Business Accounting Memo To: Supervisor, Target Corporation From: Accountant Date: 18 September 2010 Sub: Analysis of Additional Capital Sources for Target Corporation This memo is prepared to evaluate different possibilities for Target Corporation that is presently seeking out additional capital to match its business requirements. Preliminary investigation has suggested that the company can acquire this capital from two different sources. However, access to these sources would require compilation and presentation of suitable financial information that the providers of capital may be interested in. This memo has compiled such information which can be used for making a case for the company.
Company Profile Target Corporation is one of the largest retailing companies with its head office based in Minnesota and it has been in operations since 1908 when it came into existence under the name of Dayton Dry Goods Company. Back in 1962 first Target store was open and the company changed its name to Target in 2000 from its previous one. Investor’s Perspective Target Corporation can acquire capital from Company #1 that plans to invest in the target company’s stocks. This implies that it will acquire some part of ownership in the company by purchasing Target’s stock at a price to be determined between both potential parties.
The following table provides information that may be useful for Company#1 in making its decision. 2009 2008 Change % P/E 14.47 (31 Dec 09) 11.69 (31 Dec 08) 23.78% EPS $3.31 $2.87 15.33% Dividend Payout Ratio 19.94% 21.00% -5.05% Book Value per Share 59.22 57.25 3.44% Stock Price 47.82 (31 Dec 09) 33.56 (31 Dec 08) 42.49% Net Cash Flow from Operating Activities 5,881 4,430 32.75% Profit for the Year 2,488 2,214 12.38% Shareholders’ Equity 15,347 13,712 11.92% Retained Earnings 12,947 11,443 13.14% Table 1: Key Performance Measures I Source: Target Corporation Annual Report 2009 (Target 2009) & Yahoo! (2010) Table 1 suggests that the company’s overall position over the last year has improved significantly.
Its P/E ratio has improved drastically and it is presently trading at a higher level that could attract more investment in its stocks by the market as earnings expectations improve. This is also reflected by an increase in the stock price over the last 12 months. When BV compared to the stock price it could be suggested that the company’s stock is still trading lower than its BV and there could an increase in the stock price led by this gap. Financial measures including cash flow from operating activities increased by 32.75%, profit for the year by 12.38% shareholders’ Equity by 11.92% and retained Earnings by 13.14% over the last one year.
These improvements in the financial performances could therefore suggest that the company has overcome the difficulties faced by the company in the start of the recessionary period and as a result of management decisions regarding improvements in the supply chain has allowed the company to post a stronger position despite of the tougher retailing climate and competition. From this evaluation it is clear that investment in the company’s stock could be a viable proposition for the acquiring company as short term gains are expected in Target’s stock value.
Lenders Perspective Company #2 has come forward with a proposition to provide long term loan facility to Target Corporation and it will charge a predetermined interest rate on the loan amount over the loan term. The following financial information could be considered useful for this company to base its decision: 2009 2008 Change % Current Ratio 1.63 1.66 -1.81% Inventory Days 59.47 55.42 7.31% Long Term Debt to Total Assets 40.10% 45.08% -11.05% Free Cash Flow 2,402 -731 428.59% Interest Cover Ratio 5.83 5.08 14.76% Long Term Liabilities 15,118 17,490 -13.56% Profit for the Year 2,488 2,214 12.38% Net Cash from Financing Activities -2,842 -1,643 -72.98% Table 2: Key Performance Indicators II Source: Target Corporation Annual Report (2009) The above table suggests that the current ratio of the company has weakened however it remains above value of 1 that is a positive sign of the company’s ability to meet its short term liabilities.
The company has improved its supply chain through strategic setup with third parties and it has resulted in lower inventory period. Long term debt to total assets has declined by 11.05% as the company has pulled back on its financing activities and increased repayment which could also be seen from the reduction in the net cash flow from financing activities.
The company’s free cash flow position has improved significantly by 428.59% that could be viewed as highly positive sign for the company. The company is able to generate from its operations profit that is 5.83 times its interest payments as compared to 5.08 in 2008. Moreover, the company’s net profit has increased by 12.38% over the last year. The overall borrowing position of the company is therefore positive and further lending can be considered as a viable proposition.
References Target Corporation. (2009). Target Corporation Annual Report 2009. Minnesota: Target Corporation. Yahoo! , (2010). Target Corporation Common Stock. Retrieved on 19 September 2010 from http: //finance. yahoo. com/q? s=TGT.