After graduating from college in December 2014, Elizabeth Arce started her career at the W&T Corporation, a small- to medium-sized warehouse distributor in Nashville, Tennessee. The company was founded by David Winston and Colin Tabor in 2000, after they have worked together in management at Wal-Mart. Although Arce had an offer from Sam's Club, she became excited about the opportunity with W&T. Winston andTabor, as CEO and VP-arketing, respectively, assured her that she would be given every opportunity to take a leadership role in the business as quickly as she was prepared for the role.

In addition to receiving a competitive salary, Arce will immediately be entitled to a bonus based on how well the company does financially. The bonus is determined by the amount of Economic Value Added (EVA) that is generated in a year. To begin, she will receive one percent of the firm's EVA each year, to be paid half in stock and half in cash. In any year that EVA is negative, she will not receive a bonus. Also, the firm's stock is traded publicly on the NYSE, a stock exchange for small-cap companies.

The year of 2014 turned out to be a good year financially for the business. But in the ensuing year, 2015, the company experienced a

5.25.2-percent

sales reduction, where sales declined from

$5.95.9

million to

$5.65.6

million. The downturn then led to other financial problems, including a 50-percent reduction in the company's stock price. The share price went from

$3838

per share at the end of 2014 to

$1919

per share at the conclusion of 2015! Financial information for W&T for both years is shown in the popup window,

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, where all the numbers, except for per share data, are shown in $ thousands.a. Using what you have learned in this chapter and Chapter 3, prepare a financial analysis of W&T, comparing the firm's financial performance between the two years. In addition to the financial information provided, the company's chief financial officer, Mike Stegemoller, has estimated the company's average cost of capital for all its financing to be

1111

percent. (1) Compute the financial ratios as shown in the popup window,

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, for 2014 and 2015.

(2) Complete a common-sized income statement for 2014 and 2015.

(3) Complete a common-sized balance sheet for 2014 and 2015.

(4) Compute the price/earnings and price/book ratios for 2014 and 2015.

(5) Compute the Economic Value Added (EVA) for 2014 and 2015.

b. What conclusions can you make from your analysis?

c. How much will Arce's bonus be in 2014 and 2015, both in the form of cash and stock? How many shares of the stock will Arce receive?

d. What recommendations would you make to management?