Case 12.1 Home Value Stores (L02) 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 prot and decided to recommend a contract extension and a substantial sisgure hnnns for the. pleased with the increase in prot and decided to recommend a contract extension and a substantial six-gure 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 prot is a poor measure of future rm 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 prot increases, its stock price remained at. Required a. To prepare for an upcoming board meeting, Tanya has asked you to evaluate nancial performance for 2020 and 2021, taking into account both the level of investment and the cost of capital. Specically, she would like you to calculate the level of prot (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 nancial performance? b. In scal 2022, the CEO of Home Value Stores retired. His [Luv 11\"\" out: UL AUL I. LLLMLLVLIAL Bu; LU]. 111 \"ILL/U . b. In scal 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 rm 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 3,220,000 3,600,000 administrative Rent 235,000 220,000 Depreciation and amortization 211,000 200,500 Interest expense 110,000 90,000 Total 24,456,000 22,010,500 111 161651 6211) 1:311in 11U,UUU yu,uuu Total Earnings before taxes 24,456,000 1,904,000 22,010,500 1,739,500 Taxes Net earnings 380,800 $ 1,523,200 Assets Cash and temporary investments Receivables Inventories $ 90,000 358,000 1,944,000 357900 431,600 $ 60,000 202,000 '69 H 1,405,000 Prepaid and other current assets Total current assets 193,000 2,585,000 118,000 1,785,000 Land Buildings and equipment (net) 260,000 640,000 140,000 450,000 *- ['0 Total assets Liabilities and Shareholders' E s q Accounts payable 900,000 590,000 $ 3,485,000 $ 540,000 33755000 $ 500,000 f1.-.______1_ __ ___L: ___ _."I ___ _ J______ \".1 "an Accounts payable $ 540,000 $ 500,000 Current portion of longterm 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' $ 3,485,000 $ 2,375,000 equy