Reference no: EM133118298
Question - Case - Home Value Stores - Home Value Stores operates 264 membership warehouse stores in the United States, Europe, and Asia. The company offers low prices on a limited selection of household and grocery products. In the past year, sales increased by approximately 10.8 percent and net earnings increased by 6.4 percent. The company opened only two stores in 2020 and 2021 and closed one of its stores due to poor performance. Jack Davidson and Michael Prine are on the board of directors of Home Value and serve on the company's compensation committee. At a recent lunch meeting, they discussed the company's performance. (See the table on the next page for a balance sheet and an income statement.) Both were pleased with the increase in profit and decided to recommend a contract extension and a substantial six-figure bonus for the company's CEO. They anticipated, however, that the third member of the compensation committee, Tanya Barrett, would object to the bonus. Tanya believes that accounting profit is a poor measure of future firm performance. In her opinion, the company should be focused on what it is doing today to create future value for shareholders. She has also pointed out that, although the company showed quarterly profit increases, its stock price remained flat.
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2021
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2020
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Sales
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$26,360,000
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$23,800,000
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Merchandising Costs
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$20,680,000
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$17,900,000
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Operating, General, & Administrative
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$3,220,000
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$3,600,000
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Rent
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$235,000
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$220,000
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Depreciation and Amortization
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$210,000
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$200,500
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Interest Expense
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$110,000
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$90,000
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Total
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$24,455,000
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$22,010,500
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Earning Before Taxes
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$1,904,000
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$1,789,500
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Taxes
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$380,800
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$357,900
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Net Earnings
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$1,523,200
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$1,431,600
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Assets
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|
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Cash and Temporary Investments
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$90,000
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$60,000
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Receivables
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$358,000
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$202,000
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Inventories
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$1,944,000
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$1,405,000
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Prepaid and Other Current Assets
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$193,000
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$118,000
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Total Current Assets
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$2,585,000
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$1,785,000
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Land
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$260,000
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$140,000
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Buildings and Equipment (net)
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$640,000
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$450,000
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$900,000
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$590,000
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Total Assets
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$3,485,000
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$2,375,000
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|
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Liabilities and Shareholders' Equity
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|
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Accounts Payable
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$540,000
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$500,000
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Current Portion of Long-Term Debt
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$91,000
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$80,000
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Accrued Income Taxes
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$98,000
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$89,000
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Total Current Liabilities
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$729,000
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$669,000
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Long-Term Debt
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$810,000
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$600,000
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Total Liabilities
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$1,539,000
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$1,269,000
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|
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Shareholders Equity
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|
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Common Stock
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$775,000
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$674,000
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Retained Earnings
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$1,171,000
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$432,000
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Total Shareholders' Equity
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$1,946,000
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$1,106,000
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Total Liabilities and Shareholders' Equity
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$3,485,000
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$2,375,000
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Required -
a. To prepare for an upcoming board meeting, Tanya has asked you to evaluate financial performance for 2020 and 2021, taking into account both the level of investment and the cost of capital. Specifically, she would like you to calculate the level of profit (loss) that was earned in excess of the amount required given the investment in the company. Assume that the cost of capital is 15 percent. Is it clear that the company has had superior financial performance?
b. In fiscal 2022, the CEO of Home Value Stores retired. His successor is concerned that warehouse managers do not understand how their actions are linked to the company's strategy and how they can affect future firm value. In his opinion, while monthly earnings are important, managers are focused almost exclusively on how their actions affect these numbers. Suggest a performance measurement technique that can be used to address the new CEO's concerns.