Weis Markets, Inc., is a Pennsylvania business founded by Harry and Sigmund Weis in 1912. The company is engaged principally in the retail sale of food and pet supplies in Pennsylvania and surrounding states. The Weis family currently owns approximately 62 percent of the outstanding shares. The company’s retail food stores sell groceries, dairy products, frozen foods, meats, seafood, fresh produce, floral, prescriptions, deli/bakery products, prepared foods, fuel and general merchandise items, such as health and beauty care and household products.

Required 

1. Was Year 3 a good year or a bad year for Weis? Why?

2. What was the company’s interest coverage ratio in Year 3 and Year 2? On July 1, Year 3, Weis considered borrowing \($100\) million of long-term debt at an interest rate of ten percent per year to finance a \($100\) million investment in additional stores. The new properties would not generate earnings until Year 4. What would the company’s interest coverage ratio have been for Year 3 if it had completed the borrowing?

3. Evaluate Weis’s profitability in Year 2 and Year 3 using the ROE Model.

4. On March 31, following Year 3, Weis’s share price closed at \($29.85\) per share. Value Line forecasted sales of \($2,050\) million and \($2,125\) million and EPS of \($2.00\) and \($2.10\) per share for fiscal Year 4 and Year 5, respectively. The company’s cost of equity is approximately nine percent. Using the Residual Income valuation model, calculate the equity value of the company. [As a base case, a company whose expected ROE is twelve percent (14 percent) per year, whose cost of equity is nine percent, and whose growth in book value is expected to be four percent per year for the first ten years and three percent per year thereafter, would have an intrinsic value of 1.54 (1.90) times current book value.] Do you think Weis is worth \($29.85\) per share? Why?

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(S thousands, for period ended) Assets Cash.... Marketable securities.. WEIS MARKETS, INC. Consolidated Balance Sheet Year 3 Year 2 $ 3,929 43,510 $ 3,255 28,675 Accounts receivable, net 30,188 26,530 Inventories.. 182,832 169,952 Prepaid expenses... 3,980 8,294 Income taxes recoverable 3,395 Total current assets 264,439 240,101 Property and equipment, net. 428,153 439,977 Intangible and other assets 24,107 24.107 $716,699 $704,185 Liabilities Accounts payable. Accrued expenses... $101,917 $98,382 15,704 11,043 Accrued self-insurance.. Payable to employee benefit plans Income taxes payable 16,117 15.040 8,950 8,672 6,112 Deferred income taxes. Total current liabilities.. Deferred income taxes.. 702 4,633 149,502 137,770 14,765 16,051 25,000 Long-term debt Shareholders' Equity Common stock, no par value, 100,800,000 shares authorized, 32,986,337 and 32,978,037 shares issued, respectively. Retained earnings 7,882 7,630 678,294 648,522 4,145 6,479 662,631 (137,889) (137,267) 552,432 525,364 Accumulated other comprehensive income... Treasury stock at cost, 5,792,800 and 5,774,830 shares, respectively. Total shareholders' equity 690,321 $716,699 $704,185