According to the case, Lowe’s management said that the growth rate of next two years would be 18% to 19%. So I prefer to use this rate as the growth rate of the first two years. The growth rate of the first two years would be 18.5%. The growth rate from 2004 to 2006 is estimated by the number of new stores, sq. footage and the historical sales.

The number 9.7% is the geometric mean of footage/stores from 1997 to 2001 and the number 1.960% is the average of increase in sales/footage. Although the growth rate of the whole industry is decreasing, as Lowe’s goes into metropolitan market, its market share will increase. As show in this exhibit, I choose 16.28%, 15.32% and 14.49% as the growth rate of 2004 to 2006. Because Lowe’s is going to get into metropolitan markets so the footage will increase. Using sales per footage is an objective indicator to estimate how the stores’ performance. The following exhibit will show the forecast from 2002 to 2006.

We can get the average growth rate of gross margin from 1997 to 2001 and the number is 0.575%. So the gross margin from 2002 to 2006 will be the number shown in the exhibit. Cash operating expenses/ sales will increase a little bit during the next 5 years from 18.1% to 18.6%. According to the historical 5 years data, the depreciation/sales will not fluctuate so much. Cash/sales fluctuated from 2.3% to 3.8% from 1997 to 2001. So the forecast would be a fluctuated number. Receivable turnover has increased from 86 to 133 and I think Lowe’s should use more credit sales so I predict receivable turnover increases from 150 in 2002 to 160 in 2006. Inventory turnover and payable/COGS are quite stable during the past 5 years so this ratio may remain stable in the next 5 years. The trend of PPE/sales ratio is downward during the past 5 years and the number of decreasing becomes smaller so the forecast number would be 2.5 in 2002 to 2.3 in 2006. Other current liability/net earnings ratio has increased from 0.78 to 0.9 in the past 5 years. I assume the number will remain quite high. Number 56 in the forecast means the average growth of other current asset from 1997 to 2001 and the number 36 means the average growth of accrued salaries and wages from 1997 to 2001. After forecasting, the return of capital is higher than the average weighted cost of capital. This meets with Lowe’s management goal.