Costco Case Study Solution

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Register to read the introduction… The management should define the ROE & ROA targets to foresee its effectiveness in future performance.

* Industry specific factors: The forecast lacks a common analysis forecast that will determine or define whether the analysis is too aggressive or conservative for example. Having a general idea of the effect of the competitors’ actions/plans will help in defining the overall expectations.

* Few economic indicators that affects the overall results of Costco. An economic forecast of the overall performance of the US/internationally will contribute to define how much of the pre-tax income it can keep. Additionally the economic forecast will define inflation that will affect its overall revenues, however at a lesser extent.

The considered factors of the analysis are appropriate; however they cannot complete a constructive conclusion on an investment unless the ROE/ROA is considered as well as the aforementioned additions.

Assumptions
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Moreover, by looking to the free cash flow we can notice a deficit on 2002 which we believe that it consider to be normal forecast specially for a company that find it expansion internally (using returned earing) however this number started to increase from 2003 with 192 MM all through 2010 where Margarita forecast to be 11,744 MM, as a consequence earning per share was increasing as will reached until 3.30 on 2010. The terminal value information shows that margarita assumed growth at 5% since she was not sure whether free cash would increase at the same rate as US GDP ( COSTCO A (Exhibition 1) was 5.9%) , as she’s being more conservative, Moreover, Margarita use discount rate of 8% which is slightly higher than the average historical yield on 30- year U.S. Treasuries, knowing the fact the that Costco operating in a considerably low risk industry this estimation might be fine, however, we think that Margarita should considered the WAAC for COSTCO as more accurate proxy.

Quantitative check
A quantitative check was applied on the forecast of the 2001-2010 and its historical data. We come to conclude that Margarita was conservative in her forecast in comparison with management; we came to a conclusion
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In general whether to recommend that Torres buy, hold, or sell her Costco shares at the price of $35 depend on Torres risk appetite, more information to be provide as well as what we already mentioned in Costco A (if she’s willing to hold the shares now for potential future returned) , Furthermore Costco B provide more detailed information regarding Costco management future growth ( internal expansion more warehouses, increase sale per store and so on) by linking this with the result of the estimated analysis that have been done (increase in earing P/S, FCF to equity holder) the decision of buying more number of share now at $35 and hold or resell in the next couple years when the price get even more high would probably result on getting positive

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