Question
Case 12.1 Home Value Stores (LO2) Home Value Stores operates 264 membership warehouse stores in the United States, Europe, andAsia. The company offers low prices
Case 12.1 Home Value Stores (LO2)
Home Value Stores operates 264 membership warehouse stores in the United States, Europe, andAsia. 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 by6.4 percent. The company opened only two stores in 2020 and 2021 and closed one of its stores dueto poor performance. Jack Davidson and Michael Prine are on the board of directors of Home Valueand serve on the company's compensation committee. At a recent lunch meeting, they discussedthe company's performance. (See the table on the next page for a balance sheet and an incomestatement.) Both were pleased with the increase in profit and decided to recommend a contractextension 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. Shehas also pointed out that, although the company showed quarterly profit increases, its stock priceremained flat.
Required
a. To prepare for an upcoming board meeting, Tanya has asked you to evaluate financial performancefor 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 amountrequired given the investment in the company. Assume that the cost of capital is 15 percent. Is itclear that the company has had superior financial performance?
b. In fiscal 2022, the CEO of Home Value Stores retired. His successor is concerned that warehousemanagers do not understand how their actions are linked to the company's strategy and how theycan affect future firm value. In his opinion, while monthly earnings are important, managers arefocused 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.
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