Lowe’s Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,700 stores

Lowe’s Companies Inc., a major competitor of The Home Depot in the home improvement business, operates over 1,700 stores. Lowe’s recently reported the following balance sheet data (in millions):

                                 Year 2     Year 1
Total assets            $33,699    $33,005
Total liabilities        15,587     13,936

a. Determine the total stockholders’ equity as of at the end of Years 2 and 1.

b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.

c. What conclusions regarding the risk to the creditors can you draw from (b)?

d. Using the balance sheet data for The Home Depot in Exercise 1-26, how does the ratio of liabilities to stockholders’ equity of Lowe’s compare to that of The Home Depot?

Answer:
a.
Year 2:  $18,112  ($33,699 – $15,587)
Year 1:  $19,069  ($33,005 – $13,936)

b.
Year 2:  0.86  ($15,587 ÷ $18,112)
Year 1:  0.73  ($13,936 ÷ $19,069)

c.
The risk for creditors has increased from 0.73 in Year 1 to 0.86 in Year 2. In both years, creditors have less at stake in Lowe’s than do stockholders, since the ratio is less than 1.

d.
Lowe’s ratio of liabilities to stockholders’ equity is less than 1. In comparison, The Home Depot’s ratio of liabilities to stockholders’ equity is greater than 1 for Year 2 and Year 1. Thus, the creditors of The Home Depot are more at risk than are the creditors of Lowe’s.

The Home Depot, Inc., is the world’s largest home improvement retailer and one of the largest retailers in the United States

The Home Depot, Inc., is the world’s largest home improvement retailer and one of the largest retailers in the United States based on net sales volume. The Home Depot operates over 2,200 Home Depot® stores that sell a wide assortment of building materials and home improvement and lawn and garden products.
The Home Depot recently reported the following balance sheet data (in millions):

                                                Year 2          Year 1
Total assets                          $40,125         $40,877
Total stockholders’ equity     18,889          19,393

a. Determine the total liabilities at the end of Years 2 and 1.

b. Determine the ratio of liabilities to stockholders’ equity for Year 2 and Year 1. Round to two decimal places.

c. What conclusions regarding the margin of protection to the creditors can you draw from (b)?

Answer:
a.
Year 2:  $21,236  ($40,125 – $18,889)
Year 1:  $21,484  ($40,877 – $19,393)

b.
Year 2:  1.12  ($21,236 ÷ $18,889)
Year 1:  1.11  ($21,484 ÷ $19,393)

c.
The ratio of liabilities to stockholders’ equity increased from 1.11 to 1.12 indicating a slight increase in risk for creditors from Year 1 to Year 2.