ATC 10-8 Research Assignment: Analyzing Debt Financing at Home Depot

Accounting for Long-Term Debt

ATC 10-8 Research Assignment: Analyzing Debt Financing at Home Depot

From 2013 through 2016, interest rates in the United States remained at historically low levels. The country was slowly recovering from the 2008–2009 recession, and the Federal Reserve maintained low interest rates to support this recovery. Due to these favorable conditions, many companies opted to increase their long-term debt financing while reducing their reliance on equity financing. Home Depot, Inc., a leading building supplies retailer, was among these companies that chose to raise debt in order to capitalize on low borrowing costs.

For this assignment, you will analyze Home Depot's financial data using the company's 2016 Form 10-K for 2015 and 2016 data, and its 2014 Form 10-K for 2013 and 2014 data. Home Depot’s fiscal year ends in late January or early February, so the fiscal year ending on January 29, 2017, corresponds to the company’s 2016 fiscal year. Other fiscal years are similarly classified, meaning 2013 refers to the year ending February 2, 2014. To retrieve the necessary Form 10-K reports, you can either use the EDGAR system (following the steps in Appendix A) or access them directly from the company’s website.

Required:

a. For each year (2013–2016), calculate the following financial ratios:

• Debt to Assets Ratio
• Return on Assets (ROA)
• Return on Equity (ROE)

b. List the company’s interest expense for each year from 2013 through 2016.

c. Write a brief memorandum discussing the effects of Home Depot’s strategy to increase debt financing from 2013 to 2016. In your analysis, be sure to address how this decision impacted the company’s financial performance and risk profile during this period.