assignment

Case 12.1 Home Value Stores ( LO2 )

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.

Required

1. 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?

2. 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.

Comparative Financial Statements: Home Value Stores (in thousands)
	2021	2020
Sales	$26,360,000	$23,800,000
Merchandise costs	20,680,000	17,900,000
Operating, general and administrative	3,220,000	3,600,000
Rent	235,000	220,000
Depreciation and amortization	211,000	200,500
Interest expense	110,000	90,000
Total	24,456,000	22,010,500
Earnings before taxes	1,904,000	1,789,500
Taxes	380,800	357,900
Net earnings	$ 1,523,200	$ 1,431,600
Assets
Cash and temporary investments	$  90,000	$  60,000
Receivables	358,000	202,000
Inventories	1,944,000	1,405,000
Prepaid and other current assets	193,000	118,000
Total current assets	2,585,000	1,785,000
Land	260,000	140,000
Buildings and equipment (net)	640,000	450,000
	900,000	590,000
Total assets	$ 3,485,000	$ 2,375,000
Liabilities and Shareholders’ Equity
Accounts payable	$  540,000	$  500,000
Current portion of long-term debt	91,000	80,000
Accrued income taxes	98,000	89,000
Total current liabilities	729,000	669,000
Long-term debt	810,000	600,000
Total liabilities	1,539,000	1,269,000
Shareholders’ Equity
Common stock	775,000	674,000
Retained earnings	1,171,000	432,000
Total shareholders’ equity	1,946,000	1,106,000
Total liabilities and shareholders’ equity	$ 3,485,000	$ 2,375,000

Please reference this chapter and case in your textbook. Refer to case instructions in the textbook. Please upload your completed assignment to this page by the due date.

Please note that all textbook assignments must be submitted in Excel.