Executive summary This report entails an analysis into Toll Brothers Inc.

, and how it has evolved over the years. In the following report, a brief introduction will be given for the company and the report will then go on to take into account various matrices that will help us identify which strategies need to be adopted by Toll Brothers. The vision and mission for the company has also been identified, in addition, the statement of the problem and how Toll Brothers came to that situation will also be put forward. Moreover, as mentioned already, matrices such as external evaluation matrix, internal evaluation matrix, SWOT matrix, and SPACE matrix have all been identified. Lastly, the report will formulate and recommend strategies for Toll Brothers. Business Description Toll Brothers designs, builds, markets and arranges financing for single family homes in middle and high income residential communities. It caters to "move-up", "empty-nester" and "age-qualified" homebuyers. The company operates in 21 states and is located in six regions around the US. The communities are generally situated on land which has either been developed or acquired by the company. The companys home building operations are segment into four reportable geographic segments: North, Mid-Atlantic, South and West. The North segment includes: Connecticut, Illinois, Massachusetts, Michigan, Minnesota, New Hampshire, New Jersey, New York, Ohio and Rhode Island. The Mid-Atlantic segment includes: Delaware, Maryland, Pennsylvania, Virginia and West Virginia. The South segment includes Florida, North Carolina, South Carolina, Tennessee and Texas. The West segment includes: Arizona, California, Colorado and Nevada. The company has developed a number of home designs with features such as one story living and first floor master bedroom suites, as well as communities with recreational amenities such as golf courses, marinas, pool complexes, country clubs and recreation centers. Toll Brothers also operates its own land development, architectural, engineering, title, mortgage, security monitoring, lumber distribution, house component assembly and manufacturing operations. In addition to these it provides landscaping services, cable TV and broadband Internet access. The company also owns and operates golf courses and country clubs in conjunction with its master planned communities. The company also sells homes in the secondhome market. This service is offered in Arizona, California, Florida, Delaware, Maryland, Pennsylvania and South Carolina. Toll Brothers generally commences construction of a home only after executing an agreement of sale with a buyer and uses subcontractors to perform home construction and land development work on a fixed-price basis. Toll Brothers Realty Trust is a venture in which Toll Brothers own 33.3%. Toll Brothers provides development, finance and management services to Toll Realty Trust and receives fees for its services. The companys subsidiaries include the Westminster Security Company, Westminster Title Company, Westminster Mortgage Corporation, Toll-Jacksonville, Advanced Toll Brothers Inc Broadband, Richard R Dostie, Eastern States Engineering, Toll Brothers Realty Trust, Toll Architecture Group, and Toll Integrated Systems.

Company Overview Toll Brothers designs, builds, markets and arranges financing for single family homes in middle and high income residential communities. The company operates in 21 states and is located in six regions around the US. Toll Brothers is headquartered in Horsham, Pennsylvania and employs approximately 5,600 people. The company recorded revenues of $6,123.5 million during the fiscal year ended October 2006, an increase of 5.7% over 2005. The operating profit of the company was $1,025.6 million during fiscal year 2006, a decrease of 18.5% compared to 2005. The net profit was $687.2 million in fiscal year 2006, a decrease of 14.7% compared to 2005. Introduction Toll Brothers designs, builds, markets and arranges financing for single family homes in middle and high income residential communities. It caters to "move-up", "empty-nester" and "age-qualified" homebuyers. During the five years ended 2006, the company delivered 33,338 homes from 570 communities, including 8,601 homes from 350 communities in fiscal 2006. Its large scale of operations increases Toll Brothers bargaining power and helps it compete effectively against regional players. However, slowdown in the US housing market has resulted in lower demand for the companys products and has adversely affected its operations. History Toll Brothers was formed in 1986. That year also saw its initial public offering. In the late 1980s it expanded its operations to include the states of Delaware, Massachusetts and Maryland. In the 1990s, the company began operations in Virginia, Connecticut, New York, California, North Carolina, Texas, Florida, Arizona, Ohio, Nevada, Illinois and Michigan. Toll Brothers acquired Geoffrey H Edmunds, located in Arizona in 1995. The Toll Brothers Realty Trust Group was formed in 1998. In the same year Toll Brothers also acquired Coleman Homes Las Vegas division. A year later, Toll Brothers opened for sale its first active-adult, age-qualified community for households in which at least one member is 55 years of age. Silverman Homes in Detroit was also acquired. In 2000, Toll Brothers began operations in Rhode Island and New Hampshire. The company expanded its operations to Colorado in 2001 and South Carolina in 2002. In 2003, the company acquired substantially all of the assets of Richard R Dostie, a

privately owned home-builder in the Florida area. The same year, Toll Brothers acquired The Manhattan Building Company, a privately owned developer of urban infill locations in northern New Jersey. In June 2004, Toll Brothers, with other building firms, was the winning bidder of nearly 2000 acres in Nevadas Las Vegas Valley that was auctioned off by the federal government. Toll Brothers announced its entry into West Virginias Martinsburg market in November 2005. Toll Brothers City Living, the urban division of Toll Brothers, opened its first Manhattan high-rise condominium building: One Ten Third in October 2006. In December 2006, Toll Brothers announced its intention to withdraw the listing of its common stock from NYSE Arca, formerly the Pacific Exchange. Standard & Poors had affirmed BBB- investment grade corporate credit rating on Toll Brothers and its outlook of Stable in August 2007.

Mission and Vision Statement Current Mission Statement: We design, market, and arrange financing for single/family detached and attached homes in luxury residential communities. We are also involved, directly and through joint ventures, in projects where we are building, or converting existing rental apartment buildings into high, mid, and low-rise luxury homes. We cater to move up, empty-nesters, active-adult, age qualified and second home buyers in 21 states of the United States. Proposed Mission Statement: Toll Brothers not just build homes but also communities with recreational amenities in picturesque settings where luxury meets convenience. We design, build, market and arrange financing for both detached and attached homes in luxury residential communities to cater moveup, empty-nesters, active-adult, age qualified, 2nd home as well as urban and sub-urban high density buyers in 21 states of the United States. We will persevere with a pro-active approach in management and use conservative philosophy in maintaining our financial soundness. We maintain our appetite in educating our employees to gain expertise in doing their jobs. Our commitment to our customers and homeowners giving them quality products, value, superior design and service plus our attention to balancing the appeal of growth with a healthy dose of concern for risk involved shall be our guidepost in serving our markets. Our strategy of geographic and product diversification with our dedication, diligence and commitment to value will continue to be our most distinctive advantage to propel us forward. Proposed Vision Statement: To be the world leading homebuilder providing homes with the highest quality, superior design and artistic customization that will be epitome of luxury, elegance and lifestyle. Statement of the problem: 19932003: A PERIOD OF SUSTAINED PROSPERITY The U.S. housing industry emerged in the early 1990s from a several-year downturn, which had gradually rolled across the nation, impacting local and regional markets at different times and for different reasons. Once buyers started to regain confidence, the new home market began to operate in relatively typical fashion: From 1993 through 2003, demand exceeded supply in most of our markets as approval constraints constricted the pipeline of buildable home sites. This imbalance favored home builders and, on average, home prices rose a few percentage points above inflation each year. There were hiccups along the way the Russian, Mexican, and Asian financial crises; the Long-Term Credit debacle; and the Nasdaq and tech meltdowns of 2000. There were also periods when mortgage rates rose in 1995, 1997, and 2000 in part due to Federal Reserve policy shifts. But generally the housing market proved buoyant and Toll Brothers continued to succeed despite these hiccups. Favorable demographics, low interest rates, and a reasonably robust economy all contributed to what became an unusually long period, by historical standards, of sustained prosperity for our industry.

2004: SPECULATION AND LIQUIDITY ACCELERATE HOME PRICES In 2004, starting in a few markets, such as Las Vegas, then spreading across the country, home prices began to rise at a more rapid pace. In hindsight, this price acceleration turned out to have been driven, in significant part, by investors and speculators. The easy access to capital brought on by securitization and a new generation of mortgage products enabled speculators and investors to acquire multiple homes with minimal equity and allowed many marginally qualified buyers to secure mortgages and buy homes that they were ultimately unable to afford. As many home builders increased their production to meet the demand spurred on by these new mortgage products, home prices rose rapidly in many markets, pricing out of the market some on tight budgets for whom affordability was a concern. The transformation of the home mortgage market through securitization that was trumpeted as a buffer against the type of liquidity crunch that had caused several previous downturns turned out to be a major contributor to our industrys problems. The Internet might have contributed to this process as speculators could more easily educate themselves on how to secure mortgages, identify and evaluate properties, and research local market trends. THE MARKET TURNS DOWN In the late summer and fall of 2005, there was a modest deceleration in the growth rate of demand. Additionally, in the aftermath of Hurricane Katrina, gas prices rose to $3.00/gallon and consumer confidence dropped precipitously. When the music stopped, many territories were overwhelmed with excess home inventories as speculators bailed out, taking with them a significant portion of demand, and builders were left with many homes, both those they had built without an identified customer and those they had completed but had little chance of selling after buyers cancelled their contracts. In late 2005, given the general health of the economy as reflected in low interest and unemployment rates, as well as positive demographics, many thought the downturn would be short-lived. However, the market continued to take a step down as we, for the first time ever, and virtually every other builder to a greater extent, experienced a dramatic increase in cancellations from buyers who should have been showing up at the closing table: In our third quarter of 2006, our cancellation rate rose above 11% for the first time in our history, and it has remained at very elevated levels since then. A LIQUIDITY CRUNCH In January 2006, it appeared that consumer confidence was starting to firm until a wave of subprime fears in late February 2007 took the momentum away. The financial markets began to develop jitters as word spread that subprime loan foreclosures might soon bring hundreds of thousands of additional homes onto the market. This fear culminated in a financial crisis as the capital markets choked on what was perceived to be underpriced risk in the form of subprime mortgage securities that sat in global bond portfolios. This liquidity crisis brought on tightened credit standards that knocked some buyers at the lower-priced end of the spectrum off the home ownership ladder and instigated a credit crunch that constricted the secondary mortgage securities market as many investors lost confidence in their ability to evaluate and price risk into these type of loans, and therefore stopped buying them on the secondary market.

WHERE THEY ARE NOW As a result of these events, currently there is an oversupply of unsold housing inventory in many markets. This excess supply has been slow to clear because customers remain concerned about selling their existing homes or committing to purchase today in fear that prices will be lower tomorrow. The challenge for builders and the economy in general is to reverse that loss of confidence among potential home buyers. Once buyers regain confidence, we believe they will move off the sidelines and into the housing market, absorbing the excess supply and leading the housing market into recovery. WHAT STRATEGIES SHOULD TOLL BROTHERS IMPLEMENT TO DEAL WITH CURRENT HOUSING DOWNTURN AND PREPARE FOR THE UPTURN?

Internal Audit Strengths 1. Strong market position. 2. Broad product lines and services. 3. Strong performance of south segment. 4. Modest amount of cash and a secured bank credit facility. 5. Broad geographic presence. 6. Expertise in finding, evaluating approval and developing land. 7. Experienced management team 8. Strong relationship with mortgage providers and has a mortgage subsidiary. 1. 2. 3. 4. 5. 6. Weaknesses Weak profitability. Declining cash from operations. Declining order backlogs High inventory. Increasing liabilities. Lack of vision statement

IFE Matrix Weight 1. 2. 3. 4. 5. 6. 7. 8. Strengths Strong market position. Broad product lines and services. Strong performance of south segment. Modest amount of cash and a secured bank credit facility. Broad geographic presence. Expertise in finding, evaluating approval and developing land. Experienced management team Strong relationship with mortgage providers and has a mortgage subsidiary. Weaknesses Weak profitability. Declining cash from operations. Declining order backlogs High inventory. Increasing liabilities. Lack of vision statement .09 .10 .04 .09 .10 .04 .07 .08 .10 .06 .06 .09 .07 .01 1.0 Rate 3 4 3 4 4 3 3 3 2 1 1 2 2 1 Weighted Score .27 .40 .12 .36 .40 .12 .21 .24 .20 .06 .06 .15 .14 .01 2.74

1. 2. 3. 4. 5. 6.

The total weighted score is 2.74 which is slightly higher than the average score of 2.50 and clearly indicates that Toll Brothers has a well built internal strengths and minimal weaknesses. However there is still a need for significant improvements in their internal operational structure to achieve higher competency.

External Audit Opportunities 1. Aging population 2. Consolidation in homebuilding industry 3. Entry into Atlanta Market 4. Significant growth in urban luxury market 5. Low interest rates for home buyers 6. Possibility of distressed properties arising out of current housing downturn Threats 1. Slowdown in US housing market 2. Extensive and complex laws and regulations in land approval and development 1. Possibility of increase number and rising expenditures of noncompetitive land parcels. 3. Other home builders advertising price reduction and increased sales incentives 4. Reduce home mortgage application due to tighter credit standards

EFE Matrix Weight 1. 2. 3. 4. 5. 6. Opportunities Aging population Consolidation in homebuilding industry Entry into Atlanta Market Significant growth in urban luxury market Low interest rates for home buyers Possibility of distressed properties arising out of current housing downturn Threats Slowdown in US housing market Extensive and complex laws and regulations in land approval and development Possibility of increase number and rising expenditures of non-competitive land parcels. Other home builders advertising price reduction and increased sales incentives Reduce home mortgage application due to tighter credit standards .12 .08 .07 .09 .06 .14 .13 .08 .06 .09 .08 1.0 Rate 4 3 2 4 1 4 2 3 2 2 2 Weighted Score .48 .24 .14 .36 .06 .56 .26 .24 .12 .18 .16 2.80

1. 2. 2. 3. 4.

The total weighted score of this matrix reveals that Toll Brothers have a strong score of 2.80 which is higher than normal. The companys ability in responding to external forces is sufficient.

Strengths-Weaknesses-Opportunities-Threats (SWOT) Matrix Strengths

1. Strong market position. 2. Broad product lines and services. 3. Strong performance of south segment. 4. Modest amount of cash and a secured bank credit facility. 5. Broad geographic presence. 6. Expertise in finding, evaluating approval and developing land. 7. Experienced management team 8. Strong relationship with mortgage providers and has a mortgage subsidiary.

Weaknesses
1. Weak profitability. 2. Declining cash from operations. 3. Declining order backlogs 4. High inventory of homes and land. 5. Increasing liabilities. 6. Lack of vision statement

Opportunities
1. Aging population 2. Consolidation in homebuilding industry 3. Entry into Atlanta Market 4. Significant growth in urban luxury market 5. Low interest rates for home buyers 6. Possibility of distressed properties arising out of current housing downturn

SO Strategy
1. Enhance the balance of product diversification to take advantage of the favorable demographics. (S2:O1) 2. Enhance geographic presence in south segment by entering Metro-Atlanta market.(S3:O3) 3. Give more focus in building high and mid rise communities to cater urban luxury market. (S2:O4) 4. Use the significant amount of cash and credit facility with broad geographic presence to identify and capitalized on arising distressed properties.(S4:S5:O6)

WO Strategy
1. Apply low interest rates for home buyers to further reduce inventory. (W4:O5)

Threats
1. Slowdown in US housing market 2. Extensive and complex laws and regulations in land approval and development 3. Possibility of increase number and rising

ST Strategy
1. Reduce land controlled through options by evaluating and renegotiating lands that are non-competitive. Rely more on options and use expertise in land approval and development to take

WT Strategy
1. Use sales incentives to decrease inventory and lessen cancellations and downturn in sales. (W4:T4)

expenditures of noncompetitive land parcels. 4. Other home builders advertising price reduction and increased sales incentives 5. Reduce home mortgage application due to tighter credit standards

advantage of more attractive land in short length of time.(S6:T2:T3) 2. Use the mortgage subsidiary and relationship with mortgage providers and lenders to arrange mortgage for home buyers. (S8:T5) 3. Apply experienced learned by management team in past downturns to the current distressed market (S7:T1)

Strategic Position and Action Evaluation (SPACE) Matrix Competitive Advantage (CA) Industry Strength (IS) Brand Popularity -1 Growth Potential Product Quality -2 Access to Financing Market Share -3 Consolidation Latest Technology -2 Technological Know How Product Diversification -1 Financial Stability Competition Utilization -3 Resource Utilization -2.0 Point on X-Axis= 1.7 Financial Strength (FS) Environmental Stability (ES) ROI 3 Technological Changes Leverage 2 Demand Variability Liquidity 4 Price Elasticity of Demand Working Capital 3 Barriers to Entry into Markets Cash Flow 2 Competitive Pressure Inventory Turnover 1 Rate of Inflation Earnings per Share 3 2.6 Point on Y-Axis= -1.4

4 2 5 5 2 4 3.7

-3 -6 -3 -5 -4 -3 -4.0

FS

CA

IS

COMPETITIVE ES

Strategy Recommendation Toll Brothers falls on competitive quadrant. It shows that they have strong competitive advantage and has a modest financial strength but is operating in a attractive industry but unstable environment. Appropriate strategy maybe diversification, cost reduction, backward, forward, and horizontal integration; market penetration; market development; product development; productivity improvement and raising capital to follow opportunities and strengthen competitiveness. In order to deal with current distress market the business should focus on strengthening its balance sheet. To respond to the downturn and prepare for the upturn, the company should:  Enhance use its geographic diversification by entering Atlanta market to identify and take advantage of anticipated growth opportunities in this market.  Use enough cash and credit facility to capitalized distressed lands and other opportunities across the nation on an opportunistic basis.  Enhance balance of product diversification by reducing its focus in single family homes give more attention to move-up, active adult and mid and high rise communities to take advantage of the aging population.  Maintain liquidity.  Manage carefully land position.  Use sales incentives in communities where demand for home is weak.  Provide and arrange more mortgage commitments for homebuyers. Once the market condition has been stabilized and became favorable,  The expectation is that the smaller builders who are Toll Brothers primary competitors will be weakened due to rising cost and tighter lending restrictions. These small builders will make appealing candidates for toll brothers and will further increase the scope of Toll operations.

Projected Financial Statements

Projected Statement of Financial Position (in U$)
2006 Assets Cash and Marketable Securities Inventory Other Assets Total Assets Liabilities Loans Payable Senior Notes Subordinated Notes Mortgage Warehouse Line Total Liabilities Equity Total Liabilities and Equity 632,524 6,095,702 855,315 7,583,541 736,934 1,141,167 350,000 119,705 2,347,806 5,235,735 7,583,541 2007 900,337 5,572,655 747,324 7,220,316 696,814 1,142,306 350,000 76,730 2,265,850 4,954,466 7,220,316 2008 2009

1,908,894 1,236,927 3,416,723 3,241,725 724,904 703,157 6,050,521 5,181,809 613,594 472,854 1,043,445 845,665 343,000 247,872 37,867 27,015 2,037,906 1,593,406 4,012,615 3,588,403 6,050,521 5,181,809

Projected Income Statement (U$ amount in millions)

2007 Revenues Cost of Revenue Selling, general and administrative expenses Goodwill Impairment Gross Income Other: (Loss) Income from unconsolidated entities Interest and other income Expenses related to early retirement of debt (Loss) Income before income taxes Income tax provision (benefit) Net (loss) Income 40.4 118.5 -13.7 338.8 35.0 373.8 46.7 204.4 -21.5 229.6 68.0 298 54.2 121.9 -61.9 343 62 404.8 4,635.1 3,916.9 516.7 7.9 193.6 2008 4,119.8 3,498.2 429.9 3.2 188.5 228.9 2009 4,589.2 3,968.4 391.9