Target’s balancesheet debt of$9,538 million was
adjusted to include the present value of operating
leases:
- Based on theadjusted operating income of $3,695
millionandtheadjustedbookvalueofcapitalatthe
endof2003,wecomputedareturnoncapitalforthe
firm of 9.63%. In 2004, Target had capital
expenditures of $3,308million and depreciation of
$1,333 million, and the normalized increase in
noncash working capital was $407 million.
3 The resulting reinvestment rate is computed here:
- If weassume that Target canmaintain its existing
returnoncapitalandreinvestmentrateforthenext
fiveyears,theexpectedgrowthinoperatingincome
is 9.99%.
- Tocomputethecostofcapitalforthenextfiveyears,
weassumethatTarget’sbetais1.1,leadingtoacost
ofequityof8.9%(witharisk-freerateof4.5%anda
risk premium of 4%) and a cost of capital of 7.91%.
