-t) $ - $ - $ 35 $ 36 $ 38 $ 40 $ 42 $ 44 $ 47 $ 49 $ 51 $ 54 $ 57 $ 59 $ 62 $ 65
- Cap Ex $ 1,000 $ 250 $ 250 $ 150 $ 153 $ 156 $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ - $ - $ - $ -
- Capital Maintenance $ - $ - $ 153 $ 168 $ 184 $ 256 $ 272 $ 289 $ 306 $ 323 $ 341 $ 359 $ 159 $ 144 $ 128 $ 317
- Opp. Cost of Dist'n System $ - $ - $ - $ - $ 552 $ - $ - $ - $ - $ - $ - $ (634) $ - $ - $ -
- Chg in WC $ - $ 280 $ 63 $ 65 $ 68 $ 70 $ 73 $ 75 $ 78 $ 81 $ 84 $ 87 $ 20 $ 21 $ 21 $ 21
+ Terminal Value $ 6,584
Cashflows to the firm $ (1,000) $ (250) $ (530) $ (176) $ (136) $ (647) $ (86) $ (39) $ 10 $ 60 $ 112 $ 166 $ 855 $ 663 $ 685 $ 708 $ 536
\
Working Capital Worksheet
Inventory $ - $ - $ 160 $ 196 $ 233 $ 272 $ 312 $ 353 $ 396 $ 441 $ 487 $ 535 $ 585 $ 597 $ 609 $ 621
Accounts Rec $ - $ - $ 200 $ 245 $ 291 $ 340 $ 390 $ 442 $ 496 $ 551 $ 609 $ 669 $ 731 $ 746 $ 761 $ 776
- Acc Payable $ - $ - $ 80 $ 98 $ 117 $ 136 $ 156 $ 177 $ 198 $ 221 $ 244 $ 268 $ 293 $ 298 $ 304 $ 310
Non-cash Working Capital $ - $ - $ 280 $ 343 $ 408 $ 475 $ 546 $ 618 $ 694 $ 772 $ 853 $ 937 $ 1,024 $ 1,044 $ 1,065 $ 1,087
Chg in WC $ - $ 280 $ 63 $ 65 $ 68 $ 70 $ 73 $ 75 $ 78 $ 81 $ 84 $ 87 $ 20 $ 21 $ 21

Capital Expenditure Worksheet

Investment $ 1,000 $ 250 $ 250
Capital Investment in new stores $ 150 $ 153 $ 156 $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ - $ -
Capital Maintenance $ 153 $ 168 $ 184 $ 256 $ 272 $ 289 $ 306 $ 323 $ 341 $ 359 $ 159 $ 144 $ 128 $ 131

Allocated Expenses Worksheet

Existing G&A $ 500 $ 525 $ 551 $ 579 $ 608 $ 638 $ 670 $ 704 $ 739 $ 776 $ 814 $ 855 $ 898 $ 943 $ 990 $ 1,039 $ 1,091
Allocated to Division $ 58 $ 61 $ 64 $ 67 $ 70 $ 74 $ 78 $ 81 $ 86 $ 90 $ 94 $ 99 $ 104 $ 109
New G&A $ 25 $ 31 $ 36 $ 42 $ 49 $ 55 $ 62 $ 69 $ 76 $ 84 $ 91 $ 93 $ 95 $ 97

Adverstising Expense Worksheet

Without Furniture $ 1,000 $ 1,020 $ 1,040 $ 1,061 $ 1,082 $ 1,104 $ 1,126 $ 1,149 $ 1,172 $ 1,195 $ 1,219 $ 1,243 $ 1,268 $ 1,294 $ 1,319 $ 1,346 $ 1,373
With Furniture $ 1,000 $ 1,020 $ 1,040 $ 1,220 $ 1,245 $ 1,270 $ 1,295 $ 1,321 $ 1,347 $ 1,374 $ 1,402 $ 1,430 $ 1,458 $ 1,488 $ 1,517 $ 1,548 $ 1,579
Differential Cost $ - $ - $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ 183 $ 187 $ 190 $ 194 $ 198 $ 202 $ 206

Distribution System Worksheet

Capacity used by Home D 55.00% 57.75% 60.64% 63.67% 66.85% 70.20% 73.71% 77.39% 81.26% 85.32% 89.59% 94.07% 98.77% 103.71% 108.90% 114.34%
Capacity used by Home Furniture 20.00% 24.48% 29.13% 33.96% 38.97% 44.16% 49.55% 55.14% 60.93% 66.93% 73.14% 74.60% 76.09%
Expansion Investment $ 552 $ 634

Depreciation on Distribution Expansion

Depreciation on Expansion (Straight line; 10 year life) 55 55 55 55 55 55 55 55 55 55
Remaining Balance $ 497 $ 442 $ 386 $ 331 $ 276 $ 221 $ 166 $ 110 $ 55 $ -
Time Weighted Return Computation
Cost of Capital = 10.13%
Incremental Cash Flows $ (1,000) $ (250) $ (530) $ (176) $ (136) $ (647) $ (86) $ (39) $ 10 $ 60 $ 112 $ 166 $ 855 $ 663 $ 685 $ 7,292
PV of Cash Flows $ (1,000) $ (227) $ (437) $ (132) $ (93) $ (399) $ (48) $ (20) $ 4 $ 25 $ 43 $ 57 $ 269 $ 189 $ 177 $ 1,714
Net Present Value $ 123

Internal Rate of Return = 1.19%

Side Costs and Benefits

Lost EBIT (1-t) on closed s $ - $ (50.00) $ (50.00) $ (50.00) $ (50.00) $ (50.00) $ (50.00) $ (50.00) $ (50.00) $ (50.00) $ (50.00) $ - $ - $ - $ - $ -
Synergy Revenues $ - $ - $ - $ 100.00 $ 102.00 $ 104.04 $ 106.12 $ 108.24 $ 110.41 $ 112.62 $ 114.87 $ 117.17 $ 119.51 $ 121.90 $ 124.34 $ 126.82
Synergy Operating Incom $ - $ - $ - $ 14.19 $ 14.47 $ 14.76 $ 15.06 $ 15.36 $ 15.67 $ 15.98 $ 16.30 $ 16.63 $ 16.96 $ 17.30 $ 17.64 $ 18.00
Synergy Operating income $ - $ - $ - $ 8.51 $ 8.68 $ 8.86 $ 9.04 $ 9.22 $ 9.40 $ 9.59 $ 9.78 $ 9.98 $ 10.18 $ 10.38 $ 10.59 $ 10.80
Operating Income net effe $ - $ (50.00) $ (50.00) $ (41.49) $ (41.32) $ (41.14) $ (40.96) $ (40.78) $ (40.60) $ (40.41) $ (40.22) $ 9.98 $ 10.18 $ 10.38 $ 10.59 $ 10.80
Value in perpetuity $ 186.81
Present Value @ HD
Building Retail WACC $ - $ (46.39) $ (43.04) $ (33.14) $ (30.62) $ (28.29) $ (26.13) $ (24.14) $ (22.30) $ (20.59) $ (19.01) $ 4.38 $ 4.14 $ 3.92 $ 3.71 $ 64.23
Value of Synergy = $ (213.27)

Overall Project NPV = $ (90)

Capital Investment in Project

Beginning Book Value $0 $1,000 $1,250 $1,500 $1,933 $2,152 $2,377 $2,609 $2,846 $3,090 $3,341 $3,598 $3,861 $4,131 $4,222 $4,245
+ Capital Investments $1,000 $ 250 $ 250 $ 150 $ 153 $ 156 $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ - $ - $ -
- Depreciation $0 $ - $ - $ 150 $ 165 $ 180 $ 251 $ 267 $ 283 $ 300 $ 317 $ 334 $ 352 $ 156 $ 141 $ 126
+ Capital Maintenance $0 $0 $0 $153 $168 $184 $256 $272 $289 $306 $323 $341 $359 $159 $144 $128
+ Investment in Working $0 $ - $ - $ 280.00 $ 62.72 $ 65.12 $ 67.58 $ 70.12 $ 72.74 $ 75.43 $ 78.20 $ 81.05 $ 83.98 $ 87.00 $ 20.48 $ 20.89
Ending Book Value $1,000 $1,250 $1,500 $1,933 $2,152 $2,377 $2,609 $2,846 $3,090 $3,341 $3,598 $3,861 $4,131 $4,222 $4,245 $4,268
Average Book Value $500 $1,125 $1,375 $1,717 $2,043 $2,264 $2,493 $2,728 $2,968 $3,216 $3,469 $3,729 $3,996 $4,176 $4,233 $4,257 $3,176
EBIT(1-t) $ - $ - $ 4.76 $ 33.34 $ 63.53 $ 62.25 $ 92.40 $ 124.61 $ 158.87 $ 195.21 $ 233.63 $ 274.15 $ 444.85 $ 466.73 $ 489.70 $ 203.39
Return on Capital 0.28% 1.63% 2.81% 2.50% 3.39% 4.20% 4.94% 5.63% 6.26% 6.86% 10.65% 11.03% 11.50% 6.40%
 Incremental Cash Flows: Finite Life

Summary of Inputs / Cost of Capital Computation

Revenues per Store $ 40.00 Book value of Debt 21397
EBITDA/Sales 20% Interest Expenses = 972
Tax Rate = 40.00% Maturity of the debt 14.75
Riskless Rate = 2.50%
Pre-tax Cost of debt = 4.00%
Inflation Rate = 2% Increased revenues at HD sto 100
Capital cost/store $ 15.00 Growth rate in revenues = 2%
Operating margin (from 2016) 14.19%
Share Price = $ 145.00
Number of Shares Outsta 1,220.00 (in millions)
Market Value of Equity = $ 176,900
Market Value of Debt = $ 22,672 ! Used maturity of debt, book value of debt and interest expenses.
Market Value of Oper. Le $ 5,734
Total Market Value of Deb $ 28,406
MV Debt/Equity Ratio = 16.06%
MV Debt/Capital Ratio = 13.84%
Unlevered Beta for Busin 1.26
Levered Beta = 1.38 Levered Beta for HD Building 1.08
Equity Risk Premium 6.43% Equity Risk Premium for HD Bu 5.69%
Cost of Equity HD furnitu 11.38% Cost of Equity for HD Building 8.65%
After-tax Cost of Debt = 2.40% After-tax cost of debt = 2.40%
Cost of Capital HD Furnit 10.13% Cost of Capital for HD Buildin 7.78%

Page 7
 Incremental Cash Flows: Finite Life

Incremental Cash Flows when Project has Finite Life (Salvage at Book Value)
Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Number of Stores - - - 50.00 60.00 70.00 80.00 90.00 100.00 110.00 120.00 130.00 140.00 150.00 150.00 150.00
Revenues per Store $ - $ - $ - $ 40.00 $ 40.80 $ 41.62 $ 42.45 $ 43.30 $ 44.16 $ 45.05 $ 45.95 $ 46.87 $ 47.80 $ 48.76 $ 49.73 $ 50.73

Revenues $ - $ - $ 2,000 $ 2,448 $ 2,913 $ 3,396 $ 3,897 $ 4,416 $ 4,955 $ 5,514 $ 6,093 $ 6,693 $ 7,314 $ 7,460 $ 7,609
- Oper. Exp. $ - $ - $ 1,600 $ 1,958 $ 2,330 $ 2,717 $ 3,117 $ 3,533 $ 3,964 $ 4,411 $ 4,874 $ 5,354 $ 5,851 $ 5,968 $ 6,088
- Deprec'n $ - $ - $ 150 $ 165 $ 180 $ 251 $ 267 $ 283 $ 300 $ 317 $ 334 $ 352 $ 156 $ 141 $ 126
- Allocated & Incrm. G&A $ - $ - $ 83 $ 91 $ 100 $ 109 $ 119 $ 129 $ 140 $ 150 $ 162 $ 173 $ 186 $ 192 $ 199
- Advertising Exp. $ - $ - $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ 183 $ 187 $ 190 $ 194 $ 198 $ 202
EBIT $ - $ - $ 8 $ 71 $ 136 $ 150 $ 221 $ 295 $ 372 $ 453 $ 536 $ 623 $ 927 $ 961 $ 995
Taxes $ - $ - $ 3 $ 28 $ 55 $ 60 $ 88 $ 118 $ 149 $ 181 $ 215 $ 249 $ 371 $ 384 $ 398
EBIT(1-t) $ - $ - $ 5 $ 43 $ 82 $ 90 $ 133 $ 177 $ 223 $ 272 $ 322 $ 374 $ 556 $ 577 $ 597

+ Deprec'n $ - $ - $ 150 $ 165 $ 180 $ 251 $ 267 $ 283 $ 300 $ 317 $ 334 $ 352 $ 156 $ 141 $ 126
+ Fixed Allocated Exp (1-t) $ - $ - $ 35 $ 36 $ 38 $ 40 $ 42 $ 44 $ 47 $ 49 $ 51 $ 54 $ 57 $ 59 $ 62
- Cap Ex $ 1,000 $ 250 $ 250 $ 150 $ 153 $ 156 $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ - $ - $ -
- Opp. Cost of Dist'n System $ - $ - $ - $ - $ 552 $ - $ - $ - $ - $ - $ - $ (634) $ - $ - $ -
- Chg in WC $ - $ 280 $ 63 $ 65 $ 68 $ 70 $ 73 $ 75 $ 78 $ 81 $ 84 $ 87 $ 20 $ 21 $ -
+ Salvage Value $ 1,548
Cashflows to the firm $ (1,000) $ (250) $ (530) $ (23) $ 26 $ (475) $ 152 $ 207 $ 264 $ 323 $ 384 $ 447 $ 1,147 $ 748 $ 756 $ 2,333

Page 8
 Incremental Cash Flows: Finite Life

Worksheet for Working Capital, Capital Expenditures, Allocated Expenses, Advertising Expenses and Distribution System
Working Capital Worksheet
Inventory $ - $ - $ 160 $ 196 $ 233 $ 272 $ 312 $ 353 $ 396 $ 441 $ 487 $ 535 $ 585 $ 597 $ 609
Accounts Rec $ - $ - $ 200 $ 245 $ 291 $ 340 $ 390 $ 442 $ 496 $ 551 $ 609 $ 669 $ 731 $ 746 $ 761
- Acc Payable $ - $ - $ 80 $ 98 $ 117 $ 136 $ 156 $ 177 $ 198 $ 221 $ 244 $ 268 $ 293 $ 298 $ 304
Non-cash Working Capital $ - $ - $ 280 $ 343 $ 408 $ 475 $ 546 $ 618 $ 694 $ 772 $ 853 $ 937 $ 1,024 $ 1,044 $ 1,065
Chg in WC $ - $ 280 $ 63 $ 65 $ 68 $ 70 $ 73 $ 75 $ 78 $ 81 $ 84 $ 87 $ 20 $ 21

Capital Expenditure Worksheet

Investment $ 1,000 $ 250 $ 250
Capital Investment in new stores $ 150 $ 153 $ 156 $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ - $ -

Allocated Expenses Worksheet

Existing G&A $ 500 $ 525 $ 551 $ 579 $ 608 $ 638 $ 670 $ 704 $ 739 $ 776 $ 814 $ 855 $ 898 $ 943 $ 990 $ 1,039
Allocated to Division $ 58 $ 61 $ 64 $ 67 $ 70 $ 74 $ 78 $ 81 $ 86 $ 90 $ 94 $ 99 $ 104
New G&A $ 25 $ 31 $ 36 $ 42 $ 49 $ 55 $ 62 $ 69 $ 76 $ 84 $ 91 $ 93 $ 95

Adverstising Expense Worksheet

Without Furniture $ 1,000 $ 1,020 $ 1,040 $ 1,061 $ 1,082 $ 1,104 $ 1,126 $ 1,149 $ 1,172 $ 1,195 $ 1,219 $ 1,243 $ 1,268 $ 1,294 $ 1,319 $ 1,346
With Furniture $ 1,000 $ 1,020 $ 1,040 $ 1,220 $ 1,245 $ 1,270 $ 1,295 $ 1,321 $ 1,347 $ 1,374 $ 1,402 $ 1,430 $ 1,458 $ 1,488 $ 1,517 $ 1,548
Differential Cost $ - $ - $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ 183 $ 187 $ 190 $ 194 $ 198 $ 202

Distribution System Worksheet

Capacity used by Home 55.00% 57.75% 60.64% 63.67% 66.85% 70.20% 73.71% 77.39% 81.26% 85.32% 89.59% 94.07% 98.77% 103.71% 108.90% 114.34%
Capacity used by Home Furniture 20.00% 24.48% 29.13% 33.96% 38.97% 44.16% 49.55% 55.14% 60.93% 66.93% 73.14% 74.60% 76.09%
Expansion Investment $ 552 $ 634

Depreciation on Distribution Expansion

Depreciation on Expansion (Straight line; 10 year life) 55 55 55 55 55 55 55 55 55 55
Remaining Balance $ 497 $ 442 $ 386 $ 331 $ 276 $ 221 $ 166 $ 110 $ 55 $ -

Page 9
 Incremental Cash Flows: Finite Life

Time Weighted Return Computation

Cost of Capital = 10.13%

Incremental Cash Flows $ (1,000) $ (250) $ (530) $ (23) $ 26 $ (475) $ 152 $ 207 $ 264 $ 323 $ 384 $ 447 $ 1,147 $ 748 $ 756 $ 2,333
PV of Cash Flows $ (1,000) $ (227) $ (437) $ (17) $ 18 $ (293) $ 85 $ 105 $ 122 $ 135 $ 146 $ 155 $ 360 $ 213 $ 196 $ 548
Net Present Value $ 109

Internal Rate of Return = 10.70%

Side Costs and Benefits

Lost EBIT (1-t) on closed $ - $ (50) $ (50) $ (50) $ (50) $ (50) $ (50) $ (50) $ (50) $ (50) $ (50) $ - $ - $ - $ - $ -
Synergy Revenues $ - $ - $ - ### ### $ 104.04 $ 106.12 $ 108.24 $ 110.41 $ 112.62 $ 114.87 $ 117.17 $ 119.51 $ 121.90 $ 124.34 $ 126.82
Synergy Operating Inco $ - $ - $ - $ 14.19 $ 14.48 $ 14.77 $ 15.06 $ 15.36 $ 15.67 $ 15.98 $ 16.30 $ 16.63 $ 16.96 $ 17.30 $ 17.65 $ 18.00
Synergy Operating incom $ - $ - $ - $ 8.52 $ 8.69 $ 8.86 $ 9.04 $ 9.22 $ 9.40 $ 9.59 $ 9.78 $ 9.98 $ 10.18 $ 10.38 $ 10.59 $ 10.80
Operating Income net eff $ - $(50.00) $(50.00) $(41.48) $(41.31) $ (41.14) $ (40.96) $ (40.78) $ (40.60) $ (40.41) $ (40.22) $ 9.98 $ 10.18 $ 10.38 $ 10.59 $ 10.80
Present Value @ HD
Building Rtail WACC $ - $(46.39) $(43.04) $(33.13) $(30.61) $ (28.28) $ (26.13) $ (24.14) $ (22.29) $ (20.59) $ (19.01) $ 4.38 $ 4.14 $ 3.92 $ 3.71 $ 3.51
Value of Side Effects = $ (273.96)

Overall Project NPV = $ (164.87)

0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Aggregate
Beginning Book Value $0 $1,000 $1,250 $1,500 $1,780 $1,831 $1,872 $1,847 $1,813 $1,768 $1,712 $1,646 $1,569 $1,481 $1,412 $1,291
+ Capital Investments $1,000 $ 250 $ 250 $ 150 $ 153 $ 156 $ 159 $ 162 $ 166 $ 169 $ 172 $ 176 $ 179 $ - $ - $ -
- Depreciation $0 $ - $ - $ 150 $ 165 $ 180 $ 251 $ 267 $ 283 $ 300 $ 317 $ 334 $ 352 $ 156 $ 141 $ 126
+ Investment in Working $0 $ - $ - ### $ 62.72 $ 65.12 $ 67.58 $ 70.12 $ 72.74 $ 75.43 $ 78.20 $ 81.05 $ 83.98 $ 87.00 $ 20.48 $ 20.89
Ending Book Value $1,000 $1,250 $1,500 $1,780 $1,831 $1,872 $1,847 $1,813 $1,768 $1,712 $1,646 $1,569 $1,481 $1,412 $1,291 $1,186 $ 21,207
Average Book Value $500 $1,125 $1,375 $1,640 $1,805 $1,851 $1,859 $1,830 $1,790 $1,740 $1,679 $1,608 $1,525 $1,446 $1,351 $1,239 $21,364
EBIT(1-t) $ - $ - $ 4.76 $ 42.52 $ 81.89 $ 89.81 $ 132.57 $ 177.10 $ 223.46 $ 271.68 $ 321.84 $ 373.98 $ 556.20 $ 576.50 $ 597.12 $ 3,449.45
Return on Capital 0.29% 2.35% 4.42% 4.83% 7.24% 9.89% 12.84% 16.18% 20.02% 24.53% 38.46% 42.66% 48.21% 16.15%

EBIT(1-t) with synergy $ - $ - $ - $ 13.28 $ 51.20 $ 90.75 $ 98.85 $ 141.79 $ 186.51 $ 233.05 $ 281.47 $ 331.82 $ 384.15 $ 566.59 $ 587.09 $ 607.93 $ 3,574.47
Return on Capital with synergy 0.81% 2.84% 4.90% 5.32% 7.75% 10.42% 13.39% 16.76% 20.64% 25.19% 39.18% 43.44% 49.08% 18.44%

Page 10
 Depreciation on Invest
0 1 2 3 4 5 6
Old HD Stores $50 $50 $50 $50 $50
Initial Investment $150 $150 $150 $150
Stores: Yr 3 $15 $15 $15
Stores: Yr 4 $15 $15
Stores: Yr 5 $16
Stores: Yr 6
Stores: Yr 7
Stores: Yr 8
Stores: Yr 9
Stores: Yr 10
Stores: Yr 11
Stores: Yr 12
Distn System
Capital Maintenance $0 $0 $0 $15 $31 $46
Acctg Deprecn $50 $50 $200 $215 $230 $196
Incr Deprecn $0 $0 $150 $165 $180 $196

BV of Investment
0 1 2 3 4 5 6
Old HD Stores 250 $200 $150 $100 $50 $0
Initial Invest 1000 $1,250 $1,500 $1,350 $1,200 $1,050 $900
Stores: Yr 3 $150 $135 $120 $105
Stores: Yr 4 $153.00 $138 $122
Stores: Yr 5 $156.06 $140
Stores: Yr 6 $159.18
Stores: Yr 7
Stores: Yr 8
Stores: Yr 9
Stores: Yr 10
Stores: Yr 11
Stores: Yr 12
BV Cap Mtnc $ - $ - $ - $153.00 $306.00 $459.31 $669.51
BV - Infinite 1250 $1,450 $1,650 $1,753 $1,844 $1,923 $2,097
Depreciation on Investment
7 8 9 10 11 12 13 14

$150 $150 $150 $150 $150 $150

$15 $15 $15 $15 $15 $15 $15
$15 $15 $15 $15 $15 $15 $15 $15
$16 $16 $16 $16 $16 $16 $16 $16
$16 $16 $16 $16 $16 $16 $16 $16
$16 $16 $16 $16 $16 $16 $16
$17 $17 $17 $17 $17 $17
$17 $17 $17 $17 $17
$17 $17 $17 $17
$18 $18 $18
$18 $18
$55 $55 $55 $55 $55 $55 ($8) ($8)
$67 $87 $108 $127 $147 $166 $186 $183
$212 $228 $245 $262 $279 $296 $164 $149
$267 $283 $300 $317 $334 $352 $156 $141

BV of Investment
7 8 9 10 11 12 13 14

$750 $600 $450 $300 $150 $0

$90 $75 $60 $45 $30 $15 $0
$107 $92 $77 $61 $46 $31 $15 $0
$125 $109 $94 $78 $62 $47 $31 $16
$143 $127 $111 $96 $80 $64 $48 $32
$162.36 $146 $130 $114 $97 $81 $65 $49
$165.61 $149 $132 $116 $99 $83 $66
$168.92 $152 $135 $118 $101 $84
$172.30 $155 $138 $121 $103
$175.75 $158 $141 $123
$179.26 $161 $143
$ 874.93 $1,076.36 $1,274.55 $1,470.15 $1,663.76 $1,855.94 $1,829.50 $1,790.41
$2,253 $2,391 $2,514 $2,620 $2,711 $2,786 $2,595 $2,407
 15 Term Life

$16 $16
$16 $16
$16 $16
$17 $17
$17 $17
$17 $17
$18 $18
$18 $18
($8) ($8)
$179 $174
$134 $134
$126 $126

15

$0
$16
$32
$50
$68
$86
$105
$125
$1,739.62
$2,222
 Depreciation and Book Value

Depreciation on Investment
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Old HD Stores $50 $50 $50 $50 $50
Initial Investment $150 $150 $150 $150 $150 $150 $150 $150 $150 $150
Stores: Yr 3 $15 $15 $15 $15 $15 $15 $15 $15 $15 $15
Stores: Yr 4 $15 $15 $15 $15 $15 $15 $15 $15 $15 $15
Stores: Yr 5 $16 $16 $16 $16 $16 $16 $16 $16 $16 $16
Stores: Yr 6 $16 $16 $16 $16 $16 $16 $16 $16 $16
Stores: Yr 7 $16 $16 $16 $16 $16 $16 $16 $16
Stores: Yr 8 $17 $17 $17 $17 $17 $17 $17
Stores: Yr 9 $17 $17 $17 $17 $17 $17
Stores: Yr 10 $17 $17 $17 $17 $17
Stores: Yr 11 $18 $18 $18 $18
Stores: Yr 12 $18 $18 $18
Distn System $55 $55 $55 $55 $55 $55 $55 ($8) ($8) ($8)
Acctg Deprecn $50 $50 $200 $215 $230 $196 $212 $228 $245 $262 $279 $296 $164 $149 $134
Incr Deprecn $0 $0 $150 $165 $180 $251 $267 $283 $300 $317 $334 $352 $156 $141 $126

BV of Investment
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Old HD Stores 250 $200 $150 $100 $50 $0
Initial Invest 1000 $1,250 $1,500 $1,350 $1,200 $1,050 $900 $750 $600 $450 $300 $150 $0
Stores: Yr 3 $150 $135 $120 $105 $90 $75 $60 $45 $30 $15 $0
Stores: Yr 4 $153.00 $138 $122 $107 $92 $77 $61 $46 $31 $15 $0
Stores: Yr 5 $156.06 $140 $125 $109 $94 $78 $62 $47 $31 $16 $0
Stores: Yr 6 $159.18 $143 $127 $111 $96 $80 $64 $48 $32 $16
Stores: Yr 7 $162.36 $146 $130 $114 $97 $81 $65 $49 $32
Stores: Yr 8 $165.61 $149 $132 $116 $99 $83 $66 $50
Stores: Yr 9 $168.92 $152 $135 $118 $101 $84 $68
Stores: Yr 10 $172.30 $155 $138 $121 $103 $86
Stores: Yr 11 $175.75 $158 $141 $123 $105
Stores: Yr 12 $179.26 $161 $143 $125
Book Value 1250 $1,450.00 $1,650.00 $1,600.00 $1,538.00 $1,463.76 $1,427.04 $1,377.58 $1,315.13 $1,239.43 $1,150.22 $1,047.22 $930.17 $765.92 $616.68 $482.73

Page 6
 Accounting Returns

Year 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Number of Stor 0 0 0 50 60 70 80 90 100 110 120 130 140 150 150 150
Revenues per S $ - $ - $ - $ 40.00 $ 40.80 $ 41.62 $ 42.45 $ 43.30 $ 44.16 $ 45.05 $ 45.95 $ 46.87 $ 47.80 $ 48.76 $ 49.73 $ 50.73

Revenues $ - $ - $ - $ 2,000.00 $ 2,448.00 $ 2,913.12 $ 3,395.87 $ 3,896.76 $ 4,416.32 $ 4,955.11 $ 5,513.69 $ 6,092.63 $ 6,692.52 $ 7,313.97 $ 7,460.25 $ 7,609.45
- Oper. Exp. $ - $ - $ - $ 1,600.00 $ 1,958.40 $ 2,330.50 $ 2,716.69 $ 3,117.40 $ 3,533.06 $ 3,964.09 $ 4,410.95 $ 4,874.10 $ 5,354.01 $ 5,851.17 $ 5,968.20 $ 6,087.56
- Deprec'n $ - $50.00 $50.00 $200.00 $215.00 $230.30 $195.91 $211.82 $228.06 $244.62 $261.51 $278.74 $296.32 $164.25 $149.25 $133.95
- Allocated & $ - $ - $ - $ 82.88 $ 91.38 $ 100.23 $ 109.45 $ 119.06 $ 129.08 $ 139.51 $ 150.37 $ 161.67 $ 173.45 $ 185.71 $ 192.25 $ 199.06
- Advertising E $ - $ - $ - $ 159.18 $ 162.36 $ 165.61 $ 168.92 $ 172.30 $ 175.75 $ 179.26 $ 182.85 $ 186.51 $ 190.24 $ 194.04 $ 197.92 $ 201.88
EBIT $ - $ (50.00) $ (50.00) $ (42.06) $ 20.86 $ 86.48 $ 204.89 $ 276.16 $ 350.38 $ 427.63 $ 508.01 $ 591.60 $ 678.50 $ 918.80 $ 952.63 $ 987.00
Taxes $ - $ (20.00) $ (20.00) $ (16.82) $ 8.34 $ 34.59 $ 81.96 $ 110.46 $ 140.15 $ 171.05 $ 203.20 $ 236.64 $ 271.40 $ 367.52 $ 381.05 $ 394.80
EBIT(1-t) $ - $ (30.00) $ (30.00) $ (25.24) $ 12.52 $ 51.89 $ 122.93 $ 165.70 $ 210.23 $ 256.58 $ 304.81 $ 354.96 $ 407.10 $ 551.28 $ 571.58 $ 592.20

Capital Invested
Stores $ 1,250 $ 1,450 $ 1,650 $ 1,600 $ 1,538 $ 1,464 $ 1,427 $ 1,378 $ 1,315 $ 1,239 $ 1,150 $ 1,047 $ 930 $ 766 $ 617 $ 483
Distribution System $ 552 $ 497 $ 442 $ 386 $ 331 $ 276 $ 221 $ 166 $ 110 $ 55 $ -
Total Capital $ 1,250 $ 1,450 $ 1,650 $ 1,600 $ 1,538 $ 2,016 $ 1,924 $ 1,819 $ 1,702 $ 1,571 $ 1,426 $ 1,268 $ 1,096 $ 876 $ 672 $ 483
Working Capital $ - $ - $ - $ 280 $ 343 $ 408 $ 475 $ 546 $ 618 $ 694 $ 772 $ 853 $ 937 $ 1,024 $ 1,044 $ 1,065
Augmented Tota $ 1,250 $ 1,450 $ 1,650 $ 1,880 $ 1,881 $ 2,424 $ 2,399 $ 2,365 $ 2,320 $ 2,264 $ 2,198 $ 2,121 $ 2,033 $ 1,900 $ 1,716 $ 1,548
Average Capital $ 1,350 $ 1,550 $ 1,625 $ 1,569 $ 1,777 $ 1,970 $ 1,872 $ 1,760 $ 1,636 $ 1,498 $ 1,347 $ 1,182 $ 986 $ 774 $ 577
Average Augmented Capital $ 1,350 $ 1,550 $ 1,765 $ 1,880 $ 2,152 $ 2,411 $ 2,382 $ 2,342 $ 2,292 $ 2,231 $ 2,160 $ 2,077 $ 1,967 $ 1,808 $ 1,632

Return on Capital -2.22% -1.94% -1.55% 0.80% 2.92% 6.24% 8.85% 11.94% 15.68% 20.34% 26.35% 34.44% 55.91% 73.84% 102.58% 23.61%
Return on Augmented Capital -2.22% -1.94% -1.43% 0.67% 2.41% 5.10% 6.96% 8.98% 11.19% 13.66% 16.44% 19.60% 28.03% 31.61% 36.28% 11.69%

Without WC With WC
Average EBIT (1 $ 234.44 $ 234.44
Average Capital $ 1,432 $ 2,000
Return on Capit 16.38% 11.72%

Page 5
 Comparable firms

Company Name Beta Total Debt Market Cap Cash D/E

Mohawk Industries, Inc. 1.18 $2,511.50 $16,690.90 $121.70 15.05%
Leggett & Platt, 1.10 $959.80 $6,552.10 $281.90 14.65%
Incorporated
Tempur Sealy 1.39 $1,888.10 $2,529.10 $65.70 74.66%
International, Inc.
La-Z-Boy Incorporated 1.34 $0.59 $1,386.40 $126.00 0.04%
Ethan Allen Interiors Inc. 1.28 $40.30 $797.50 $57.10 5.05%
Flexsteel Industries, Inc. 1.82 $0.00 $412.70 $40.80 0.00%
Hooker Furniture 0.86 $49.00 $383.60 $43.10 12.77%
Corporation
Bassett Furniture 1.23 $7.11 $293.80 $58.30 2.42%
Industries, Inc.
The Dixie Group, Inc. 1.18 $122.10 $54.10 $0.09 ###
Nova Lifestyle, Inc. 0.99 $8.03 $48.20 $5.84 16.66%
Live Ventures 1.49 $75.50 $33.10 $1.59 ###
Incorporated
Stanley Furniture 1.32 $0.00 $11.90 $4.21 0.00%
Company, Inc
Average 1.27 ###
Median 1.26 ###
Unlevered beta = 1.1596 Using median values
Unlevered beta corrected for cash = 1.2598

Page 6
 Comparable firms

Cash/Val Revenue Operating

ue s Income
0.63% ### $1,279.90
3.75% ### $482.50

1.49% ### $404.30

9.08% ### $122.60

6.82% $784.20 $77.20
9.89% $478.70 $34.10
9.96% $463.90 $31.00

19.37% $432.00 $28.20

0.05% $402.60 $3.71

10.39% $114.80 $1.06
1.46% $91.00 $5.30
35.38% $44.60 -$5.57

9.02%
7.95%

Page 7
 ERP Computation

% of
Region Revenu
es ERP
United States 90 5.69%
Western
20
Europe 6.81%
Asia 30 7.12%
Latin America 10 ###
Total 150 6.43%

Page 8