Costco Financial statement analysis, forecasting and discounted cash flows
ASSIGNMENT
Case Study "Costco Wholesale Corporation" consists of two parts - "Costco Wholesale Corporation Financial Statement Analysis" (Part A) and "Costco Wholesale Corporation Financial Statement Analysis" (Part B).
Part A. Ratio Analysis
In this part, you will help an individual shareholder in Costco, Margarita Torres, to evaluate the operational performance of the company that she has invested over the last five years. You will answer the following questions, by using the provided case, in particular common-size financial statements, sustainable growth model, and benchmarking ratios used for the retail industry:
Has Costco become more or less efficient over her investment period?
You are expected to analyse rather than calculate each provided ratio, allowing for a deeper discussion for interpreting the information. This analysis will help you to evaluate the health of Costco. In interpreting the ratios, you will be expected to qualitative information about the business, its strategy and operational performance.
Part B. Cash-Flow Analysis, Forecasting, Discounted Cash-Flow Valuation
In this part, you will help Margarita Torres to evaluate the future performance of Costco. She has evaluated her investment in two steps: she forecasted company's performance several years into the future, and she has built a discounted cash-flow model.
- How appropriate are the five factors that Torres chooses to determine the future performance of Costco?
- What other relevant factors might be included in a forecast of the business? To what extent are they covered in the factors above?
- Review Torres's assumptions in Exhibit 2. Which assumptions would represent a change from Costco's historical performance? Do you feel her assumptions are appropriate, and if not, which ones would you change?
- Review Torres' forecasted income statement and common-size income statement. Do you feel these are achievable results for Costco?
- Review Torres' forecast in Exhibit 5. How does the rate of expansion (i.e. new store openings) affect the balance sheet and free cash-flow? Do you agree with her terminal value assumptions?
- How does Costco's use of the equity method to account for its ownership of the 20 warehouses in Mexico impact the income statement forecast, the balance sheet forecast, and the discounted cash-flow model?
- Review Torres' quantitative checks. Compare her projections with management's forward-looking comments. Based on these and other constraints (e.g. the effect of competition, historical performance, etc.) do you feel that her forecast is realistic, pessimistic or optimistic?
- Would you recommend that Torres buy, hold or sell her Costco's shares at the price of $35?
Word count (2700)
Attachment:- Case Study.rar