1. TARGET CORPORATION
By Xianqi Shen
Abstract
Briefly introducecurrent situation and its predictablefuture to Target Corp’s investors.

2. Executive Summary
The purpose of this report is to briefly introduce Target Corporation’s current situation
and its predictable future to its investors. Firstly, the report discusses about Target
Corporation’s current situation. Secondly, the report analysises the mistake in the
previous two programs and correct them. Finally, the report gives some recommendation
of stock, capital structure and shareholders distribution.
Over-view
Target Corporation operates general merchandise stores in the United States. The
company offers household essentials, including pharmacy, beauty, personal care, baby
care, cleaning, and paper products; hardlines comprising music, movies, books, computer
software, sporting goods, and toys, as well as electronics that consist of video game
hardware and software; apparel and accessories. It also provides food and pet supplies,
and home furnishings and décor. In addition, it offers in-store amenities. As of September
25, 2013, it had 1,870 stores, including 1,788 stores in the United States and 82 stores in
Canada. The company distributes its merchandise through a network of distribution
centers, as well as third parties and direct shipping from vendors. Further, it provides
general merchandise through its Website, Target.com; and branded proprietary Target
Debit Card. Target Corporation was founded in 1902 and is headquartered in
Minneapolis, Minnesota.
Explanations
I make some assumptions in income statements and balance sheet in project 1. I assumed
to use the log regression growth rate to calculate the free cash flow, which is 3.88% in
2013, 3.97% in 2014, 4.00% in 2015, and 4.01% in both 2016 and 2017. In the income
statements, total revenues is assumed to use the log regression sales growth rate because
the industry is almost the same as previous 4 years and Target doesn’t change very much
in 2013. Also, Target gets some new members on board, which will definitely increase
the revenues. Costs except depreciation is assumed to use the rate of costs except
depreciation to total revenues in last year. Depreciation and amortization is assumed to
use the rate of depreciation and amortization to property and equipment, net in last year.

3. Net interest expense is assumed to use the average of beginning and ending this year debt.
Because there is non-linear relationship between earnings before income taxes and
provision for income taxes, I chose tax rate (34.93%) of 2012 as tax rate in next five
years. Dividends to common stock is assumed to use the rate of dividends to common
stock to net earnings in last year. Shares of common stock is assumed to be the same as
last year because I payoff long term bond in AFN caculation, which has nothing to do
with shares of common stock.
In the balance sheet, I assumed to use the growth rate to calculate cash and cash
equivalents, credit card receivables, inventory, property and equipment, accounts payable,
and accrued and other current liabilities. The other current assets, other noncurrent assets,
debt and borrowings, additional paid-in capital, common stock, accumulated other
comprehensive loss are the same as last year. The long-term debt is predicted by adding
the AFN adjustment. Retained earnings are calculated as the retained earnings plus
addition to retained earnings.
In project 1, I didn’t discuss why the firm was going to issue bonds. The reason is that the
stock price became really weird when I use AFN adjustment to balance the assets and the
liabilities and shareholders' investment. Thus, I can only let the firm to issue bonds
instead of stocks.
Then, I need to calculate the WACC of Target Corporation. In project 2, the firm doesn’t
have preferred stock. The tax rate is based on the 2012 income statement. I use 20 years
to compute Beta because I think more data can get more accurate outcome. What’s more,
Rd, Rf and stock price are all in Nov. 7.
However, in project 2, I didn’t state out that Target Corporation doesn’t have preferred
stock. Also, the β was not normal to be 1.00, which shows in my calculation. Finally, I
didn’t put any assumptions in project2. Thus, it seems like the project is not that accurate.
Analysis of the Valuation Estimate
Because Target Corporation is very mature and its sales are largely driven by basic
household products, I choose 1% as its growth rate.

4. Year 2013 2014 2015 2016 2017 WACC
FCF(in millions) $2,307.11 $2,365.62 $2,450.40 $2,545.00 $2645.58 5.07%
Firstly, I calculate the Vop. Vop =
FCF2013/(1+WACC2013)+FCF2014/(1+WACC2014)^2+FCF2015/(1+WACC2015)^3+
FCF2016/(1+WACC2016)^4+ FCF2017/(1+WACC2017)^5+Present value of Terminal
Value = 2,307.11/(1+5.07%)+2,365.62/(1+5.07%)^2+2,450.40/(1+5.07%)^3
+2,545.00/(1+5.07%)^4+2,645.58/(1+5.07%)^5+ [2,645.58*(1+1%)/ (5.07% -
1%)]/[1+5.07%]^5=61,892.25 millions. Secondly, I got book value of any non-operating
(financial) assets equals to zero to get the total intrinsic value. Total intrinsic value = Vop
+ book value of any non-operating (financial) assets=61,892.25+0= 61,892.25 millions.
Thirdly, as the book value of debt equals to 14,654 and the book value of preferred stock
equals to 0, intrinsic value of the common stock= Total intrinsic value- Book value of
debt= 47,238.25 millions. Finally, because the current shares outstanding equals to
641,387,165, intrinsic value per share= Intrinsic value of the common stock/ Current
shares outstanding=$73.65 per share. $73.65 is a little higher than $65.70, which is the
current stock price of Target Corporation.
Corrected Analysis
As I discussed above, I have some mistakes in program 1 & 2. $73.65 may be not the
right number of intrinsic value of the common stock. Thus, I make some corrections
according these mistakes in the following paragraph.
Although I use the slope function to calculate Beta, the Beta seems so weird that it is
almost 1.00. So I tried to use the Beta of Target Corporation from Yahoo Finance, which
is 0.63.
Year 2013 2014 2015 2016 2017 WACC
FCF(in millions) $2,307.11 $2,365.62 $2,450.40 $2,545.00 $2645.58 4.22%
I got the new rs as 2.64%+0.63*3.26%=4.69%. 2.64% represents Rf. 3.26% represents
MRP. Then WACC = wd *rd*(1-T) +wps*rps+ws*rs=

5. 30%*4.74%*75.07%+0%*0%+70%*4.69%=4.22%. Finally, I adapted the new WACC
to the Vop equation, Vop came out as $99.32 per share, which is $25.67 higher than
$73.65.
From the correction, I learned that I need to use different ways to calculate the variables.
In this way, I can get the most accurate data to use. With more accurate data, it’s easier to
predict the future of Target Corporation.
Conclusion
In my opinion, the investors should buy the stock of Target Corporation. Firstly, the
intrinsic value per share of the firm is higher than the current stock price in my projects.
The market value of the firm has been underestimated by the current market. Thus, buy
the stock of the firm means that the investors get more intrinsic value than the book value.
Secondly, from the graph below, it’s quite clear that the stock price is going up in
November. Also, Target Corporation selected some new members on board. They will
help to increase the stock price of the firm.
Resource: Yahoo Finance
As for the capital structure, the beta of Target Corporation is 0.63 after correction. I use
the Hamada equation to calculate the bu= b/[1 + (1 – T)(D / E)]=0.63/[1+(1-
34.93%)(17,648.00/30,515.00)=0.49. Then I try to find the optimal capital structure. I
found out that WACC is the lowest when ws equals 80%. Thus, Target Corporation needs

6. to payback more debt in order to achieve the optimal capital structure because the lowest
WACC means the optimal capital structure.
Target Corporation should maintain its current distribution. The growth rate of dividends
to common stock is reasonable: 22% in 2010, 23% in 2011 and 16% in 2012. Thus, there
is no need to change the distribution policy.
(in millions) 2013 2014 2015 2016 2017
Dividends to common
stock
$909.7 $955.31 $1003.21 $1053.38 $1105.91
FCF $2307.11 $2365.62 $2450.4 $2545 $2645.58
From the chart above, my FCF estimation is obviously larger than dividends to common
stock. There is no doubt that FCF can afford dividends to common stock.
Because only small difference between the intrinsic value of common stock and the
current value of common stock, there is no need to make a stock split or reverse stock
split for the next five years. The difference of $25.67 can be fixed by adjusting the market.