Valuation and Analysis of Dollar General as of June 1, 2007

Ravi Patel
Thai Tran
Jackee Otieno
Nathan Johnson
Lauren Kirkland

Ravi.D.Patel@ttu.edu
T.Tran@ttu.edu
Jaq008@hotmail.com
Njjohnson.johnson@ttu.edu
Lauren.Kirkland@ttu.edu

Table of Contents
Executive Summary1
Overview of Dollar General6
Five Forces Model................................................9

Rivalry among Existing Firms................................9

Industry Growth.10
Concentration..10
Differentiation and Switching costs13
Scale Economies and Fixed/Variable Costs..13
Excess Capacity and Exit Barriers14

Threat of New Entrants..15

Economies of Scale.15
Channels of Distribution and Relationships..16
Legal Barriers17

Threat of Substitute products.17

Buyers willingness to switch17

Bargaining Power..18
Bargaining Power of the Customer...............................18
Switching Cost.18
Product Cost and Quality..19
Number of Buyers..19
Volume per Buyer..19

Bargaining Power of the Suppliers...20

Switching Cost...............................................20
Product Cost and Quality..20

Number of Suppliers....20

Value Chain Analysis...21

Efficient Production22
Simpler Product Design.22
Lower Input Costs....22
Low-cost Distribution...22
Minimal Brand Image Cost..23
Tight Cost Control..23

Firm Competitive Advantage Analysis....23

Efficient Production..24
Simpler Product Design.24
Lower Input Costs....24
Low-cost Distribution25
Minimal Brand Image Cost..25
Tight Cost Control..25
Conclusion...26

Accounting Analysis.......27
Key Accounting Policies.28
Degrees of accounting flexibility..30
Accounting Strategy...32
Quality of Disclosure..34
Identify Potential Red Flags...44
Undo Accounting Distortions.45

Financial Analysis.48
Trend and Cross Sectional Analysis48
Financial Ratio Analysis.49

Liquidity Ratios..49
Current Ratio...............................................50
Acid Test..50
Quick Asset Ratio.52
Inventory Turnover...53

Profitability Ratios...57
Gross Profit Margin....57
Operating Profit Margin...58
Net Profit Margin....59
Asset Turnover.60
Return on Assets.61
Return on Equity.62

Capital Structure Ratios..63

Debt to Equity..64
Times Interest Earned.65
Debt Service Margin.66

IGR/SGR Ratios67
Forecasting Financial Statements..70
Income Statement....70
Balance Sheet.72
Statement of Cash Flows..75

Cost of Capital Estimation.76

WACC estimation....78

Valuation analysis.79
Method of comparables80

Intrinsic Value Models.85

Discounted Dividends Model.85
Free Cash Flow.87

Residual Income..88
Long Run Residual Income...90
Abnormal Earnings Growth...91

APPENDIX.92

Executive Summary
Investment Recommendation: Overvalued, Sell 6-1-07
DG----NYSE (6/1/07)
$21.63
52 Week Range
$12.10-$21.85
Revenue (2/2/07)
$9,169,822
Market Capitalization
$6.86 Bill
Shares Outstanding
314.88 Mill
3-Month Avg. Daily Trading Volume:
Institutional Ownership
66%
Book Value per Share
$5.706
ROE:
20%
ROA:
12%

EPS Forecast
2008 2009 2010
.44
.46
.48

Cost of Capital Est.

3-Month
6-Month
2-Year
5-Year
10-Year

Valuation Estimates:
Actual Price (6/1/07): $21.63
Trailing P/E
$9.57
Forward P/E
$7.80
PEG
$2.92
P/B
$54.00
P/EBITDA
$28.24
P/FCF
$123.39
EV/EBITDA
$3.54

R2 Beta Ke
.19 1.19
.19 1.19
.19 1.19
.19 1.19
.18 1.18

Ke
Kd
WACC
Altman Z-Score
2003 2004 2005
7.48
7.88
7.74

12.09%
5.19%
10.99%
2006
6.43

Revised Z-Score 2007: 2.847

2007
7.33

Ratio comp.
Trailing P/E
Forward P/E
PEG
P/B

DG
9.53
7.62
.065
11.8

Intrinsic Valuations
Discounted Dividend
Free Cash
Residual Income
LR ROE
AEG

2011
.50

2012
.55

DLTR
22.19
17.78
1.27
3.87

FDO
22.75
18.98
1.61
3.95

Actual
$18.40
$29.71
$3.22
$7.21
$8.79

Recommendation: Sell-Overvalued
Industry Analysis
Dollar General was founded in Scottsville, Kentucky in 1939 and was
originally called J.L. Turner and Son Wholesale, then Turners Department Store,
and then in 1955 it was converted to Dollar General and did not sell any item
over $1. Dollar General was the originator of the dollar store concept and in 1968
it became a publicly traded company. Dollar General is a Fortune 500
company and the leader in the dollar store segment, with more than 8,000
stores and $9.2 billion in fiscal 2006 sales (www.dollargeneral.com).
Dollar General is in the discount retail store industry and focuses on cost
leadership. Its direct competitors are Family Dollar Stores, Freds Inc., and Dollar
Tree. In this industry, maintaining low costs are crucial to generating profits,
since the merchandise is already being sold at a discount and there is such high
competition between companies. The competition is high due to the threat of
substitute products: the products being sold are extremely similar, if not identical
and pose no switching costs to customers.

Accounting Analysis
A major part of analyzing and valuing a firm is analyzing its methods of
accounting. The information needed to do this can be found in the companys
annual 10-K report. First the key accounting policies are analyzed to ensure that
they correspond with the key success factors as defined by the five forces model.
Then the degree of flexibility allowed by GAAP is determined, as well as the
actual accounting strategy used by the firm. The quality of disclosure is how
transparent the companys reports are and how believable their numbers are and
is determined though screening ratios. These ratios alert us of any red flags in
their accounting, and finally any distortions found are corrected to show the
company more accurately.
After our analysis, the only area in which Dollar General uses flexibility is
in the reporting of leases, which is allowed by GAAP, but greatly alters their
financial statements. While the footnotes were very clear in disclosing
information, the consolidation of the financial statements makes it difficult to
actually see what they are disclosing. After computing all of the revenue and
expense manipulation ratios we did not find any red flags so the only distortion
to undo was the reporting of the leases.

Ratio Analysis, Forecast Financials, & Cost of Capital

Estimation
Ratio analysis is done to evaluate a company and to find out how it ranks
with its competitors. There are three sets of ratios used in this part of the
analysis; liquidity ratios, profitability ratios, and capital structure ratios. All the
information needed to compute these can be found in a companys financial
statements. In our analysis of the past five years, Dollar General has performed
about average with the industry and in a few cases has out-performed the
industry. Once these ratios have been calculated they can be used to forecast
the companys future performance. By using the CAPM model, a Beta for the
company can be estimated; then using the estimated Beta, the companies
estimated cost of equity can be determined through regression analysis. Finally
the estimated cost of equity can be computed by using the WACC formula.

Valuations
The main focus for valuation models are to show whether the companies
estimated value is worth what the market implies. To derive such prices, you
must estimate the firms cost of capital and equity, the growth rate, and the
WACC and use them to determine how well the companys stock is priced. There
are five different valuation models the discounted dividends, free cash flows,
residual income, long-run residual income, and the abnormal growth earnings.

These models use different factors in deriving the estimated share price, in which
some are more accurate than others.
We began with the method of comparables, which uses the current
financials of Dollar General and also the financials of industry competitors. This
method includes using the P/B ratio, PEG ratio, DPS, and trailing/forecasted P/E
ratio. We believe this is a good benchmark to where firms should stand when
compared to the industry.
For our valuation models, we based our valuations using our ten
year forecasted financials. The models indicated that Dollar General is highly
overvalued compared to our intrinsic valuations. The free cash flow model
shows that Dollar General is undervalued; we believe this valuation is doubtful
based on the uncertainty of our forecasted cash flow. After using all five models,
our overall decision is that Dollar General is highly overvalued and investors
should sell.

10

Overview of Dollar General

Dollar General is in the discount retail store industry selling common
household necessities, such as cleaning supplies, health and beauty aids, basic
food items, some clothing, and seasonal products. The target market of this
corporation is people who generally have lower, middle and fixed incomes.
Dollar General started out as J.L. Turner & Son, in 1939 as a wholesale business
in Scottsville, Ky. The company coined the dollar store concept in 1955 opening
retail stores which boosted the companys sales. In 1968 the company went
public and changed its name to Dollar General. Today, the corporate office is
located in Goodlettsville, TN. (www.dollargeneral.com)
Sales volume and growth are very important factors for success in the
discount retail industry. As shown below, sales for the industry has been rising
each year for the past five years with Dollar General leading the way.
Sales Volume
*

2002

2003

2004

2005

2006

Dollar General

$6,100,404 $6,871,992 $7,660,927 $8,582,237 $9,169,822

Dollar Tree

$2,357,836 $2,799,872 $3,126,000 $3,393,900 $3,969,400

Stores, Inc.
Family Dollar

$1,108,637 $1,244,683 $1,380,245 $1,511,457 $1,600,264

Stores, Inc.
Freds, Inc.

$1,103,418 $1,302,650 $1,441,781 $1,589,342 $1,767,239

*All numbers in thousands.

(www.edgarscan.com)

11

While Dollar Generals sales have exceeded their competition by far,

their net income decreased this past year while the competitions rose. This is
mainly due to the fact that Dollar Generals general expenses rose and interest
income decreased.

Industry Net Income

*

2002

2003

2004

2005

2006

Dollar General

$262,351

$299,002

$344,190

$350,155

$137,943

Dollar Tree

$145,219

$177,583

$180,300

$173,900

$192,000

$57,478

$64,452

$55,355

$51,389

$54,124

$27,491

$32,795

$27,952

$27,952

$26,746

Stores, Inc.
Family Dollar
Stores, Inc.
Freds, Inc.

*All numbers in thousands.

Dollar Generals Stock is currently selling for $21.63 and there are
314,788,000 outstanding shares giving it a market capitalization of
$6,808,864,440. While it has far more outstanding shares than its competitors,
they are selling at a lower price. In the past year Dollar Generals price per share
has remained relatively constant while its competitions prices have been rising.
(www.nyse.com).

12

Price

Average Stock Prices 2003-2007

35
30
25
20
15
10
5
0

FRED
FDO
DLTR
DG

2003

2004

2005

2006

2007

Year

Within the past year, stock prices have been on the rise after hitting the
low of 13.42 which is the lowest it has been in two years.

http://moneycentral.msn.com
In comparison to its competitors, Dollar Generals stock is outperforming
its competitors this year after prices fell in the third quarter last year.

13

THE FIVE FORCES MODEL

The five forces model is an excellent tool used to analyze the industry in
which the firm is competing in. It helps us see the type of industry the firm is
competing in, what characteristics are associated with the type of industry, and
also identify what types of things the firm can do to stay a head of the
competition. The five forces model includes: Rivalry among existing firms,
Threats of new entrants, threat of substitute products and bargaining power of
buyers and suppliers. These forces assess the degree of competition and the
marketing power of buyers and suppliers.
We will use the five forces model to evaluate the industry as a whole.
After briefly explaining each segment of the five forces model, the model will be
put to use by developing a value chain analysis. After the value chain analysis we
will use the complete information to compare Dollar General with the rest of the
industry.
Cost Leadership Industry
Rivalry among

Threats of

Threats of

Bargaining

Bargaining

Existing firms

new

substitute

power of

power of

Entrants

products

buyers

suppliers

Low

High

Moderate

Moderate

Very High

Rivalry among Existing Firms

Dollar General is in the discount retail merchandise industry, which is
highly competitive with respect to price, store location, merchandise quality, instock consistency and customer service. Since the discount retail industry is a
highly concentrated industry they strive to provide merchandise at low prices,
thus it is necessary to keep prices as close to marginal cost as possible.

14

Industry Growth
A company striving to make it in this industry has to come up with
innovative ways to grow. Most of the firms competing in this industry have found
a niche in small towns because of the low and low-middle class population. In
doing so, they have experienced a rapid expansion and in turn have increased
their number of stores. Another element encouraging growth is the low every
day prices characterized by the industry. As a result of the low prices they are
able to cut costs and expand in different areas, like offering a new line of
products or even increasing number of stores. Other firms in this industry have
invested in advertising, by inserting circulars in the newspapers and reaching out
to different customers who dont necessarily shop at a dollar store.

Concentration
Concentration plays a very big role in price setting. The more competitors
in an industry the lower concentrated the industry is which creates price wars.
Dollar Generals main competitors include: Family Dollar, Dollar Tree, Freds and
99 Cents Only. The industry is characterized by providing the every day low
prices and still making a profit by having a low cost structure and relatively low
assortment of products.

15

Market Percentage

2002

7%

5%
Dollar General

40%

Dollar Tree
Family Dollar
Fred's

31%

99 cents
17%

2003

9%

6%
Dollar General
47%

Dollar Tree
Family Dollar
Fred's
99 cents

37%
1%

16

2004

5%

8%

40%

Dollar General
Dollar Tree
Family Dollar
Fred's

31%

99 cents
16%

2005

8%

1%
Dollar General
42%

Dollar Tree
Family Dollar

32%

Fred's
99 cents
17%

17

2006

8%

5%
Dollar General
40%

Dollar Tree
Family Dollar
Fred's

31%

99 cents
16%

Differentiation and switching costs

The discount retail industry has no differentiation cost because it is a cost
leadership competitive Industry. Switching cost would be low because our
merchandise is easily liquidated. It would take very little to get rid of the
merchandise without losing money and switching to another industry.

Scale economies and fixed/variable costs

The price of the merchandise depends on how a company handles
operational costs. Dollar General emphasizes aggressive management of its
overhead cost structure. Additionally, they seek to locate stores in
neighborhoods where rental and operating costs are relatively low. Individual
Dollar General Store leases vary in their terms, rental provisions, and expiration
18

dates. Majority of the leases are low-cost and short-term ranging from three to
five years. Family Dollar leases 5719 of their stores and only owns 489; this
indicates that they have high fixed costs. The 99 cents only store own 37 stores
and lease 105 store which again shows they have high fixed costs.
The level of fixed cost plays a role in the growth of a company in this
industry. If the fixed costs are too high then expansion is going to be slow.
Family Dollar has 350 stores opened in 2006. The 99 cents only store has only
19 store opening this year. Dollar General has introduced control in fixed cost
which is supported by the 300 stores they plan to open this year, plus
remodeling 300 other stores. In such an industry, firms must generate large
inventory turnover for the fixed cost to cover variable costs.
In conclusion, if a firm wants to be successful in this industry they have to
make sure that they do not have too many fixed costs, because this slows down
growth. If they have a lot of fixed costs then they need to make sure that they
generate large inventory turnover to cover the variable costs.

Excess Capacity and Exit Barriers

Excess capacity exists if the customer demand exceeds supply. In the
discount retail industry, supply is always greater than demand because of the
amount of competition and ease of access. Same-store sales are one way to
monitor just how much sales a firm is getting. Same-store sales measure the
increase or decrease in sales for the stores that have been open for more than
one year. This helps a firm know just how well they are doing in comparison to
the industry. There are high exit barriers in the discount retail industry mainly
because it would be costly and time consuming to liquidate merchandise or break
lease agreements. For these reasons, the industry requires lower cost and
increases rivalry among existing firms.
The discount retail industry is characterized by high exit barriers mainly
due to cost of liquidation. Same-store sales are an important measure for firms

19

to use so they can see just how much they are selling and how much inventory
they have left, thus avoid tying up their resources in idol inventory.

THREAT OF NEW ENTRANTS

The potential for earning high profits in an industry will attract new
entrants to an industry. Easily accessible industries force existing firms to
compete not only with the new entrant but also amongst other firms. There are
many barriers for new entrants in the discount retail industry. New entrants
must rise above large economies of scale that exist within established firms.
Also, suppliers will be difficult to find in the discount retail business mainly
because of profitability sought by suppliers. There are few legal barriers to be
faced; new firms will face some legal discretion just like in any industry. There is
the possibility for entrance of new firms but there are barriers to be faced.

Economies of Scale
When entering into a specific industry, economies of scale play a major
role. New entrants will initially suffer from a cost disadvantage in competing
with well established firms. New entrants do not have the capital and resources
to compete on such a level. Dollar General and Family Dollar Stores are the two
largest firms in this industry and have the upper-hand on suppliers and
distribution access to their stores. This advantage poses high economies of scale
allowing most of the firms in the industry to offer low prices for their customers.
The diagram below shows the level of assets possessed by the existing
firms in the industry. Thus new entrants would have to acquire the minimum
capital needed to enter the industry.

20

Total Assets

3,500,000
3,000,000
2,500,000

Dollar General

2,000,000

Dollar Tree
Family Dollar

1,500,000

Fred's Inc

1,000,000

99 Cents Only

500,000
0
2005

2006

2007

Channels of Distribution and Relationships

It is imperative for a firm to have a proficient channel of distribution and
keep good relations with the supplier in order to be cost efficient. The discount
retail industry is cost driven therefore making it essential for the company to be
efficient. It is difficult for new entrants to distribute their goods from suppliers
without the right system. Dollar General has nine distribution centers (also used
as warehouse space) of which they lease three but own the other six and has
their own trucking system to deliver goods to their stores. Family Dollar has nine
distributing centers, but they do not have enough trucks to distribute their
merchandise. 86% of their merchandise was distributed by external carriers in
2006. In order for Family Dollar to manage this, they have a good relationship
with their carriers that lead to discounts. The 99 Cents Only lease trucks and also
transport by rail.

21

Legal Barriers
There are no direct legal barriers in the discount retail industry. Legal
barriers exist when importing goods from other countries therefore making it
costly in terms of trained personnel in international trade policies. Dollar General
directly imports 14% of their goods and Dollar Tree imports 35%-40% of their
goods. Companies need to be aware of certain items such as; import laws,
currency exchange, and foreign business operations.
New entrants have a tough hurdle to overcome when it comes to legal
barriers. With most of their products supplied by companies abroad, it would be
costly and difficult for a new entrant to compete to get the same supplier or
even try to lobby for the same prices.

THREAT OF SUBSTITUTE PRODUCTS

The discount retail industry is a highly competitive industry with five direct
competitors and certain other relative competitors like Wal-mart and Target.
Customers are therefore very price sensitive. Threat of substitute products is low
in the discount retail industry because the products offered are generally the
same across the board. In the discount retail industry most of the firms have the
same suppliers therefore the products are the same.

Buyers willingness to switch

The discount retail industry is very price conscious, therefore most the
players in the industry compete in those terms. Also, since the products in the
industry are the same, customers are drawn to picking the firm with the lowest
price, therefore the customers switching cost is very high.

22

Bargaining Power
In the Following sections, bargaining power will be discussed relative to
the buyers and suppliers of the market. The industry will be examined as a lowcost, highly competitive market. The five factor model guidelines will be used in
assessing the industry. Topics that will be discussed include switching cost,
product cost and quality, number of buyers, and volume per buyer.
Information will be given on how a company should compete in order to
be effective in a highly competitive industry. The guidelines and information will
help value the companies in the industry. The next two sections will give an idea
of what the industry requires of buyers and sellers.
Bargaining power of the Customer
In such a highly competitive market, the customers have a rather large
bargaining power over the companies in the industry. It is easy for customers to
switch from store to store depending on the relative prices of each. The
switching cost is merely the price of gas to drive or time to walk from one store
to the next. The customers of the discount retail industry have a some what
higher volume per purchase because the stores are catered to be a one stop
shop for the lower/ lower middle class customer. For this reason, firms in this
particular retail market have incentive to keep prices as low as possible because
of the bargaining power of the customer.

Switching Cost
Switching cost of the customer is a large reason why the customer has
bargaining power. A customer can easily switch from one low price store to
another depending on how cheap the stores products are. The price sensitivity of
the buyer is relatively high because they have limited financial means. Each of
the companies in the industry carry the same line of products, and the customers
will look for the best prices among each. For the reasons above, it is highly

23

important where a store is located. Most companies will situate a store in or very
near low-income neighborhoods.

Product Cost and Quality

The particular industry does not focus as much on the product quality as it
does on the price of the product. The companies in this industry will carry
substitute products that are lower quality rather then name brand items in more
expensive stores. The industry has to focus on the cost rather then quality
because the customers demand the cheapest product possible.

Number of Buyers
The number of buyers in the industry is the lower middle and lower
income consumers in the industry area. The discount retail industry is affected
by every customer. The number of customers and amount bought determines
the profitability of the company. In essence, the customer has more bargaining
power because the stores survival depends on the number of customers. It is
very important for companies to keep prices low to remain attractive.

Volume per Buyer

The volume of products bought by a customer in the discount retail
industry can vary from a few items to several. Most of the customers of this
industry use the stores as a one stop shop. Once again, each customer matters.
After evaluating each segment of bargaining power of the buyer, we
concluded that the bargaining power of the customers for the discount retail
industry is relatively high.

24

Bargaining Power of the Suppliers

In contrast to the bargaining power of the customer, the bargaining
power of the suppliers is relatively low. The low switching costs, number of
companies, and the number of substitute suppliers are factors that give very low
bargaining power to the suppliers. The companies in the discount retail industry
are very price sensitive because it caters to the low-income customer. The
suppliers of products have to sell at the right price because companies are trying
to keep the lowest cost possible.

Switching Cost
The switching cost is relatively low among suppliers. It is important for a
company in this industry to minimize cost as much as possible. The large number
of suppliers that are available makes it easy for companies to switch to suppliers
that have the lower costs. Suppliers have to compete with one another to supply
to the companies in the industry. Their bargaining power is very low because the
stores dictate who they will choose and it will always be the lowest cost supplier.

Product Cost and Quality

Suppliers have to focus on minimizing costs. Product quality is not at the
forefront t because companies are not shopping for quality products, but they
are looking for low cost products. The suppliers have no choice but to focus on
cutting costs.

Number of Suppliers
The number of suppliers in the discount retail industry is very large. The
large number of supplier decreases the bargaining power of the supplier because
of the number of alternatives for the customers. Each supplier has no choice, but
to compete with each other and whoever is able to achieve the lowest price gets
the deal.

25

Volume per Supplier

The volume of purchases by the companies is moderate. The suppliers
need to keep cost low in order for companies to consider them as a supplier. If
the supplier cant supply the products at the right price set by the companies the
company will look for other producers. The volume at which the companies will
purchase at is more incentive for suppliers to keep cost low.
In conclusion, the suppliers in the industry need to maintain low costs
because of the bargaining power in the hands of the company. The number of
suppliers available and the ease of switching from one to the other affect how
much bargaining power each supplier is able to have; therefore, the bargaining
power of suppliers is low.
Lastly, the five forces model is a tool used to value an industry and see
how attractive it is. The model is divided into two categories, the degree of
actual and potential competition, which talks about how the firms in the industry
compete with each other and the strategies used in the industry in order to stay
competitive. The second part is the bargaining power in the input and output
markets, which talks about the bargaining power of suppliers and buyers. It
focuses on the things they do in order to stay ahead of the competition.

Value Chain Analysis

The value chain analysis discusses important strategies that a company
needs to utilize in order to be a cost leader in the industry. The following
paragraphs will go through each strategy and analyze effective ways a company
can pursue in order to keep costs low.
The following analysis will present information on how a discount retail
company should compete in a highly competitive industry. After the value chain
analysis is complete we will use the information to evaluate Dollar Generals
performance in the discount retail industry.

26

Dollar General resides in a highly competitive discount retail industry.

Each company competes to provide basic commodities and service at a low price.
In order to be successful, each competitor has adopted the business strategy of
cost leadership. By implementing this strategy successfully, companies will be
able to earn profits and gain greater market share.

Efficient production
In order for a company to be a cost leader in the discount retail industry,
the company has to be efficient and strive to have low operational costs.
Improving Technology helps to cut cost and increase efficiency with systems like
inventory management tools and supply chain systems (Dollar General 10k).
Another way to be efficient is by maximizing trailer loads in order to cut down on
the number of trips to be made and increase efficiency (family Dollar 10k)

Simpler Product Design

Since this is a discount retail industry, quality is not as an important factor
therefore a company can sacrifice on using high quality raw materials and go for
the generic products that cost much less. The companies need to use low cost
products many of which rely on the supplier they choose. Efficient companies are
able to get semi-decent quality products at a very low price.

Lower Input costs

A company in the discount retail industry needs to keep input cost at a
minimum. Companies can reduce the amount of input costs by managing leases,
buildings, and warehouse in an efficient manner.

Low-cost distribution
Lower cost distribution is also very imperative in cutting costs. If a
company has to hire a transporting company, warehouse space and labor that go
along with it, they incur unnecessary costs. This factor alone makes it very
27

difficult for new entrants to survive in the industry. The company needs to
minimize these cost by using efficient, low-price means of distribution.

Minimal Brand Image cost

Companies in the discount retail industry need to have very little expenses
in brand images. A company that spent money to keep its image up would be
using unnecessary cost. In order for a company to be a cost leader, it must
minimize its unnecessary expenses.

Tight cost control

The discount retail industry mainly deals with the same types of products
therefore making it important for a company to strive to be a price leader. Since
the industry deals in discounted products you can only lower the price so much,
thus the company has to focus of having lower operational cost in order to be
able to have the everyday low prices. Having long relationships with suppliers, is
a good way of cutting cost because it enables a company to have a steady
supply of merchandise at a discount. This not only makes it hard for new
entrants, but it also cuts costs.

Firm Competitive Advantage Analysis

In this section, we will discuss how Dollar General has performed using
the value chain analysis in the previous section. Each section of the value chain
presented above will be presented relative to our company. We will discuss how
the company has performed historically, currently, and how they are projected to
perform in the future.
The competitive advantage analysis is important because it shows how
well Dollar General is utilizing cost leadership in a very competitive industry. Each
Section below will discuss important information that will help value the company
relative to other companies in the industry.

28

Efficient production
Dollar General has done a decent job to utilize the cost leadership
strategies. It has focused on efficient low cost production and distribution. They
have their own warehouse and trucks to supply stores to minimize transportation
costs. Dollar General will only use suppliers that can maintain a low cost on
products and delivery. They have diversified their supplier chain to minimize
costs which is due to 14% coming from Proctor & Gamble, 16% from imports,
and the maintaining from different suppliers. They have located every store in
cities that are 20,000 or less populated to cater to their target market.
Currently, Dollar General is trying to improve the efficiency of its stores.
They are closing a few stores in less productive areas and spending money to
remodel, advertise and develop a more efficient means of distribution. They
hope to improve the quality of existing stores to maintain there slightly higher
position in the industry.
Simpler product design
As a leader in the industry, Dollar General provides basic commodities at a
low price. A sacrifice in the quality must be made to achieve these low prices.
As a result, products that are offered do not carry a brand image and has no
research and development costs. This is a key to be competitive in the industry
and Dollar General will continue to provide simple product designs throughout
the year to accommodate the demand for low cost merchandise
Lower Input Costs
Dollar general historically has minimized input cost spending very little on
capital improvement costs. They have tried to minimize the cost of owning
buildings by leasing out most of their buildings. They have had a system that has
focused on minimizing input-costs.
29

Currently, Dollar general has spent more money trying to remodel worn
down buildings and increase sales space. They have also invested a lot of money
into improving their distribution system to increase efficiency. They have also
incurred costs to shut down non-producing stores.
Dollar General hopes that these improvements will increase sales and
lower costs in the future. We believe that these expenses will have a negative
effect on the companys value currently, but could improve the companys value
in the future.
Low-cost Distribution
Dollar General owns six of there nine distribution centers across the U.S.
and have their own trucking service. This helps minimize the cost of contracting
to other trucking companies. The distribution centers, being located in central
hub areas, cut costs of transportation to Dollar General stores. 99 Cents Only
lease to trucking companies which adds to cost. We believe because they are
cutting distribution costs, they have the upper-hand against the competitors in
the industry.
Minimal Brand Image Cost
Dollar General owns several trademarks pertaining to their company and
subsidiaries. Brand image is not a high cost for Dollar General; they invest when
needed in their image to protect their identity in the industry.
Tight Cost Control
As a leader in the discount retail industry, Dollar General has to
continually focus on improving their tight cost controls. This will help sustain low
prices that drive the success of the stores. Recent improvements in the point of
sale system allow the store to accept gift cards which will bring in a new source
of revenue. An additional upgrade of software applications was added to
monitor inventory in each store. This allows management to efficiently manage
30

their in store stocks and improve turnover. These investments made will help
Dollar General operate their stores more efficiently and will in turn reduce their
operating costs.
Conclusion
In our analysis, we have concluded that Dollar General is doing a decent
job in utilizing cost leadership strategies. They are striving to be the cost leader
in their industry. They have taken on many projects to improve quality,
efficiency, and production that could help lower overall costs in the future. The
company has also spent only what it needs on brand imaging keeping costs low.
Dollar General owns most of there distribution centers and trucks minimizing
contracting fees.
We believe that Dollar General recent costs to improve their stores and
improve production may decrease the value of the firm in the short-run
compared to competitors; however, the improvements to the stores quality and
efficiency could improve the company overall in the future. Other then the recent
costs to improve current stores, Dollar general is utilizing effective cost
leadership strategies.

31

Accounting analysis
Within a companys financial reports lies crucial information to determine
the valuation of its performance. An accounting analysis is used to assess the
financial disclosures and conclude if its accounting practices support the
structure of the industry in which the company resides in. This examination is
important because the financial reports released have managerial estimates and
judgments that affect the outcome. The first step is to identify the key
accounting policies of the company. Next, the analyst has to assess the degree
of potential accounting flexibility, or how able the company is to manipulate
numbers and still follow the rules outlined by GAAP. An evaluation of the actual
accounting strategy is performed next to decide how conservatively or
aggressively the flexibility is used to manipulate financial reports. The next step
is to review the quality of information disclosed in the statements. From the
evaluation, there could be some red flags that signal discrepancies in the
reported information. The figures need further investigation to determine its
validity. The last step in the analysis involves undoing the accounting
distortions. The following is the assessment of Dollar Generals accounting
practices.

32

Key Accounting Policies

Dollar Generals main Key Success Factors focuses on cost leadership. Dollar
General uses slightly aggressive accounting policies and is only partially clear in
stating how they record transactions in their footnotes; however the only balance
sheets they give are consolidated so you cannot actually see the individual
events being recorded.
Dollar General record vendors rebates as a reduction of merchandise
purchases costs and are recognized in the statement of operations at the time
the goods are sold (Dollar General 10-K). This reduces their overall costs and
allocates the extra cash to the correct account.
Dollar General does not have any Goodwill recorded, which can be used to
inflate a companys value since it is an intangible asset. Dollar General records
store opening costs as expenses as they occur (Dollar General 10-K p56) rather
than capitalizing them. This is the appropriate and honest way to account for
these costs.
Another way Dollar General maintains their cost leadership is through the
reporting of building leases. In terms of the types of leases Dollar General has,
they have both operating and capital leases. Dollar General leases the majority
of its stores on a short term of 3-5 years. These leases include multiple
renewing options for the managers to decide on a basis of performance and
sales. In addition, there are store that are built-to-suit where the leases range
from 7-10 years. Among all the stores that Dollar General leases, half are
operating on a contingent rent based on sales. If a store is performing well, the

33

likelihood of it renewing its lease is high. This conditional rent expense is

recognized when sales goals are met or probable. For the remaining stores, rent
expense is recognized on a straight line basis over the term of the lease. Also, if
it is stated in the lease that rent will increase annually at a fixed rate, rent
expense is recognized on a straight line basis while the increased amount will be
recorded as deferred rent. Another accounting strategy that Dollar General uses
to its benefit is to record tenant allowances as deferred incentive rent. This in
turn can be amortized to reduce rent expense over the term of the lease.

Industry Inventory 2002-2006

$1,600,000,000
$1,400,000,000
$1,200,000,000
$1,000,000,000

Dollar General
Family Dollar, Inc.

$800,000,000

Dollar Tree, Inc.

Fred's, Inc.

$600,000,000
$400,000,000
$200,000,000
$0
2002

2003

2004

2005

2006

34

Degrees of accounting flexibility

Managers at Dollar General may have latitude with their reporting

methods within their financial statements, but they must comply with industry
standards of GAAP. This set of regulations is the framework for which all
companies must use in the preparation of financial statements. Accounting
manipulation within the guidelines of GAAP may produce or conceal important
information that would work in favor the company. Dollar General uses this
flexibility in reporting their key accounting policies of leases and vendor rebates.
As previously stated, Dollar General accounts for its leases under both
capital and operating. The accounting flexibility in balancing between these two
methods allows them to determine how much is disclosed on their financial
statements from operations. The benefit of operating leases is that it allows
Dollar General to report its lease expenses as an operating expense leaving it off
the balance sheet. This in turns reduces the liability of the company. Conversely,
the amounts that are reported under capital leases are recognized immediately
on the balance sheet. The following table shows how the leases are currently
reported for Dollar General. They are discounted at an effective interest rate of
6.7%.

35

Future Minimum Payments of leases

*In thousands
2007
2008
2009
2010
2011
Thereafter
Total minimum payments
Discount rate 6.7%
(Dollar General 2006 10-K)

Capital Leases *
7,658
5,440
2,082
599
599
7,036
23,414

Operating Leases *
304,567
254,087
206,369
169,454
139,841
415,263
1,489,581

It is evident that the majority of Dollar Generals leasing costs are

operating rather than capital leases. The large amount of operating leases is
crucial to the stores success in the discount retail industry. A stores ability to
bring in revenues and earn profits is the key to remain in business. The
flexibility in the terms of the lease allows managers to assess the profits earned
for a store and to determine if they can afford to remain in business. The ability
of Dollar General to spend a large amount of money on operating leases allows
them to keep that same amount off the balance sheet as a liability. This reduces
the amount of debt reported on the balance sheet working in favor of the
company.
Another method of accounting flexibility shown by Dollar General is the
way vendor rebates are handled on the financial statements. Vendor rebates
received are accounted for as a reduction in the purchase cost of the
merchandise. This is recognized in the statement of operations at time the

36

commodities are sold. Cash considerations from the vendor may in turn offset
some general, selling and administrative (GS&A) expenses related to the sale of
the merchandise. Depending on the amount of rebates Dollar General realizes, it
reduces operating expenses showing greater income. This rebate is limited and
will only offset the costs associated with the GS&A expenses incurred of the
merchandise. Consequently, this is an incentive for Dollar General to claim as
many vendor rebates as they can. However, while the footnotes are very clear
on how they do this the actual numbers are not given on the balance sheet;
therefore, it is unclear just how much this affects their financials.

Accounting Strategy

Dollar General uses slightly aggressive methods when reporting their

financials. Dollar General disclosed quiet a bit of information in their footnotes,
but supporting data was hard to interpret. We feel that their slightly aggressive
accounting policies made it difficult to go through their financial statements.
Dollar General has both operating and capital leases. The majority of
capital leases have terms between 3 to 5 years with renewable options. There
are built-to-suit arrangements with landlords that have terms of 7 to 10 year and
multiple renewal options on some of the leases. Operating leases are treated as
rent expense rather than being liabilities therefore it does not give a true picture
of total liabilities on the balance sheet. Improvements of leased properties are

37

amortized over the shorter of the life of the applicable lease term or the
estimated useful life of the asset (Dollar General 10k) Dollar Tree and 99 Cents
Only also have similar accounting strategies, concluding that this could be an
industry trend.
The recording of depreciation, benefit, and goodwill are a few of the
minor things Dollar General has done to stay a head of the competition in a cost
leadership industry. Dollar General depreciates property, plant, and equipment
using the straight-line method. A benefit to using the straight-line method is at
the end of the life term of the asset the company pays the salvage value of the
asset opposed to the fair value, decreasing the expenses related to these assets
and further helping the bottom line. Employee benefit plans are expensed on a
year to year basis rather than being liabilities to the firm. Dollar General does
not have any goodwill on the books which we consider a very conservative
accounting strategy. This indicates that they do not inflate their numbers for
investors.
Since Dollar General is in a low concentrated industry, they strive to
provide merchandise at everyday low prices thus it is necessary to keep prices as
close to marginal cost as possible. Dollar General has achieved this by
categorizing their products into four distinct areas; highly consumable, home
products, seasonal, and basic clothing. This has made it easy for management to
track where most sales come from and improve where they need to, as shown
below in the graph.

38

Product Sales

70.00%
60.00%

40.00%

Highly
consumable
Home products

30.00%

Seasonal

50.00%

20.00%
Basic Clothing

10.00%
0.00%
2006 2005 2004

Quality of Disclosure

Qualitative
The quality of disclosure is very important to investors and analysts. The
10K is usually the best source of information when looking at a companys well
being. However not many companys do a good job in disclosing a lot of
important information in their 10K.
Dollar General does a good job in disclosing a lot of important information
in their 10K. They not only focus on showing only the elements in which they
excel in but also areas that they are not doing too well in. For example The gross

39

profit rate declined in 2006 from 28.7% to 25.8%. They farther go on to explain
the reason for the decline which resulted due to significant increase in
markdowns activity as a percentage of sales, and store closing initiatives. The
only downfall is that they do not disclose how they will go about correcting the
problem; we thought that would be critical information for investors to know,
otherwise they may think that gross profit will continue to fall.
Dollar Generals 10K is loaded with good information. They go into detail
talking about the company performance measures, the results of operations. This
managers overview helps an investor know exactly how the firm is doing without
doing too much research.
The footnotes on the financial statements are informative and explain
what on the financial statements. For example it states how the capital leases
and operating leases are handled and what percentage they cover. In February
2006 the gross amount of property and equipment recorded was 85.1million and
150.2 million as of February 2007. This gives a true picture of the fixed assets
that Dollar General has.

Quantitative

40

The measure of the quantitative quality of disclosure involves two sets of

ratios, revenue diagnostics and expense diagnostics. We will use the data from
the ratios in our valuation of the firm. The data we collect from this section will
indicate how well Dollar General has reported their financial information and
potentially identify any red flags.

Sales Manipulation Diagnostics

We calculated five core sales manipulation or revenue diagnostics. We
found these by dividing a companys net sales by the following denominators:
cash from sales, net accounts receivable, unearned revenues, warranty liabilities,
and inventory. When analyzing a company, the ratios are calculated over time
and compared to those of the competitors in the same industry. The ratios
indicate how well the company is reporting their revenues.

41

Net Sales/Cash from Sales

1.2
1
0.8
0.6
0.4
0.2
0

2002

2003

2004

2005

2006

Dollar General

Dollar Tree

Family Dollar

Fred's Inc.

Net sales/Cash from sales

The discount retail industry is cash to sales basis industry. A cash to sale
industry is one in which every sale is accompanied by payment, therefore
deferred payments do not exist. Thus, the ratio of net sales/ cash from sales is 1
all across the board.

Net sales/Net accounts receivable

Since the discount retail industry is cash to sale industry they do not have
any account receivables, thus the ratio does not affect the industry.

42

Net sales/Unearned revenues

Unearned revenue is when a company offers a service or product and
does not receive immediate payment until later. The discount retail industry does
not have credit sales because everything is on a cash to sale basis, therefore this
ratio does not apply to the industry.

Net sales/Warranty liabilities

Warranty is when a company guarantees their products of by offering to
replace or repair the product if something goes wrong within a specified amount
of time. So a company that has warranty liabilities would have high sales but low
revenues. The discount retail industry does not offer warranties on their products
so again this ratio does not apply to the industry.
Net Sales/Inventory
8
6
4
2
0

2002

2003

2004

2005

2006

Dollar General

5.43

5.94

5.57

5.82

6.4

Dollar Tree

5.37

5.33

5.08

5.89

6.56

Family Dollar

5.43

5.56

5.39

4.42

6.16

Fred's Inc.

5.7

5.43

5.24

5.23

5.79

43

Net Sales/Inventory
The net sales/ inventory ratio is important because it tells us the amount
of inventory we have in relation to our sales. It asks the question; do reported
sales and inventory match each other in a believable way? If this number starts
increasing rapidly and/or unexplained it raises a red flag because it would imply
that while sales are growing, inventory is decreasing. If it is increasing like this,
the company must be recording things wrong, or perhaps channel stuffing. We
have found the industry as a whole to be pretty consistent the past five years
and have not found any potential red flags for Dollar General.

Core Expense Manipulation Diagnostics

There are six core expense manipulation diagnostics. These ratios are
found in a variety of ways, but they all relate to a companys expenses and are
also used to identify potential red flags.

44

Asset Turnover (sales/assets)

4
3
2
1
0

2002

2003

2004

2005

2006

Dollar General

2.61

2.62

2.7

2.88

3.02

Dollar Tree

1.81

1.86

1.74

1.89

2.12

Family Dollar

2.37

2.39

2.37

2.42

2.53

Fred's Inc.

3.19

3.14

3.1

3.19

3.43

Asset Turnover Net Sales/Total Assets

The asset turnover tells us how much sales our assets can generate. If
this number begins declining, it implies that sales are decreasing while assets are
increasing, we must wonder if the company has the appropriate amount of
assets to generate the desired sales. Through off-balance sheet accounting,
reporting operating leases, as opposed to capital leases, a company can show
fewer assets on the balance sheet and in turn have a higher asset turnover ratio.
Overall the industry is quite consistent and Dollar General has remained
consistent with the industry standards and show no potential red flags.

45

CFFO/OI
3.00
2.00
1.00
0.00
-1.00

2002

2003

2004

2005

2006

Dollar General

0.93

1.01

0.70

0.98

1.63

Dollar Tree

2.77

0.83

0.94

1.28

1.33

Family Dollar

0.23

-0.33

-0.11

0.44

0.52

Fred's Inc.

1.02

0.72

0.54

1.21

0.86

Changes in CFFO/OI
This ratio is found by dividing the cash flow from operations by the
operating income and tells us whether or not the income is being supported by
the cash flows. If this number is dropping without explanation it raises a red flag
because cash flows cannot be increasing while income decreases. In this
situation, expenses may not be recorded or revenues may be overstated. With
the exception of Dollar Tree in 2002, the industry has remained quite consistent.
Seeing that Dollar General has remained consistent with the trends and has not
fluctuated too much over the past five years there are no potential red flags to
investigate.

46

CFFO/NOA
1
0.5
0
-0.5
-1

2002

2003

2004

2005

2006

Dollar General

0.42

0.54

0.36

0.47

0.33

Dollar Tree

-0.5

0.38

0.4

0.54

0.58

Family Dollar

0.59

0.36

0.41

0.29

0.42

Fred's Inc.

0.34

0.49

0.28

0.15

0.35

Changes in CFFO/NOA
This ratio is found by dividing the changes in a companys cash flow from
operations from the previous year by its net operating assets. If this ratio is
dropping without explanation it raises a red flag because in order for this to
happen the assets are most likely being overstated to increase a companys
value. Overall the industry has remained steady with the exception of Freds
Inc., who had a negative cash flow in 2002, but has since recovered. The only
concern we have is that Dollar Generals ratio slightly dropped in 2004 and 2006.
However, this drop can be explained by an increase in net operating assets due
to recent renovations and added equipment, such as freezers. Overall, there are
no potential red flags in this area.

47

Accruals/ Changes in SalesThis ratio is found by taking the total accruals for the year and dividing
them by the difference in the sales of the current year and the previous year.
Total accruals are found by subtracting the net cash flow from operations from
the net income. This measure is a way to measure the returns the company is
getting form operating assets.

Pension Expense/ SG&A

Dollar General has a defined contribution plan in place. The defined
contribution plan leaves the liability on the hands of the employee and the
obligation of the employer is merely a small percent of the plan. They do not
need to recognize any Pension Expense through out the year only when it is
incurred. No ratios needed to be calculated.

Other Employment Expenses/ SG&A

Other employment expense includes medical insurance and other certain
benefit programs. Due to the nature of the discount retail Industry Companys
offer little to no benefit packages. Most employees are privately insured. No
Ratios need to be calculated.

48

Identifying Potential Red Flags

The quantitative characteristics of a firms accounting disclosure can be
analyzed to signal distortions in the accounting. In this section, we will analyze
the discount retail industry and compare Dollar General with the rest of the
industry. The main purpose of this section is to find potential deviations from the
norm that could potentially distort the companies accounting records. We will be
assessing several ratios and evaluating the amount of disclosure Dollar General
has presented.
Identifying potential distortions in the accounting is important because a
clearer view of the company can be presented once the distortions are fixed. The
following ratios will help compare and signal any deviations Dollar General may
have compared with the rest of the company.
* The fact that Freds Inc. fiscal year ends in August while every other
company year ends in March or May was taken into consideration in the
comparability in our analysis.

49

Undoing Accounting Distortions

Accounting distortions occur when a company unknowingly or knowingly
reports numbers that are misleading. This allows the managers to influence the
outcome of the financial statements to show better performance. The simplistic
nature of the discount retail industry enables Dollar General to report their
financials rather straight forward without accounting alterations to show better
value. This industry is driven by high volume sales of low cost items. Revenues
and profitability determine if store operating leases will be renewed to cut loses.
After analyzing Dollar Generals financial statements and determining the level of
sales and expense manipulation, we did find a potential red flag from the
CFFO/NOA ratio.
Dollar Generals expense diagnostics raise a red flag with their accounting
reporting. The cash flow from operations to net operating asset ratio shows us
the proportion of the operation cash flows from the property, plant, and
equipment owned. In comparison to its competitors, the ratio is on average
except for 2005 when the ratio dropped for Dollar General. The increase in the
net operating assets is a result from the growth of the company in the past
years. Dollar General has been acquiring new assets to expand their
departments to meet the demand of the discount retail industry. This
information was disclosed on the Dollar General 10-K allowing us to match the
increase in assets.

50

Dollar General has used accounting flexibility to record a large portion of

their leases as operating leases. In the next table we have converted the current
operating lease payments into capital leases to show the differences of
approximately $1.2 billion in avoided liabilities.
Operating Lease Conversion
Capital Leases

Operating leases

PV Factor

PV

2007

$7,658.00

$304,567.00

0.937

$285,442.36

2008

$5,440.00

$254,087.00

0.878

$223,179.14

2009

$2,082.00

$206,369.00

0.823

$169,883.50

2010

$599.00

$169,454.00

0.772

$130,735.69

2011

$599.00

$139,841.00

0.723

$101,114.26

2012

$1,407.20

$83,052.60

0.678

$56,281.64

2013

$1,407.20

$83,052.60

0.635

$52,747.55

2014

$1,407.20

$83,052.60

0.595

$49,435.38

2015

$1,407.20

$83,052.60

0.558

$46,331.19

2016

$1,407.20

10

$83,052.60

0.523

$43,421.92

Reported

Total

Capital

Operating

Leases

$23,414.00*

Leases

Total Capital
$1,489,581.00*

Lease

$1,158,572.63*

*In Thousands
Along with the avoided liabilities, the reporting of operating leases leads
to understated expenses. This next table shows the interest expense and
depreciation expense being avoided over the next ten years, using the 6.7% rate
found in Dollar Generals 10-K.

51

Discount
Rate

0.067

Term

10
Straight Line

Payment

Interest

Principle

Depreciation

1,158,573
2007

1,073,522

162,675

77,624

85,050

$115,857

2008

982,774

162,675

71,926

90,749

$115,857

2009

885,945

162,675

65,846

96,829

$115,857

2010

782,629

162,675

59,358

103,316

$115,857

2011

672,390

162,675

52,436

110,238

$115,857

2012

554,766

162,675

45,050

117,624

$115,857

2013

429,260

162,675

37,169

125,505

$115,857

2014

295,346

162,675

28,760

133,914

$115,857

2015

152,460

162,675

19,788

142,886

$115,857

2016

162,675

10,215

152,460

$115,857

*All Numbers in thousands.

**The affects of the capitalization of these leases on the balance sheet can be seen in the
appendix.

52

Financial Analysis
At this part of the valuation, it is important to tie together all the previous
analysis. This gives a true sense of how the company is operating in the
industry and where it is heading in the future. First we identified the business
strategy and the five success factors. This tells us how the company plans to
thrive in the discount retail industry. From the accounting analysis, we will be
able to determine from past financial statements how the company will fund
future growth. To properly forecast the future of Dollar General and assess their
development, it is essential to calculate the liquidity, profitability, and capital
structure ratios. Liquidity ratios refer to the amount of cash or equivalence on
hand for operations. Profitability ratios determine the amount of profits based
on operations. Capital structure ratios determine the cost of debt it takes to
operate the business. These ratios will help determine how well the company is
performing from a business strategy perspective to its competitors.
Trend & Cross Sectional Analysis
The analyses of a firms financial statements tell about its liquidity,
profitability, and capital structure. Know these things when analyzing a firm is
important in order to evaluate the firm and its performance. The liquidity ratios
tell us how much of the firms assets is cash or cash-equivalents and in turn tell
how timely they will be able to meet their current obligations. The profitability
ratios tell how profitable a firm is based on its efficiency and rate of return.
Finally, the capital structure ratios tell how the firm is financed and how much of
their income is being used to pay interest versus how much is being used to pay
the principal.

53

Financial Ratio Analysis

Several ratios can be performed to evaluate the financial position of a
firm. Each ratio illustrates a different aspect of the companys well being for
example how quick assets can be converted in to cash to cover liabilities. The
ratios can also tell how efficient the company is in the industry. Each ratio will be
computed to reflect a 5 year trend of each company. Three main areas that will
be focused on in the following section are liquidity ratios, profitability ratios, and
capital structure ratios.
These ratios will be used to asses Dollar Generals position in the discount
retail industry. Each ratio will dissect the financial statements of Dollar General
and their competitors. From these ratios, the value of the past performance can
be determined as well as trends that can help in forecasting the future trends of
the company.
Liquidity Ratios
Liquidity ratios apply to the amount of cash equivalent assets on hand for
a firm and the ability to convert these into funds for future liabilities. The
liquidity ratio will be broken down into two different types of ratios. The first two
line items are current and acid test coverage ratios which display a companys
ability to cover debt with current assets. The next three ratios are operating
efficiency ratios which consist of inventory turnover, receivable turnover, and
working capital turnover. The operating efficiency ratios are based on the cause
and effect using financial data from both the income statement and the balance
sheet.
The first sets of ratios we have analyzed are the liquidity ratios and of
these the first to discuss is the current ratio. The current ratio is found by
dividing a firms current assets by its current liabilities. Current assets are almost
all assets besides land, buildings, equipment, and intangibles; and current
liabilities are any liabilities that will be due in the next year. This number tells us
54

how many dollars of assets we have for every one dollar of liability. The higher
the number this ratio is, the more liquid a firm is, or the greater ability it has to
pay off its upcoming obligations. However if this number is too high above the
industry standard the firm is most likely not using all their assets efficiently. The
lower this number is the more debt the firm has in comparison to its assets, and
therefore less able to pay them off. Dollar Generals current ratio over the past
five years has remained just below the industry average. Although, when looking
at the chart you can see that Dollar Tree has had a much higher ratio than the
other firms, and in turn has brought the industry average up. Dollar Generals
ratio being lower than the industrys is nothing to be alarmed about, especially
since they have constantly had more than one dollar of assets to every one dollar
of liabilities.
Current Ratio over the past five years
2002

2003

2004

2005

2006

Dollar General

1.37

1.99

2.22

2.1

1.89

Family Dollar

1.99

1.94

1.72

1.51

1.44

Dollar Tree

2.88

2.73

3.29

3.19

2.5

Freds

3.27

2.55

2.55

2.76

2.58

Below is the cross sectional analysis showing the trends of Dollar General
over the past five years in comparison with the trends of its direct competitors
and the industry as a whole. Dollar General started out with the lowest current
ratio, but more recently has been just below the industry standard. While Family
Dollar started out with a higher ratio than Dollar General, their ratio has been
declining and they currently have the lowest ratio in the industry. Freds and
Dollar Tree have ratios that remained higher than the industry in the past five
years. This could mean they are inefficiently using their assets. Overall Dollar
General has the best ratio because it is closest to the industry standard without

55

being too high. The trend with each competitor in the industry appears to be
heading towards convergence within the next couple of years.
Current Ratio
3.5
3
Dollar General

2.5

Family Dollar

Dollar Tree
1.5

Freds

Industry. Average

0.5
0
2002

2003

2004

2005

2006

The second liquidity ratio is the quick asset ratio or acid test. This shows
how much cash or cash-equivalents there are for every dollar of liability and is
found by dividing the quick assets by the current liabilities. Quick assets are cash
and any assets that can be easily converted to cash if need be. Dollar Generals
quick asset ratio has been pretty low for the past five years with the exception of
2004 where it peaked. This is similar to the current ratio in that too high a
number can equate to inefficient use of assets. Recently Dollar General has
remained below the industry average, but has still followed the industrys trends.
Acid Test for the past five years
2002

2003

2004

2005

2006

Dollar General

0.23

0.18

0.54

0.33

0.22

Family Dollar

0.41

0.35

0.21

0.16

0.22

Dollar Tree

1.13

0.64

1.08

1.15

0.8

Freds

0.26

0.09

0.04

0.046

.023

56

Below is the cross sectional analysis of Dollar Generals quick ratio as well
as its direct competitors and the industrys as a whole. With the exception of
Freds, the industry has remained within the range of a dollar over the past five
years ($0.16-$1.15). Freds most likely has far too many assets in comparison to
the industry, which shows signs of inefficiency. Dollar Tree, Dollar General, and
Freds have all followed the industry trend the past five years, while Family Dollar
has done just the opposite. Since Freds has such a higher ratio it has brought
the industry ratio up; therefore there is no need to be alarmed over Dollar
General being slightly lower than the industry.

Quick Asset Ratio

1.4
1.2
Dollar General

Family Dollar

0.8

Dollar Tree
0.6

Freds

0.4

Industry Average

0.2
0
2002

2003

2004

2005

2006

Although the next two ratios -inventory turnover and working capital
turnover- are classified as liquidity ratios, they tell more about a firms operating
efficiency than its actual liquidity. The first of these to analyze is the Inventory
Turnover. This ratio measures how frequently the inventory in a companys
warehouse is used and replenished. The higher the number is the better because
it indicates higher sales. This number is found by dividing the cost of goods sold

57

by the inventory and it tells us how many times per year the inventory is
replenished. Dollar General, being the industry leader, has consistently had one
of the highest inventory turnovers in the industry.
Inventory Turnover for the past 5 years
2002

2003

2004

2005

2006

Dollar General

3.37

3.9

4.19

3.92

4.15

Family Dollar

0.64

0.6

0.59

0.06

0.08

Dollar Tree

0.26

3.4

3.27

3.85

4.32

Freds

4.04

4.13

3.9

3.76

3.76

2.077

3.01

2.98

2.89

3.078

Industry Avg.

The cross sectional analysis below shows the industry and its trends over
the past five years. Family Dollar is well below the industry standard, showing
that they are not selling efficiently enough to keep up with the industry. Dollar
Tree experienced a tremendous amount of growth from 2002-2003 and has
since been able to remain above the industry average; however if Family Dollar
wasnt so low, bringing the average down, Dollar Tree would probably be just
below the industry average up until the past year or so. Freds has one of the
higher turnovers of the industry showing very efficient sales, with a slight decline
just recently. Dollar Generals ratio was rising until 2004 with a decline in 2005
and now is almost back on track.
Dollar General has followed the industry trend more than any of other
firms and has remained above the industry every year. Operating efficiency has
been consistent with inventory turnover averaging four times a year. This shows
that their inventory is fairly liquid with three month intervals out of the year.

58

Inventory Turnover
5
4.5
4
3.5
3
2.5
2
1.5
1
0.5
0

Dollar General
Family Dollar
Dollar Tree
Freds
Industry average

2002

2003

2004

2005

2006

The other liquidity ratio that measures operating efficiency is the Working
Capital Turnover. This number is found by dividing a companys sales by its
working capital, working capital being the companys current assets less its
current liabilities. Working capital measures how many sales dollars every one
dollar of working capital can generate. The higher this number is the better,
because it indicates higher sales. Dollar General has set the industry standard
for working capital turnover and has had the highest turnover every year for the
past five years with the exception of 2004. Since 2004, Dollar General has had a
steadily rising turnover.
Working Capital Turnover
2002

2003

2004

2005

2006

Dollar General

12.6

9.25

7.56

8.46

10.35

Family Dollar

0.24

0.25

0.3

0.27

0.08

Dollar Tree

0.32

6.12

4.63

5.24

6.89

Freds

6.58

7.97

7.87

7.08

7.43

Below is the cross sectional analysis of Dollar Generals working capital

turnover as well as its direct competitors and the industry as a whole. As you can
59

see Dollar General leads the industry and has had the highest turnover every
year for the past five years, with the exception of 2004, where they were just
barley behind Freds. Since 2003 Dollar General has been setting the trends for
the industry. Family Dollar has a very low turnover relative to the other
companies, while Freds and Dollar Tree are just a little behind Dollar General.

Working Capital Turnover

14
12
Dollar General

10

Family Dollar

Dollar Tree
6

Freds

Industry average

2
0
2002

2003

2004

2005

2006

The nature of the discount retail industry does not entail the need for
accounts receivables. The industry is dependent on the volume of purchases
because basic commodities are sold at low prices. As a result, the average
customer purchase was $9.36 in 2006. (Dollar General 10-K) Therefore the
accounts receivable turnover ratio will not be calculated for Dollar General. If
the receivables turnover ratio were to be calculated, it would be performed by
taking total sales and dividing it by accounts receivable. This would be a
valuable tool for determining the corporations cash to cash cycle. This is the
measure of how long it would take to free up cash from accounts receivables and
inventory. The faster the cycle is the more amounts of cash is available for
operations and reducing debt. The only part of this cycle that Dollar General can
monitor is the day supply of inventory. In essence, the cash to cash cycle for the

60

industry is just the day supply of inventory. This is first half of the cash to cash
cycle. This is calculated by taking the number of days in the year and dividing it
by the inventory turnover ratio. The smaller the ratio is the better it is for the
firm. It states how many days inventory stays in storage instead of being sold
on the floor. Below is a chart showing the day supply of inventory for Dollar
General and the industry. They have been leading the industry with Freds and
have remained below the industry average. This is favorable because it shows
that inventory is generating revenue instead of sitting in storage.

Day Supply of Inventory

7000
6000
5000

Dollar General
Family Dollar

4000

Dollar Tree
3000

Freds
Industry Average

2000
1000
0
2002

2003

2004

2005

2006

Liquidity overview
Over the past five years Dollar General has followed the industry liquidity
trends quite consistently and has set the trends in inventory and working capital
turnover. Dollar General is quite liquid in comparison to the industry which
means they are able to quickly convert their cash to assets if necessary to meet
current and upcoming obligations. Dollar General has shown great ability to
generate sales over the past five years and is the leader in its industry.

61

Profitability Ratios
The basis of profitability ratios is to determine the rate at which a
company can turn a profit off of operations. Four main factors determining
profits are operating efficiency, asset productivity, rate of return on assets, and
rate of return on equity. The overall goal of any company is to make sales at the
lowest cost feasible to achieve profits. This operating efficiency is measured by
the gross profit, operating profit, and net profit margin. Asset productivity is the
efficiency rates a company can turnover investments of assets into revenue.
This is calculated by the ratio of return on assets. Lastly, the rate of return on
equity measures the effectiveness a company can produce earnings growth from
investments.

Gross Profit Margin

0.4
0.35
0.3

Dollar General

0.25

Family Dollar

0.2

Dollar Tree
Freds

0.15

Industry average

0.1
0.05
0
2002

2003

2004

2005

2006

The gross profit margin ratio measures the gross profits of the company
to the amount of sales. We can determine how well a company has minimized
cost of good sold. According to the graph, Dollar General has maintained about a
25 to 30% ranges on it gross profit margin for the past five years. Freds Inc has

62

remained about the same as Dollar General, but Dollar Tree has minimized more
cost of good sold and created more profit. Dollar Tree has done average on its
profit margin, but as Dollar Trees ratios prove, Dollar General can improve on its
efficiency whether it is improving inventory costs or finding cheaper suppliers.

Operating Profit Margin

0.12
0.1
0.08
Dollar General

0.06

Family Dollar

0.04

Dollar Tree

0.02

Freds

0
-0.02

2002

2003

2004

2005

2006

Industry average

-0.04
-0.06

Operating profit ratio measures the same thing the gross profit ratio
measures, but it includes selling and administrating expenses. Once again, Dollar
General has maintained an average percentage of the past five years of around 7
%. Compared to Freds Inc, Dollar General has done well to keep costs at a
minimum. As before, Dollar Tree has maintained greater efficiency of the past
five years on average, but we should expect this because their gross profit
margin was higher. Once again we did not include Family Dollar in our valuation
of Dollar General though we did consider that Family Dollar did have a higher
operating profit ratio in 2006. We have concluded from the above data that
Dollar General is only doing average to the rest of the market. The trend of the
overall industry seems to be converging on Dollar Generals position, but we
believe that Dollar General can improve its position in the industry by getting rid
of excess cost.

63

Net Profit Margin

0.08
0.06

Dollar General

0.04
Dollar Tree
0.02
Family Dollar

0
-0.02
-0.04
-0.06

2002 2003 2004 2005 2006

Freds
Industry
average

-0.08

The net profit margin considers the overall effect of expenses compared
to sales and other income. We see that Dollar General has flat lined over the
past five years. They have no trends of growing or shrinking and have
maintained about a 4% net profit. The slightly higher margin for Dollar General is
because of an interest income. Dollar Generals competitors Family Dollar and
Dollar Tree have done a slightly better job over the past five years except for
2006 where Family Dollar has incurred more costs. Freds Inc. has done the
worst in the industry with a ratio of only 2% in the past two years. Dollar
General has a good job of maintaining a near average ratio margin, but
competitors are doing better which means Dollar General is not as efficient as
they could be.

64

Asset Turnover

3.5
Dollar General

Dollar Tree

2.5
2

Family Dollar

1.5
Freds
1
Industry
average

0.5
0
2002 2003 2004 2005 2006

The asset turnover ratios were used earlier as an expense diagnostic. We

have now used average assets instead of total assets. The asset turnover ratios
show that for every dollar of assets the company has a certain number of sales
will be made. In the past five years, Dollar General has improved their revenue
profitability. In 2002, they were getting two dollars worth of sales for every
asset. They have steadily increased this number over the past five years and in
2006 they are up to about 3.2-3.3 dollars per asset. Compared to the
competitors only Freds Inc has done a better job of asset turnover then Dollar
General. Freds inc. high asset turnover can be explained by size. They have far
less inventory and are a much smaller company then the other three companies.
Family Dollar has maintained a 2.5 asset turnover which is only slightly up from
past years. Dollar Tree has been lagging behind at 2.2 asset turnovers which
have been slightly better then past years. We can conclude from this information
that Dollar General is doing a good job of using assets to support sales volume.

65

Return on Assets
0.16
Dollar General

0.14
0.12

Dollar Tree

0.1
Family Dollar

0.08

Freds

0.06
0.04

Industry
average

0.02
0
-0.02

2002 2003 2004 2005 2006

The return on asset is the overall measure of profitability. It uses the net
income and the average total assets which include parts of other ratios mainly
net profit margin and asset turnover ratio. By dividing net income by assets we
can determine the return on the assets. We hope to see a greater percentage
from year to year. As the graph displays, Dollar General over the past five years
has increased its ROA except for the last year. It is now at a 12 % ROA down
from 13% the year before, but the company has improved its ROA from 2002
where it was at a 9% ROA. Dollar General has done relatively well against its
competitors. Dollar Tree has maintained a 10 % ROA in the past three years
while Family Dollar and Freds Inc are down to 5% ROA. We can conclude from
this information that Dollar General is doing overall better on its profitability from
asset productivity and operating efficiency compared to the other companies in
the industry. However, the recent decline, which is slightly unfavorable, in ROA
may be signaling a downward trend which could bring it further down to the
industry average.

66

Return on Equity

0.25
Dollar General
0.2
Dollar Tree

0.15

Family Dollar

0.1

Freds

0.05
0
-0.05

2002 2003 2004 2005 2006

Industry
average

The Return on equity is the net income of the company divided by the
past years owners equity. The ROE measures the amount of the owners interest
in total assets (class notes). We expect to this ratio much larger then the ROA
because equity is only a part of assets and would only equal ROA if the company
had no debt. As you can see from the chart, Dollar General finances its operation
with great debt then the other companies. Overall, Dollar general has maintained
about the same mount of return for the past 5 years. The others companies have
lower ROE this could be due to the fact that they finance there companies
operations with less debt. The more profit a company gets each year we should
see an increase in ROE. The past five years there has not been a significant
increase in ROE. We do not to expect to see much change in ROE in the next
few years because of the competitive nature of the industry. Dollar General may
have a slight advantage because of their leverage as long as they can maintain
there debt covenants.

67

Profitability overview
In conclusion Dollar General has by and large has followed the industry
trends in profitability. Dollar General has a lower gross profit margin and a
slightly lower net profit margin recently. While the gross profit has remained
lower than the industry, it has still followed it. However net profits has remained
almost constant over the past five years, since sales have been rising. There is
obvious room for improvement here. Seeing that the operating profit and net
profit have remained constant over the past five years while gross profit has
risen it shows us that general selling and administrative costs might need to be
cut in order to start increasing profit. They have set the industry trends for asset
turnover and their return on equity and have lead the industry in return on
assets. Overall Dollar General is the industry leader and has maintained its ability
to generate profit, with some slight room for improvement.
Capital Structure Ratios
The capital Structure Ratios are designed to identify how much of the
firms assets are financed through debt and owners equity. The next three ratios,
Debt to Equity ratio, Time Interest Earned, and Debt Service margin, will present
how much each firm in the industry invests in debt. They will also consider how
well the company can meet its debt obligation requirements. We will use these
ratios to evaluate Dollar General to the rest of the industry and draw conclusions
about the ability of the company to manage its capital structure.

68

Debt to equity
2.5
Dollar General
2
Dollar Tree
1.5
Family Dollar
1
Freds
0.5
Industry
average

0
2002 2003 2004 2005 2006

The debt to equity ratio takes the total liabilities and divides them by the
total owners equity. This ratio gives us an idea of the weight of liabilities
compared to owners equity. Knowing these ratios gives us an idea of what the
companys credit risk can be and how it compares to other companies. Dollar
General in 2002 was financing its company with over 2 dollars debt to 1 dollar
owners equity. In the next few years, they took several steps to reduce liabilities
and maintain proper debt leverage. They have managed to lower their debt to
equity to just below 1. The competitors have had significantly lower debt to
equity ratios. Most companies have financed most of their assets with owners
equity. Family Dollar is the only company that has increased to 1 dollar of
liabilities to 1 dollar of owners equity. We believe it is important for Dollar
General to maintain low levels of debt obligation. The nature of the discount
retail industry gives very little leeway. If a company falls into debt, it is much
harder to gain the resources to pay off debt obligations because of the highly
competitive nature of the industry.

69

Times Interest Earned

250
Dollar
General

200

Dollar Tree

150

Family Dollar

100

Freds

50
0
-50

2002 2003 2004 2005 2006

Industry
average

The times interest earned ratio tells us is how long it takes a company to
operate to cover the cost of interest expense. This is important because a
company would want to have high earnings with low interest expense. The ratio
is calculated by taking the operating income before interest and taxes and
dividing it by interest expense. As interest expenses increases for a company it
reduces the profits towards adverse conditions. Dollar Generals ratios have
been on a steady increase for the past five years merging to the market trend in
2006. This shows that Dollar General is about par with the industry regarding
interest costs. If this ratio were to deviate from the industry norm, this would be
a red flag to alert managers that something could be awry. The stable increase
in this ratio for Dollar General shows favorable growth in operating income to
interest expense. This is crucial because income from operations should be
adequate enough to cover expenses otherwise it could lead a decrease in profits.
It is important to note that Freds Inc. ratios are considerably higher than the
industry because of their high operating income in relation to interest expense.

70

Though they are a competitor of Dollar General, it should not be a benchmark

because their ratios are higher than the industry average year to year.
Debt Service Margin
2.5
Dollar General

Dollar Tree

1.5

Family Dollar

Freds

0.5

Industry
average

0
2002 2003 2004 2005 2006
-0.5

The debt service margin reveals the capability of a company to pay annual
installments of long term liabilities. This is calculated by dividing cash from
operations by installment payments of long term debt. It would be favorable for
a company to have a ratio greater than 1 because it shows that enough revenue
is being generated to cover long term debt. The greater the ratio the better off
a company is financially. In 2002, Dollar Generals ratio was at low of .78 but
increased to above 2 in 2006. This is a valuable tool to an analyst because it
tells if a company is able to pay off its long term debt. It would be concerning if
the ratio was consistently under 1 year after year showing more debt than
incoming cash. In comparison to Dollar Generals competitor Dollar Tree, their
ratios are above 1.5 in 2006. This is a favorable ratio for the two companies
after both dropping .5 respectively within the past 3 years. There was not
enough data available to calculate the ratio for the rest of the competitors.

71

Though this does not show a complete trend in the industry, we felt that it was
sufficient enough in comparison to Dollar Tree.

Capital Structure overview

Capital structure ratios show how a firm is financed. While Dollar General
has a lot of debt in comparison to the industry, they have greatly reduced it over
the past five years and are continuing to do so. Also they have had a consistent
increase in their ability to pay they interest on this debt, as well as steady
increase in their ability to pay their long term debt (with the exception of 2005).
Overall this shows Dollar General has been improving their capital structure over
the past five years and will most likely continue to do so in the future.

IGR/SGR Ratios
When forecasting a companys future outlook, it is important to know
what the internal growth rate (IGR) and the sustainable growth rate (SGR) is.
The SGR is the maximum amount of growth a company can maintain without
increasing its debt. On the other hand, the IGR is the peak at which a company
may grow without external financial assistance. These ratios will help determine
how much of the projected growth will be funded by operations instead of
borrowing. In order to be competitive in the discount retail industry, a company
must grow but not a large expense of debt. These growth rates are a key to
determine how successful future developments will be.

72

IGR
14

12

10
Freds
8

dollar tree
family dollar
Dollar general

industry
4

0
2002

2003

2004

2005

2006

2007

As shown above, the IGR for Dollar General is leveling off after peaking in
2004. The internal growth rate for the industry appears to be decreasing across
the board. Although rates are decreasing, Dollar Generals rates are well above
its competitors. This indicates they are able to grow with less financial debt,
which increases net income in the long run. This is favorable because it allows
room for growth in the industry without the expense of debt. Internal growth
rate is calculated by multiplying the return on assets by one minus dividends
divided by net income. Return on assets is a large factor in determining how
much a firm may grow. As more revenue is generated from assets, more will be
allocated towards net income and will be available for future expansion.

73

SGR
25

20

freds

15

dollar tree
family dollar
dollar general

10

industry

0
2002

2003

2004

2005

2006

2007

Sustainable growth rate is affected by the internal growth rate and the
debt to equity ratio. It is calculated by multiplying the IGR by one minus the
debt to equity ratio. It is beneficial to have a higher IGR to sustain the
companys growth. As shown in the above chart, Dollar General is able to
sustain their growth well above their competitors. This is explained by keeping
the debt to equity ratio as low as possible. It is beneficial for a company to
maintain a fair amount of debt and equity for operations. If Dollar General were
to increase the amount of debt used to finance their operations it would cost
more reducing profits.
Analyzing the IGR and SGR for Dollar General reveals that they are able to
experience growth in the future with minimal debt. Maintaining a good ratio of
return on assets and a low debt to equity makes this possible. In order for
Dollar General to remain profitable in the discount retail industry, they must

74

grow by increasing sales and improving their market presence. Generally

speaking, these growth rates are an encouraging sign for the future of this
company.
Forecasting financial statements
Forecasting a firms financial statements will help us to understand where
the company stands and where the company will be in the future. To forecast
Dollar Generals financials, we took the past 5 years of the companys financials
and forecasted those 10 years out to the future. We forecasted the income
statement using assumptions from the past 5 years of sales and looking at the
industry trend. To forecast the balance sheet, we took into factor Dollar
Generals inventory turnover ratio, current ratio, and asset turnover ratio. We
forecasted the statement of cash flows by taking into account the cash flow from
operations divided by net income (CFFO/NI), cash flow from operations divided
by sales (CFFO/SALES), and cash flow from operations divided by operating
income (CFFO/OI) ratios.
Income Statement
Forecasting our financial statements was required to perform a
prospective analysis of Dollar General. These projected statements form the
foundation to determine the corporations future potential. Long term forecasts
of 10 years were implemented which implied that assumptions were made on
our behalf. The first financial statement to forecast is the income statement.
This is the easier statement to forecast out of the three statements and require
fewer assumptions on our behalf. Since this has the fewest assumptions of the
forecasted statements, this is considered to be the most accurate. Dollar
General has already released its first 10-Q of the year on May 4, 2007. This
means that there is already accurate data for the first quarter to base our
forecast on for the remaining year. To start off, we assumed a growth of sales
75

to be 10%. This growth rate was derived from the average of the past five years
of sales reported on the income statement. We felt that this was an efficient
growth rate because between the years of 2003 and 2006 the average growth
rate was 11%. We assumed a more reserved growth rate of 10% to forecast
our variable sales from new store openings and upcoming product lines. Dollar
General is below the industry average of 13.06%, but is trying to increase sales
by adding a wider variety of merchandise. The estimate of our cost of goods
sold is approximately 73% of net sales each year. This was determined from our
common sized income statement shown below.

Common size Income Statement

Dollar General

Actual Financial Statement

Forecast Financial Statement

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

100%

Cost of goods sold

72%

71%

70%

71%

73%

73%

73%

73%

73%

73%

73%

73%

73%

73%

73%

Gross profit

28%

29%

30%

29%

27%

27%

27%

27%

27%

27%

27%

27%

27%

27%

27%

SG&A Expenses

21%

22%

22%

22%

21%

21%

23%

23%

23%

23%

23%

23%

23%

23%

23%

Operating profit

7%

7%

7%

7%

6%

6%

4%

4%

4%

4%

4%

4%

4%

4%

4%

Interest expense
Income before income
taxes

1%

0%

0%

0%

0%

0%

1%

1%

1%

1%

1%

1%

1%

1%

1%

7%

7%

7%

6%

6%

6%

2%

2%

2%

2%

2%

2%

2%

2%

2%

Total current income taxes

1%

2%

2%

2%

2%
4%

4%

4%

4%

4%

4%

4%

4%

4%

4%

Net sales

Income taxes

2%

3%

2%

2%

2%

Net income

4%

4%

4%

4%

4%

The common size income statement is a reflection of the income

statement but every line item as a percentage of sales. Sales starts out as 100%
and every item on the income statement are divided by sales. From this we
determined our cost of goods sold to be 72.95% of our base years of 2002-2006.
Using the same methodology with the common size income statement, we
forecasted interest expense, operating income, and selling, general and
administrative (SG&A) expenses. Net income was forecasted using a growth rate
of 9%. The percentage was a result from the average growth for the past five
76

years. With a few reasonable assumptions made on our behalf of past

information, the groundwork of our forecast is completed with the income
statement.

Dollar General

Actual Income Statement

*In millions

2003

2004

2005

2006

Forecasted Income Statement

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Net sales

6100

6871

7660

8582

9526

10478

11526

12679

13947

15342

16876

18564

20420

22462

24708

Cost of goods sold

4376

4853

5397

6117

6912

7644

8408

9249

10174

11192

12311

13542

14896

16386

18025

Gross profit

1724

2018

2263

2464

2613

2834

3117

3429

3773

4150

4565

5021

5524

6076

6684

SG&A

1296

1496

1706

1902

2000

2200

2674

2941

3236

3559

3915

4307

4737

5211

5732

457

511

556

561

613

633

443

488

537

591

650

715

786

865

951

42

31

28

26

23

21

168

185

204

224

247

272

299

329

361

414

479

534

544

589

612

275

302

333

366

403

443

487

536

590

427

465

507

553

603

657

716

781

851

928

Operating profit
Interest expense
Income before income taxes
Total current income taxes

66

158

164

186

200

Income taxes

149

178

190

194

197

Net income

264

301

344

350

391

Balance Sheet
The next financial statement in line to forecast is the balance sheet. This
will be a little less accurate because this forecast will be based off our forecasted
data from the income statement instead of past balance sheet numbers. To
forecast the balance sheet out ten years into the future, we enlisted the aid from
a few liquidity ratios covered earlier. The first line item to forecast is inventories.
To maintain consistency, we used the inventory turnover liquidity ratio. The
basis of this ratio is to take costs of goods sold and divide it by inventory. For
Dollar General the ratio is four, stating that inventory is replenished four times a
year. Since we already have the costs of goods sold forecasted from our income
statement, we manipulated the formula to determine that inventory is
approximately a quarter of costs of goods sold projected annually.
The next item in line is total assets. For this, we used the asset turnover
ratio which is sales divided by total assets. As previously discussed, Dollar
Generals asset turnover ratio in 2006 is 3.1. From this we rearranged the
equation and forecasted total assets as a third of sales each year. The next

77

major item in our balance sheet to forecast is total current liabilities. For this
account, we used the current ratio to project the estimated data. The current
ratio is a result of taking current assets and dividing it by current liabilities. We
took the industry average of 2.1 for this ratio and used it as a tool to predict our
current liabilities. At this point of the forecast, it is important to make sure the
financial statements flow together. We need to make sure our statements reflect
the flow of cash from net income into our retained earnings on the balance
sheet. Our forecasted retained earnings is a result of our previous years
retained earnings plus next years net income and subtracting next years
dividends. This is repeated for the remainder of the forecast of retained
earnings. The flow of cash is shown in the table below.
Statement of Retained Earnings
Forecasted Financial Statement
*In thousands

2007

Beg RE
Net Income
Dividends
End RE

1,434,537

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

1,434,537

1,808,385

2,218,670

2,669,308

3,164,932

3,710,230

4,310,932

4,970,105

5,693,336

6,486,651

426,020
52,172

464,363

506,155

551,708

601,362

655,485

714,479

778,782

848,872

925,271

54,078

55,517

56,084

56,064

54,783

55,306

55,551

55,557

55,452

1,808,385

2,218,670

2,669,308

3,164,932

3,710,230

4,310,932

4,970,105

5,693,336

6,486,651

7,356,470

78

Dollar General
*In Millions

2003

Actual Balalnce Sheet

2004 2005 2006 2007

ASSETS
Cash & cash equivalents
Short-term investments
Merchandise inventories
Deferred income taxes
Prepaid expenses & other current assets
Total current assets
Land & land improvements
Buildings
Leasehold improvements
Furniture, fixtures & equipment
Construction in progress
Gross property & equipment
Less accumulated depreciation & amort.
Net property & equipment
Other assets, net
Total Long-term assets
Total assets

121
1123
33
45
1323
145
333
157
940
1
1577
584
993
15
1010
2333

398
1157
30
66
1652
145
333
170
1039
19
1709
720
989
11
1000
2652

232
42
1376
24
53
1730
145
333
191
1196
74
1940
859
1080
29
1111
2841

200
8
1474
11
67
1762
147
381
209
1437
46
2221
1029
1192
37
1230
2992

189
29
1432
24
57
1742
147
437
212
1617
16
2430
1193
1236
60
1298
3040

16
341
63
73
29
239
67
664
199

16
383
78
97
35
297
45
743
199

12
409
72
118
39
333
69
825
199

LIABILITIES AND OWNER'S EQUITY

Current portion of long-term obligations
Accounts payable
Accrued compensation & benefits
Accrued insurance
Accrued taxes (other than taxes on income)
Accrued expenses & other current liabilities
Income taxes payable
Total current liabilities
Notes
Tax increment financing
Capital lease obligations
Financing obligations
Long-term obligations, incl current portion
Less: Current portion
Long-term obligations
Deferred income taxes
Other liabilities
Total liabilities

52
94
346
16
330
50

38
44
282
16
265
66

28
43
271
12
258
72

8
508
53
154
58
372
43
933
199
14
22
42
278
8
269
67

1751

1653

1708

1832

8
555
41
76
50
253
15
832
199
14
18
37
270
8
261
41
158
1838

164
421
1102
-0.97
1687

157
462
1106
-0.79
-

156
486
1434
-0.99
-

SHAREHOLDERS EQUITY
Common stock
Additional paid-in capital
Retained earnings
Accumulated other comprehensive income
Shareholders' equity before undernoted
Less com stk purch by employ dfd comp
trust
Less unearned comp rel to outstg restrict stk
Other shareholders equity
Alternative equity

166
313
812
-1
1290

168
376
1037
-1
1581

2
1291

2
1
1583

-2
1684

-4
-4.79

0.42
-0.57

Total shareholders' equity

Total Liabilities and equity

1288
3039

1576
3229

1684
3392

1720
3552

1745
3583

2008

2009

2010

Forecasted Balance Sheet

2011 2012 2013 2014

2015

2016

2017

1860

2069

2301

2559

2847

3167

3522

3918

4358

4847

1948

2167

2410

2681

2982

3317

3689

4104

4565

5077

1283

1427

1587

1765

1964

2184

2430

2702

3006

3344

1341
3290

1492
3659

1660
4070

1846
4527

2053
5036

2284
5601

2541
6230

2826
6930

3143
7708

3496
8574

927

1031

1147

1276

1420

1579

1757

1954

2173

2417

3288

3283

3284

3290

3303

3324

3352

3393

3448

3520

375

785

1236

1731

2277

2877

3537

4260

5053

5923

2075
3290

375
3659

786
4070

1236
4527

1732
5036

2277
5601

2878
6230

3537
6930

4260
7708

5054
8574

79

Statement of Cash Flows

To begin our forecast of Dollar General, we took our forecasted net
income and stated it in the cash flow. We took into account depreciation of
plant, property, and equipment and saw how vital the depreciation was to Dollar
Generals cash flow. Our forecasted growth rate for depreciation is 7%; our net
income growth rate of 9% makes it seem reasonable to have depreciation
growth in the area of our net income growth. We forecasted the operating
activities which grew in total over the ten years by 150% with a growth rate of
11%. We forecasted the dividends by taking the average cash dividends paid
from the past five years. We choose this method because we believe it is highly
unpredictable when and how much a firm is willing to pay dividends. We have
concluded that the statement of cash flows is by far the hardest set of financials
to forecast.
* See Appendix

80

Cost of capital estimation

A proper valuation of a firms projected growth and success requires an
estimate of its cost of capital. This cost amounts to all the acquisitions that bring
or add value to a firm or corporation. As a leader in the discount retail industry,
Dollar General makes a number of strategic moves such as opening new stores
and adding new inventory to maintain its position. This of course costs the
corporation capital and should be monitored carefully to supplement the
expected growth. Calculating the cost of capital requires the cost of debt and
equity to be determined first.
Dollar Generals cost of debt was not explicitly stated in our 2006 10-K so
an estimate was needed. This was achieved by using the most recent balance
sheet from the 10-K. The weighted average cost of debt before taxes was used
to establish our cost of debt. We took the current and long term liabilities and
figured the value of its weight in terms of total liabilities and multiplied this by
the market interest rate. For the market interest rate, we used the 3 month
non-financial commercial paper rate from the St. Louis Federal Reserve website.
The sum of each line item of liabilities resulted in a cost of debt of 5.19%.
Another estimate was needed for the cost of equity for Dollar General.
This was achieved by running a sequence of regression analysis to measure the
variables involved in calculating the cost of equity. A regression analysis
measures the relation of a dependent variable to a specified independent
variable. In our case, the dependent variable is the market risk premium and the
independent variable is the returns on the shares. In this estimation process, we
needed the T-Bill rate from the Federal Reserve. The regression analysis was
implemented for five different time periods of 3 months, 6 months, 2 ,5, and 10
years. This was used to establish which variables would provide the most
accurate data to determine the cost of equity. After running the series of
regressions, the results were close across all the time tables. From 2 months to
10 years, the output was similar. The could be explained by the stable nature of

81

the discount retail industry where there is constant market risk, from changes in
stock prices and interest rates that will not likely alter between time periods.
From the regression, we took the beta with the highest explanatory power. Our
beta appeared fairly stable and consistent across all the regression periods and
years. The beta would decrease from 72 months all the way to 24 months.
Regression output
3 month

72
60
48
36
24

Beta
1.19
1.02
1.5
0.53
0.28

6 month
R
square
0.19
0.14
0.14
0.02
0

72
60
48
36
24

2 years

72
60
48
36
24

Beta
1.19
1.02
1.51
0.54
0.31

Beta
1.19
1.02
1.5
0.53
0.29

R
square
0.19
0.14
0.14
0.02
0

5 years
R
square
0.19
0.14
0.14
0.02
0

72
60
48
36
24

Beta
1.19
1.01
1.51
0.54
0.31

R
square
0.19
0.14
0.14
0.02
0

10 years

72
60
48
36
24

Beta
1.18
1.01
1.51
0.54
0.31

R
square
0.18
0.14
0.14
0.02
0

The explanatory power yield is a key factor in determining the cost of

equity because it interprets the degree of the output as a result of the input.
With this said, the highest amount we received from the regression was 19%.
This is not a strong and convincing number to base our results on. This means
that 81% of the ensuing estimated figures are not a result of the inputs. A slight
82

decrease in the explanatory power from the 10 year to the 5 year regression
indicates that a shorter term would provide to some extent, higher assurance in
the results. Using this as a guide, and our stable results of beta we are now
almost able to calculate the cost of equity using the capital asset pricing model.
The next item in line to find is the risk free rate. For this rate we used a 1-year
treasury constant maturity rate of 4.98% from the St. Louis Federal Reserve
website. Referring to the textbook, Business valuation and analysis, when
analysts use the rate of treasury bonds as the risk free rate, the average
common stock return (based on returns of the S&P 500 index) have exceeded
that rate by 7.0 percent. (Palepu 8-3) Adopting this technique and using the
capital asset pricing model, we concluded that our cost of equity is 12.09%.
Our cost of debt was calculated from determining the weighted average
cost of debt from our most recent 10-K. We observed the stated long term debt
and took the weighted average of it. Once again, we used an interest rate from
the St. Louis Federal Reserve website. The 3 month non-financial commercial
paper rate was implemented as our rate of interest. From this, we multiplied
each weighted average debt by this rate and resulted with the value weighted
rate. The resulting sum of these calculations turned out to be Dollar Generals
estimated cost of debt before tax.
WACC estimation
Now that we have found the estimated cost of debt and equity, we can
calculate the weighted average cost of capital. The value of equity was
determined by taking the total number of outstanding shares and multiplying it
by the share price. These figures were attained from the date of valuation of
June 1, 2007. Dollar Generals market value of debt was determined to be the
book value of its total liabilities. Adding these two amounts together gives the
approximate value of the firm. From the stated values, our estimated WACC is
10.99% before tax. Dollar General reports a tax rate of 35% in their most recent

83

10-K, therefore we will use this as the effective tax rate to determine WACC after
tax has been implemented. The after tax WACC is 10.7%.
WACC (revised)
Capitalizing Dollar Generals operating leases increases their liabilities by
1.2 billion. This has no effect on the cost of equity. This is a result of taking
lease expenses off the income statement and adding it to liabilities and assets on
the balance sheet. The capital asset lease account increases by the same
amount as debt when this is done. As a result, the debt to equity ratio increases
from .74 to 1.45. This in turns causes their cost of debt to increase by 8%. This
causes the cost of debt to be approximately twice as less as the cost of equity.
From the revision, we recalculated Dollar Generals WACC to be 11%.
Valuation Analysis
In the previous sections, we have analyzed Dollar Generals industry,
accounting, and financials. With all the data that we have gathered, we can price
the company relative to the industry and put a value on the company. There are
several ways in which we can price Dollar General. In the next few sections, we
will run several different methods of valuing price. Each method we use will give
us an idea on determining if the company is overvalued, undervalued, or fairly
valued. We will be taking into account a mixture of financial and accounting
methods.
To begin, we will use method of comparables. The ratios we will be using
consider the average of the industry and price Dollar General relative to the
other firms. The method of comparables is relatively inaccurate due to the fact
that we are taking the average of the industry and the amount of variation is
high. After we have priced the company comparatively, we will use several
theoretical valuation models. The theoretical models are more reliable. The

84

theoretical model take forecasted information and determines the present value
of the company.
After we have collected all the data from the method of comparables and
theoretical model valuation, we can then determine weather or company is
valued correctly. Our overall valuation will consider all the information from
previous sections as well as the price that we determine to be most accurate.
Method of comparables
The Method of comparables uses several ratios to value the firm. We will
be taking the industry average for each ratio excluding Dollar General. We will
then determine a price relative to the industry average using algebra. We will be
pricing Dollar General using the P/E ratio (trailing and forecasted), the P/B ratio,
the P.E.G. ratio, the P/EBITDA ratio, P/ FCF ratio, and Enterprise value/ EBITDA.
After we have calculated each ratio, we will determine whether Dollar General is
overvalued, undervalued, or fairly valued compared to the industry average.
Price to Earnings Ratio (Trailing)
Millions

PPS

EPS

P/E

Industry Average

$21.74

Family Dollar

$35.11

$1.54

$22.80 Dollar General Estimated Price

Dollar Tree

$42.85

$1.93

$22.20

Fred's

$13.55

$0.67

$20.22

Dollar General $21.76

$0.44

Valuation=

$9.57

Overvalued

The trailing P/E Ratio prices the companies using past data and is very
inaccurate since it is valuating the company based on past performance.
According to the ratio, Dollar General is considerably overvalued. Dollar General

85

as of June 1st is selling at a price of $21.76. In our calculation, we determined

that the price based on the past performance should be $9.57. We will not be
considering this ratio as much as other on the pure fact that it does not
accurately portray the future of the firm.

Price to Earnings Ratio (Forecast)

Millions

PPS

Family Dollar
Dollar Tree
Fred's

$35.11
$42.85
$13.55

Dollar General $21.76

EPS

$ 1.85
$ 2.41
$ 0.89

$0.45

P/E

Industry Average

$17.33

Dollar General Estimated

$ 18.98 Price
$ 17.78
$ 15.22

P=

$7.80

Valuation= Overvalued

The forecasted price to earnings ratio uses forecasted earnings to project

what the price should be in the future. The forecasting P/E ratio does a better
job of predicting the future price of a company then the trailing P/E. In the table
above, we have calculated the forecasted price using the forecasting P/E. We
calculated that the price of shares given the forecasted P/E should be $7.80.
Once again, Dollar General is overvalued company if we use the forecasted P/E
ratio as an indicator of price. The numbers still have the potential of being
skewed because the earnings per share of each company have a large amount of
variation. The industry average is still being used and therefore is very
inaccurate.

86

Price to Book Ratio

Millions

PPS

BPS

P/B

Industry Average

Family Dollar
Dollar Tree
Fred's

Dollar General Estimated

$35.11 $3.95 $8.89 Price
$42.85 $3.87 $11.07
$13.55 $1.46 $9.28

Dollar General $21.76 $5.54

$9.75

P=

$54.00

Valuation= Undervalued

The price to book value ratio takes the current price and divides it by the
book value per share. Once we computed the P/B of each company, we took the
average. We then were able to calculate the price of Dollar General given their
book price per share of $5.54. We calculated the price given the book value to
be $54. We calculated with the P/B ratio that the company is undervalued. We
did not consider this calculation in are judgment of valuation. It is a very
inaccurate estimation because of the book value being recorded under historical
price.

P.E.G.
Millions

PPS

Family Dollar
Dollar Tree
Fred's

35.11
42.85
13.55

Dollar General

21.76

EPS

Earnings Growth
per share

1.85

12%

2.41

14%

0.89

15%

$0.45

5%

PEG

1.61
1.27
1.03

Industry
Average

$1.30

Dollar General
Estimated Price
P=

$2.92

Valuation= Overvalued

The PEG ratio uses the P/E ratio and divides it by the estimated growth of
earnings. We calculated the average of every other companys PEG to be 1.30.
By using algebra, we were able to back into the price of Dollar General given a
87

5% growth rate of earnings. We calculated the value of Dollar General to be .03

cents. Dollar General is overvalued given this information. We believe the
estimates to be very inaccurate due to the fact that we collected unreliable data
from yahoo finance, but used our calculations for Dollar General. There is just
too much variation in the earnings growth and earnings per share to get an
accurate picture of Dollar Generals price relative to the industry.
Price to EBITDA
Millions

Family Dollar
Dollar Tree
Fred's

PPS

EBITDA

P/EBITTDA Industry Average

$35.11 $542.16
$42.85 $488.80
$13.55 $75.53

$0.11

Dollar General Estimated

$0.06 Price
$0.09
P
$0.18

Dollar General $21.76 $255.28

$28.24

Valuation= Undervalued

The price to EBITDA is removes the interest and tax expenses from the
valuation. We calculated the industry average to be .11 cents. By multiplying the
industry average by the EBITDA of Dollar General we were able to arrive at a
price of $28.24. The price indicates that Dollar General is an undervalued firm.
Once again, the information is inaccurate due to lack of other relevant factors.
Price to Free Cash Flows
Millions

Family Dollar
Dollar Tree
Fred's

PPS

$35.11
$42.85
$13.55

Dollar General $21.76

FCF

P/FCF

157645
222100
5770
123,393

Industry Average

Dollar General
$0.0002 Estimated Price
$0.0002
P
$0.0023

$0.001

$123.39

Valuation= Undervalued

88

We calculated the average P/FCF to be $.001. We were able then to

calculate the price of Dollar General by multiplying the FCF of 123,393 by the
industry average P/FCF of $.001 to give us a price of $123.39. The P/FCF ratio
undervalues Dollar Generals current price.
Enterprise Value to EBITDA
Millions

EV

EBITDA EV/EBITDA Industry Average

Family Dollar
Dollar Tree
Fred's

5120
4360
558

542.16
488.8
75.53

Dollar General

7926

255.28

$8.58

Dollar General Estimated

$9.44 Price
$8.92
$7.39

P=

$3.54

Valuation= Overvalued

The EV/EBITDA ratio can be used to calculate the price of Dollar general
as well. We arrived at an industry average of $8.58. We were then able to
calculate Dollar Generals price by multiplying the industry average by 255.28. We
then subtracted the value of liabilities and cash and financial investments. We
then divide the number by the number of shares outstanding to reach a price of
$3.54. The price indicates that Dollar General is an over valued Firm.
Conclusion
After calculating the comparable ratios, we came to the conclusion that
Dollar General is an over valued firm. We believe however that the calculation
were very inaccurate estimate of Dollar Generals price because of the industry
average and the relative inaccurate information. The ratios are only able to
calculate a small portion of information needed to value a firm. The ratios are
also void of theory and common sense. However, the ratios do indicate slightly
how well the company is doing relative to competitors, and given this we believe
that Dollar Generals competitors are doing a better job.

89

Intrinsic Value Models

The intrinsic value models are theoretical models that asses the forecasted
information of a company and bring them back to present value. These models
are more effective then the comparable ratios we calculated in the previous
section. There are two types of models that we will be using. The discounted
dividend model and the free cash flows model use financial data to compute a
forecasted price on a company. The residual income incorporates financial and
accounting data and uses these numbers to calculate a value for the company.
The theoretical models use the data we calculated in our regression
analysis and WACC. Each model will use the Ke we calculated or the WACC we
calculated. Every model will calculate a present value factor which will be used to
bring all the forecasted years back to the present. We will also use the perpetuity
calculation for the last year and bring it back to present value using the previous
years present value factor. We then can calculate everything we need to develop
an intrinsic price.
The models we are using are very important in our analysis because they
give us the most accurate price we can calculate for Dollar General. There are
still a few inaccuracies in these models just from the pure fact that we are using
forecasted data. The models also dont consider conceptual analysis, but the
models do give us a relative price so that we may value a firm based on
quantitative measures. We will use the prices we calculate in each model along
with the overall analysis to value our company.
Discounted Dividends Model
The discounted dividend model will be the first method we will use in
calculating Dollar Generals intrinsic value. The equity value provided from this
model is equal to the present value of expected future dividends. This method
suggests that the firm expects to pay dividends to its shareholders for an
indefinite life at a certain growth rate. We started by taking the dividends we
90

forecasted from our statement of cash flows for the next ten years and divided
our cost of equity minus our estimated growth rate of 11%. Our cost of equity
was calculated by using regressions from 3 month, 6 month, 2-year, 5-year, and
10-year time periods. We then choose the highest R square and with that Beta
computed our cost of equity.
We calculated our present value factor by dividing one, by one plus our
cost of equity to the time powered. Then we took our forecasted dividends paid
and multiplied them by our present value factor which discounted them back to
present value. We also computed a perpetuity starting in 2018 by dividing the
total dividends paid by our cost of equity minus our growth rate. This value plus
the total dividends paid represents the intrinsic value of equity. We found the
intrinsic price per share by dividing that number by the total shares outstanding.
The implied price per share from this model was $18.94. This price is below the
current share price of $21.76 which we can conclude is implying this firm is
overvalued.
The sensitivity analysis helps to better understand if the firm is overvalued
or undervalued by using different variables. In our discounted dividend model,
we used the change in our growth and a change in our cost of equity to help us
value the firm. From our model we can clearly see that Dollar General is
overvalued.

91

Sensitivity Analysis

Ke

0.14
0.13
0.1209
0.11
0.1

0
2.74
3.01
3.3
3.72
4.18

0.02
2.93
3.25
3.61
4.13
4.75

0.04
3.2
3.6
4.07
4.79
5.68

0.06
0.11
3.59
6.9
4.15 10.34
4.83 18.94
5.96 N/A
7.56 N/A

Growth

Undervalued < 20.02

Overvalued > 23.50
N/A
Free Cash Flows
This model is calculated by taking the forecasted cash flows from
operations and discounting them back to the present value. To do this we need
the free cash flows, WACC, and the growth rate of the perpetuity. Our WACC
estimate of 10.99% was used as the discount rate to find the present value
factor. The factor was then multiplied by each free cash flow which brought it to
the present value. The perpetuity was forecasted for 2018 and was divided by
WACC less the growth rate. This perpetuity was then multiplied by the present
value factor in year ten to get the present value.
We then took the present value sum of free cash flows, added the
perpetuity, and subtracted our book value of liabilities to get the value of Dollar
Generals equity. Because this value was at the end of February, we forecasted
three-months ahead as a value on June 1, 2007. The market value of equity is
then divided by the total number of shares outstanding to give Dollar Generals
intrinsic share price.
Dollar General has different outcomes when using this model. This
method is somewhat consistent on keeping the firm overvalued. Our estimate of
WACC shows that the firm is overvalued except for the growth rate of the

92

perpetuity being at 11%. There are a few cases where the outcome has shown
that Dollar General was fairly valued and perpetuity growth rates being at 2%
and 4%.
Sensitivity Analysis
Growth

0.08
0.09
0.1099
0.12
0.13

WACC

0
14.88
11.89
7.76
6.27
5.06

0.02
19.67
15.22
9.52
7.59
6.07

0.04
29.27
21.2
12.29
9.57
7.53

0.06
0.08
58.08 n/a
35.17
105.01
17.28
28.95
12.88
19.48
9.83
13.97

Overvalued > 20.02

Fairly Valued
Undervalued < 23.50
N/A

RESIDUAL INCOME
Residual income is what you earn when you create a result just once,
then get paid for it periodically (yahoo finance), therefore the purpose of
residual income is to earn more with assets already invested. The main aim for
this model was to see how much money Dollar General is looking to earn in the
future.
The discount rate used in the calculation of residual income is the cost of
capital (ke). Unlike the other valuation methods that use the cost of capital, we
started off by calculating our book value equity per share by adding the book
value from the previous year plus the earnings per share minus the dividends per
share. Then we proceeded to calculate our normal earnings by multiplying the
book value from the previous year by the cost of equity. To get the residual
93

income we subtracted the normal income from net income. To calculate the
present value of annual residual income we multiplied the residual income by
1/(1+ke)^n, which is the present value factor. We then calculated the total
present value of annual residual income by multiplying the residual income by
the present value of the annual residual income. We then discounted the
perpetuity back to the present value using our growth rate of 11%.
The growth rate used to discount the perpetuity is a negative growth rate
because we are trying to bring the negative residual income back to zero, so if
we used a positive growth rate then the negative value would just keep getting
larger and larger. The sensitivity analysis table helps to illustrate how quickly the
value gets to zero by changing the growth rate. Using the data we calculated, we
determined that by using the residual income model Dollar General is
overvalued.

Sensitivity Analysis
Growth

Ke

0.09
0.11
0.1209
0.15
0.17

0
24.68
16.41
12.97
6.05
2.60

-0.05
19.81
14.18
11.64
6.19
3.28

-0.11
17.19
12.84
10.81
6.28
3.78

-0.15
16.17
12.29
10.46
6.32
4.00

-0.2
15.29
11.80
10.14
6.36
4.22

Overvalued > 20.02

Fairly Valued
Undervalued < 23.50
N/A

94

Long Run Residual Income

The long run residual income model uses the ROE, Ke, and growth to
predict the intrinsic value. We used three different sensitivity analysis tables to
take in account different variation to growth, ROE and Ke. We used the formula:
P0 = BVE(1+( ROE-Ke / Ke-G )
Using this formula to determine the price we calculated the prices on the tables below.
According to the table, it is evident that our firm is greatly overvalued except for the first
table in which we are not sure if it was just a calculation error.
Growth

Ke

0.11
0.13
0.1507
0.17 NA
0.19 NA

0.15
7.21
4.26
1.21

0.17
6.85
4.56
2.20
0
NA

0.19
6.49
4.86
3.19
1.62
0

0.21
6.29
5.03
3.73
2.52
1.26

0.23
6.16
5.14
4.07
3.08
2.05

0.19
2.2
2.75
3.19
5.51
11.01

0.21
2.77
3.32
3.73
5.54
8.31

0.23
3.17
3.7
4.07
5.55
7.41

Growth

ROE

0.09
0.11
0.1209
0.15
0.17

0.15
0.67
0.94
1.21
5.17
NA NA

0.17
1.35
1.8
2.20
5.41

95

ROE

0.11
0.13
0.1507
0.17
0.19

Ke

0.09
3.98
2.35
0.67
NA
NA

0.11
5.60
3.31
0.94
NA
NA

0.1209
7.21
4.26
1.21
NA
NA

0.15
30.78
18.19
5.16
NA
NA

0.17
NA
NA
NA
5.60
15.7

*Assuming Average Long Run Growth Rate

Overvalued > 20.02
Fairly Valued
Undervalued < 23.50
N/A

Abnormal earning growth model (AEG)

The Abnormal growth model uses the cost of equity. The D.R.I.P. is first
calculated by multiplying the cost of equity by the dividends from the previous
year. Then the cumulative income is found by subtracting the earning per share
of the current year from the D.R.I.P. Then we proceeded to find the normal
income or the benchmark by multiplying one plus the cost of equity (1+Ke) by
the earning per share from the previous year. The AEG is the result of
subtracting the normal income from the cumulative income. To find the present
value of AEG we multiply AEG by its present value factor-the present value
factor= 1/(1+Ke)^t-1. We used the last years Annual AEG as the perpetuity,
then we discounted it back by dividing it by Ke minus the growth. The AEG
model used the same concept as the residual income model because the growth

96

used has to be negative in order to bring the perpetuity closer to zero instead of
the latter.

Growth

Ke

0.14
0.13
0.1209
0.11
0.1

-0.1
7.34
7.93
8.54
9.41
10.37

-0.09
7.31
7.89
8.5
9.37
10.33

-0.08
7.27
7.85
8.46
9.32
10.27

-0.07
7.23
7.81
8.41
9.27
10.22

-0.06
7.19
7.76
8.36
9.21
10.16

Overvalued > 20.02

Fairly Valued
Undervalued < 23.50
N/A

97

Appendix
Current Ratio

DG
FDO
DLTR
FRED
AVG

2002

2003

2004

2005

2006

1.37
1.99

1.99
1.94

2.22
1.72

2.1
1.51

1.89
1.44

2.88

2.73

3.29

3.19

2.5

3.27

2.55

2.55

2.76

2.58

2.3775

2.3025

2.445

2.39

2.1025

Quick Asset Ratio

2002

2003

2004

2005

2006

DG

0.23

0.18

0.54

0.33

0.22

FDO

0.41

0.35

0.21

0.16

0.22

1.13

0.64

1.08

1.15

0.8

3.2

2.46

2.51

2.6

2.42

1.2425

0.9075

1.085

1.06

0.915

DLTR
FRED
AVG

Inventory Turnover

DG
FDO
DLTR
FRED
AVG

2002

2003

2004

2005

2006

3.37
0.64

3.9
0.6

4.19
0.59

3.92
0.06

4.15
0.08

0.26

3.4

3.27

3.85

4.32

4.04

4.13

3.9

3.76

3.76

2.0775

3.0075

2.9875

2.8975

3.0775

98

Working Capital Turnover

DG
FDO
DLTR
FRED
AVG

2002

2003

2004

2005

2006

12.6
0.24

9.25
0.25

7.56
0.3

8.46
0.27

10.35
0.08

0.32

6.12

4.63

5.24

6.89

6.58

7.97

7.87

7.08

7.43

4.935

5.8975

5.09

5.2625

6.1875

Gross Profit Margin

2002

2003

2004

2005

2006

0.28
0.33

0.28
0.34

0.29
0.34

0.3
0.33

0.29
0.33

0.29

0.36

0.36

0.35

0.34

0.27

0.28

0.28

0.28

0.28

0.2925

0.315

0.3175

0.315

0.31

DG
FDO
DLTR
FRED
AVG

Operating Profit Margin

DG
FDO
DLTR
FRED
AVG

2003
0.07

2002
0.07
n/a

n/a

2004
0.07
n/a

2005
0.07

2006
0.07
0.074

n/a

-0.05

0.1

0.09

0.08

0.08

0.03

0.04

0.04

0.03

0.03

0.016667

0.07

0.066667

0.06

0.0635

99

Net Profit Margin

DG
FDO
DLTR
FRED
AVG

2002

2003

2004

2005

2006

0.04
0.05

0.04
0.05

0.04
0.05

0.04
0.04

0.04
0.03

-0.07

0.06

0.06

0.05

0.05

0.02

0.03

0.03

0.02

0.02

0.01

0.045

0.045

0.0375

0.035

Asset Turnover

DG
FDO
DLTR
FRED
AVG

2002

2003

2004

2005

2006

1.99
2.37

2.28
2.39

2.57
2.44

2.86
2.42

3.21
2.53

0.12

1.89

1.74

1.89

2.12

3.21

3.19

3.15

3.1

3.19

1.9225

2.4375

2.475

2.5675

2.7625

ROA

DG
FDO
DLTR
FRED
AVG

2002

2003

2004

2005

2006

0.09
0.07

0.1
0.07

0.13
0.07

0.13
0.05

0.12
0.05

-0.01

0.12

0.1

0.1

0.1

0.07

0.08

0.08

0.06

0.05

0.055

0.0925

0.095

0.085

0.08

100

ROE

2003

2002

2005
0.2

2006

0.11

0.19
0.11

0.09

0.2
0.1

-0.01

0.18

0.15

0.15

0.16

0.09

0.11

0.12

0.09

0.08

0.0975

0.1525

0.1425

0.1325

0.135

DG
FDO
DLTR
FRED
AVG

0.21

2004

0.2
0.11

Debt to Equity Ratio

DG
FDO
DLTR
FRED
AVG

2002

2003

2004

2005

2006

2.16
0.46

1.08
0.45

0.86
0.52

0.85
0.63

0.9
1.02

0.54

0.46

0.54

0.53

0.6

0.3

0.38

0.42

0.48

0.47

0.865

0.5925

0.585

0.6225

0.7475

Times Interest Earned

2002
DG
FDO
DLTR
FRED
AVG

8.16
n/a

2003

2004

10.72

16.23
n/a

n/a

2005

2006

19.34

21.42
23.76

n/a

-11.72

35.03

28.51

20.17

18.84

n/a

210.23

127.19

49.1

40

85.32667

57.31

29.53667

26.005

-1.78

101

IGR
Freds
dollar tree
family dollar
Dollar general
industry

2002
0.07
12
7.16
6.41

2003
0.08
0
11.2
8.64
4.98

2004
0.08
0.12
10.2
10.89
5.3225

2005
7.4
0.1
7
10.91
6.3525

2006
4.95
0.1
5.4
10.33
5.195

2007
0.1

0.1

SGR
freds
dollar tree
family dollar
dollar
general

2002
9
0
17.5

2003
11
0
16.2

2004
14.4
17.52
15.5

2005
10.91
15.4
11.4

2006
7.27
13.3
10.9

22.62

17.97

20.25

20.18

19.63

industry

12.28

11.2925

16.9175

14.4725

12.775

2007
16

16

102

Regressions
3 month
SUMMARY
OUTPUT
Regression
Statistics
Multiple R

0.437668942

R Square

0.191554103

Adjusted R Square

0.180004876

Standard Error

0.090997736

Observations

72

ANOVA
df

MS

Significance F

0.137340843

0.137340843

16.58588069

0.000120756

Residual

70

0.579641155

0.008280588

Total

71

0.716981999

Regression

SS

Coefficients
Intercept
X Variable 1

Standard
Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

0.00827982

0.010727215

0.771851759

0.442800225

-0.013114936

0.029674575

-0.013114936

Upper 95.0%
0.029674575

1.197711529

0.294091831

4.072576664

0.000120756

0.611163874

1.784259183

0.611163874

1.784259183

SUMMARY
OUTPUT
Regression
Statistics
Multiple R

0.386732661

R Square

0.149562151

Adjusted R Square
Standard Error

0.13489943
0.085231014

Observations

60

ANOVA
df

MS

Significance F

0.074097307

0.074097307

10.20016313

0.002270781

Residual

58

0.421330889

0.007264326

Total

59

0.495428196

Regression

SS

Coefficients

Standard
Error

t Stat

P-value

Lower 95%

Upper 95%

Lower 95.0%

Upper 95.0%

Intercept

0.005944851

0.011068089

0.53711627

0.593241965

-0.016210336

0.028100038

-0.016210336

0.028100038

X Variable 1

1.023362125

0.320424548

3.193769423

0.002270781

0.381962709

1.664761541

0.381962709

1.664761541

103

SUMMARY
OUTPUT
Regression
Statistics
Multiple R

0.383509939

R Square

0.147079873

Adjusted R Square

0.128538131

Standard Error

0.080195712

Observations

48

ANOVA
df
Regression

SS

MS

F
7.932365467

0.051015836

0.051015836

Residual

46

0.2958422

0.006431352

Total

47

0.346858036

Significance
F
0.00712947

Coefficients

Standard
Error

t Stat

P-value

Lower 95%

Upper 95%

0.000393806

0.012311057

0.031987973

0.974620036

-0.024387067

0.025174678

Lower 95.0%
0.024387067

Upper 95.0%

Intercept
X Variable 1

1.507907888

0.535393945

2.816445538

0.00712947

0.430215789

2.585599986

0.430215789

2.585599986

SS

MS

Significance
F

0.93341596

0.340799124

Lower 95%
0.019689044
0.588934039

Upper 95%

Lower 95.0%
0.019689044
0.588934039

Upper 95.0%

0.025174678

SUMMARY
OUTPUT
Regression
Statistics
Multiple R

0.163462104

R Square
Adjusted R Square

0.026719859
0.001906027

Standard Error

0.066683295

Observations

36

ANOVA
df
Regression

0.004150585

0.004150585

Residual

34

0.151186504

0.004446662

Total

35

0.155337089

Coefficients

Standard
Error

t Stat

P-value

Intercept

0.003675764

0.011497046

0.319713764

0.751141677

X Variable 1

0.533706226

0.552413977

0.966134545

0.340799124

0.027040572
1.656346491

0.027040572
1.656346491

104

SUMMARY
OUTPUT
Regression
Statistics
Multiple R

0.069278346

R Square
Adjusted R Square

0.004799489
0.040436898

Standard Error

0.079167201

Observations

24

ANOVA
df

SS

Regression

MS

Significance
F

0.106097978

0.747708888

Lower 95%
0.031964238
1.519665049

0.000664963

0.000664963

Residual

22

0.137883804

0.006267446

Total

23

0.138548767

Coefficients

Standard
Error

t Stat

P-value

Intercept

0.003756989

0.017224404

0.218120123

0.829346055

X Variable 1

0.283154635

0.869300885

0.325726846

0.747708888

Upper 95%
0.039478216
2.08597432

Lower 95.0%
0.031964238
1.519665049

Upper 95.0%
0.039478216
2.08597432

6 Month
SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.437891034
R Square
0.191748558
Adjusted R Square
0.180202109
Standard Error
0.090986791
Observations
72
ANOVA
df
1
70
71

SS
0.137480264
0.579501734
0.716981999

MS
0.137480264
0.008278596

F
16.60671217

Significance F
0.000119689

Coefficients
0.00841056
1.198420355

Standard Error
0.010725208
0.294081258

t Stat
0.784186213
4.075133393

P-value
0.435576501
0.000119689

Lower 95%
-0.012980192
0.611893788

Regression
Residual
Total

Intercept
X Variable 1
SUMMARY
OUTPUT
SUMMARY
OUTPUT

Upper 95%
0.029801312
1.784946922

Lower 95.0%
-0.012980192
0.611893788

Upper 95.0%
0.029801312
1.784946922

Regression Statistics
Multiple R
0.387048161
R Square
0.149806279
Adjusted R Square
0.135147767
Standard Error
0.085218779
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

1
58
59

SS
0.074218255
0.421209941
0.495428196

MS
0.074218255
0.00726224

F
10.21974635

Significance F
0.002250409

Coefficients
0.006066834
1.024101022

Standard Error
0.01106234
0.320348534

t Stat
0.548422289
3.196833801

P-value
0.58550685
0.002250409

Lower 95%
-0.016076845
0.382853765

Upper 95%
0.028210513
1.665348278

Lower 95.0%
-0.016076845
0.382853765

Upper 95.0%
0.028210513
1.665348278

105

Regression Statistics
Multiple R
0.384170707
R Square
0.147587132
Adjusted R Square
0.129056418
Standard Error
0.080171861
Observations
48
ANOVA
df
1
46
47

SS
0.051191783
0.295666253
0.346858036

MS
0.051191783
0.006427527

F
7.964459871

Significance F
0.007022773

Coefficients
0.000605378
1.508855636

Standard Error
0.012279655
0.534649943

t Stat
0.049299284
2.822137465

P-value
0.960894229
0.007022773

Lower 95%
-0.024112284
0.432661135

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.025323041
2.585050136

Lower 95.0%
-0.024112284
0.432661135

Upper 95.0%
0.025323041
2.585050136

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.164654568
R Square
0.027111127
Adjusted R Square
-0.001503252
Standard Error
0.06666989
Observations
36
ANOVA
df
1
34
35

SS
0.004211363
0.151125726
0.155337089

MS
0.004211363
0.004444874

F
0.947465153

Significance F
0.337239999

Coefficients
0.003750672
0.537149552

Standard Error
0.01146997
0.55184053

t Stat
0.326999293
0.973378217

P-value
0.745673146
0.337239999

Lower 95%
-0.019559111
-0.58432533

1
22
23

SS
0.000699286
0.137849482
0.138548767

MS
0.000699286
0.006265886

F
0.11160203

Significance F
0.74149115

Coefficients
0.003749872
0.290232311

Standard Error
0.017178783
0.868779796

t Stat
0.218285103
0.3340689

P-value
0.829219103
0.74149115

Lower 95%
-0.031876742
-1.511506702

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.027060455
1.658624433

Lower 95.0%
-0.019559111
-0.58432533

Upper 95.0%
0.027060455
1.658624433

Upper 95%
0.039376487
2.091971324

Lower 95.0%
-0.031876742
-1.511506702

Upper 95.0%
0.039376487
2.091971324

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.071043761
R Square
0.005047216
Adjusted R Square
-0.040177911
Standard Error
0.079157347
Observations
24
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

106

2 Year
SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.437022633
R Square
0.190988782
Adjusted R Square
0.179431478
Standard Error
0.091029546
Observations
72
ANOVA
df
1
70
71

SS
0.136935518
0.58004648
0.716981999

MS
0.136935518
0.008286378

F
16.52537617

Significance F
0.000123908

Coefficients
0.008866941
1.194278879

Standard Error
0.010728509
0.293785309

t Stat
0.826484043
4.065141593

P-value
0.411337865
0.000123908

Lower 95%
-0.012530394
0.608342564

1
58
59

SS
0.074124106
0.42130409
0.495428196

MS
0.074124106
0.007263864

F
10.20450134

Significance F
0.002266251

Coefficients
0.0063934
1.021775626

Standard Error
0.011053424
0.319859788

t Stat
0.578408994
3.194448519

P-value
0.565227312
0.002266251

Lower 95%
-0.015732433
0.381506701

1
46
47

SS
0.051510156
0.29534788
0.346858036

MS
0.051510156
0.006420606

F
8.022631427

Significance F
0.006833677

Coefficients
0.000966055
1.512916823

Standard Error
0.012226892
0.534141882

t Stat
0.079010639
2.832425008

P-value
0.937366879
0.006833677

Lower 95%
-0.023645402
0.437744998

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.030264276
1.780215195

Lower 95.0%
-0.012530394
0.608342564

Upper 95.0%
0.030264276
1.780215195

Upper 95%
0.028519233
1.662044552

Lower 95.0%
-0.015732433
0.381506701

Upper 95.0%
0.028519233
1.662044552

Upper 95%
0.025577511
2.588088649

Lower 95.0%
-0.023645402
0.437744998

Upper 95.0%
0.025577511
2.588088649

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.386802591
R Square
0.149616244
Adjusted R Square
0.134954456
Standard Error
0.085228303
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.385363478
R Square
0.14850501
Adjusted R Square
0.129994249
Standard Error
0.080128685
Observations
48
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

107

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.167397983
R Square
0.028022085
Adjusted R Square
-0.000565501
Standard Error
0.06663867
Observations
36
ANOVA
df
1
34
35

SS
0.004352869
0.15098422
0.155337089

MS
0.004352869
0.004440712

F
0.980218652

Significance F
0.329138808

Coefficients
0.003797349
0.544678083

Standard Error
0.011441711
0.550146582

t Stat
0.331886479
0.990059923

P-value
0.742012282
0.329138808

Lower 95%
-0.019455005
-0.573354282

1
22
23

SS
0.000804933
0.137743834
0.138548767

MS
0.000804933
0.006261083

F
0.128561304

Significance F
0.723346262

Coefficients
0.00359244
0.311040141

Standard Error
0.017186825
0.867483666

t Stat
0.209022878
0.358554464

P-value
0.83635368
0.723346262

Lower 95%
-0.032050853
-1.488010863

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.027049703
1.662710448

Lower 95.0%
-0.019455005
-0.573354282

Upper 95.0%
0.027049703
1.662710448

Upper 95%
0.039235733
2.110091145

Lower 95.0%
-0.032050853
-1.488010863

Upper 95.0%
0.039235733
2.110091145

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.076221685
R Square
0.005809745
Adjusted R Square
-0.039380721
Standard Error
0.079127008
Observations
24
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

5 Year

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.436041577
R Square
0.190132257
Adjusted R Square
0.178562718
Standard Error
0.091077721
Observations
72
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

1
70
71

SS
0.136321406
0.580660593
0.716981999

MS
0.136321406
0.008295151

F
16.43386603

Significance F
0.000128839

Coefficients
0.009573166
1.19052507

Standard Error
0.010733797
0.293676147

t Stat
0.891871344
4.0538705

P-value
0.375517483
0.000128839

Lower 95%
-0.011834717
0.60480647

Upper 95%
0.030981049
1.776243669

Lower 95.0%
-0.011834717
0.60480647

Upper 95.0%
0.030981049
1.776243669

108

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.385788312
R Square
0.148832622
Adjusted R Square
0.134157322
Standard Error
0.085267563
Observations
60
ANOVA
df
1
58
59

SS
0.073735877
0.421692318
0.495428196

MS
0.073735877
0.007270557

F
10.14170924

Significance F
0.002332744

Coefficients
0.006950186
1.018364892

Standard Error
0.011043416
0.319777454

t Stat
0.629351098
3.184605037

P-value
0.531590467
0.002332744

Lower 95%
-0.015155613
0.378260776

1
46
47

SS
0.051240188
0.295617848
0.346858036

MS
0.051240188
0.006426475

F
7.973296219

Significance F
0.006993695

Coefficients
0.001607214
1.512615632

Standard Error
0.012163928
0.535685184

t Stat
0.132129505
2.823702573

P-value
0.895458121
0.006993695

Lower 95%
-0.022877503
0.4343373

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.029055985
1.658469008

Lower 95.0%
-0.015155613
0.378260776

Upper 95.0%
0.029055985
1.658469008

Upper 95%
0.02609193
2.590893965

Lower 95.0%
-0.022877503
0.4343373

Upper 95.0%
0.02609193
2.590893965

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.384352295
R Square
0.147726687
Adjusted R Square
0.129199006
Standard Error
0.080165298
Observations
48
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.167435662
R Square
0.028034701
Adjusted R Square
-0.000552514
Standard Error
0.066638238
Observations
36
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

1
34
35

SS
0.004354829
0.15098226
0.155337089

MS
0.004354829
0.004440655

F
0.980672692

Significance F
0.329028391

Coefficients
0.003906649
0.544050983

Standard Error
0.011415474
0.549385962

t Stat
0.342223966
0.990289196

P-value
0.734288894
0.329028391

Lower 95%
-0.019292385
-0.572435616

Upper 95%
0.027105682
1.660537583

Lower 95.0%
-0.019292385
-0.572435616

Upper 95.0%
0.027105682
1.660537583

109

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.077490443
R Square
0.006004769
Adjusted R Square
-0.039176833
Standard Error
0.079119247
Observations
24
ANOVA
df
1
22
23

SS
0.000831953
0.137716814
0.138548767

MS
0.000831953
0.006259855

F
0.132902965

Significance F
0.718921732

Coefficients
0.00355091
0.316183885

Standard Error
0.017191212
0.867306089

t Stat
0.206553818
0.36455859

P-value
0.838258026
0.718921732

Lower 95%
-0.032101481
-1.482498847

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.039203302
2.114866617

Lower 95.0%
-0.032101481
-1.482498847

Upper 95.0%
0.039203302
2.114866617

10 Year

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.435697218
R Square
0.189832066
Adjusted R Square
0.178258238
Standard Error
0.0910946
Observations
72
ANOVA
df
1
70
71

SS
0.136106174
0.580875825
0.716981999

MS
0.136106174
0.008298226

F
16.40183969

Significance F
0.000130612

Coefficients
0.01012926
1.189664311

Standard Error
0.010737471
0.293750187

t Stat
0.943356229
4.04991848

P-value
0.348743333
0.000130612

Lower 95%
-0.01128595
0.603798044

1
58
59

SS
0.073550082
0.421878114
0.495428196

MS
0.073550082
0.007273761

F
10.11169963

Significance F
0.00236524

Coefficients
0.007427615
1.01698019

Standard Error
0.011034922
0.319816166

t Stat
0.673100803
3.179889877

P-value
0.503556421
0.00236524

Lower 95%
-0.014661182
0.376798583

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.031544469
1.775530578

Lower 95.0%
-0.01128595
0.603798044

Upper 95%
0.029516412
1.657161797

Lower 95.0%
-0.014661182
0.376798583

Upper 95.0%
0.031544469
1.775530578

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.385301963
R Square
0.148457603
Adjusted R Square
0.133775837
Standard Error
0.085286345
Observations
60
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

Upper 95.0%
0.029516412
1.657161797

110

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.383430821
R Square
0.147019195
Adjusted R Square
0.128476134
Standard Error
0.080198564
Observations
48
ANOVA
df
1
46
47

SS
0.050994789
0.295863247
0.346858036

MS
0.050994789
0.00643181

F
7.928528899

Significance F
0.007142339

Coefficients
0.002198057
1.511944215

Standard Error
0.012108544
0.536956941

t Stat
0.181529438
2.815764354

P-value
0.856749571
0.007142339

Lower 95%
-0.022175177
0.431105968

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.026571291
2.592782462

Lower 95.0%
-0.022175177
0.431105968

Upper 95.0%
0.026571291
2.592782462

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.167299661
R Square
0.027989176
Adjusted R Square
-0.000599377
Standard Error
0.066639798
Observations
36
ANOVA
df
1
34
35

SS
0.004347757
0.150989332
0.155337089

MS
0.004347757
0.004440863

F
0.979034364

Significance F
0.329427052

Coefficients
0.004033295
0.543318167

Standard Error
0.011387311
0.549104824

t Stat
0.354192039
0.989461653

P-value
0.72538225
0.329427052

Lower 95%
-0.019108506
-0.57259709

Regression
Residual
Total

Intercept
X Variable 1

Upper 95%
0.027175096
1.659233423

Lower 95.0%
-0.019108506
-0.57259709

Upper 95.0%
0.027175096
1.659233423

SUMMARY
OUTPUT
Regression Statistics
Multiple R
0.077998405
R Square
0.006083751
Adjusted R Square
-0.03909426
Standard Error
0.079116103
Observations
24
ANOVA
df
Regression
Residual
Total

Intercept
X Variable 1

1
22
23

SS
0.000842896
0.137705871
0.138548767

MS
0.000842896
0.006259358

F
0.134661775

Significance F
0.717152766

Coefficients
0.003559351
0.318375148

Standard Error
0.017169595
0.867594906

t Stat
0.207305462
0.366962907

P-value
0.837678188
0.717152766

Lower 95%
-0.032048209
-1.480906553

Upper 95%
0.03916691
2.117656849

Lower 95.0%
-0.032048209
-1.480906553

Upper 95.0%
0.03916691
2.117656849

111

References
1. www.dollargeneral.com
Dollar General 10-K
2. www.familydollar.com
Family Dollar 10-K
3. www.dollartree.com
Dollar Tree 10-K
4. www.edgarscan.com
5. www.finance.yahoo.com
6. www.nyse.com
7. http://moneycentral.msn.com
8. www.research.stlouisfed.org/fred2/
9. Bernard, Victor, Paul Healy, and Krishna Palepu. Business Analysis &
Valuation Third Edition. 2004

112