Mini Case: Warehouse Distribution Inc.

Adapted from Chapter 4 Mini Case in Foundations of Finance

Grammy is considering purchasing Warehouse Distribution, Inc., a small- to medium-sized warehouse distributor in Nashville, Tennessee. She wants a national distribution system to deliver product to grocery stores and gas station mini-marts. Warehouse Distribution, Inc., has the capability to operate in all 50 states. Grammy sent you to meet with the owners and report back to the board of directors whether or not an acquisition should be approved. She has two primary concerns that you must satisfy before being willing to move forward. First, is the company financially viable? Second, does Warehouse Distribution operate with biblical principles? You know the owners are active in their local church, but you need to know how that impacts their business.

The year of 2012 turned out to be a good year financially for the business. But in the ensuring year, 2013, the company experienced a 5.3 percent sales reduction, where sales declined from $5.7 million to $5.4 million. The downturn then led to other financial problems, including a 50 percent reduction in the companys stock price. The share price went from $36 per share at the end of 2012 to $18 per share at the conclusion of 2013!

Financial information for Warehouse Distribution, Inc., for both years is shown below, where all the numbers, except for per-share data, are shown in $ thousands.

Using what you learned in this chapter and Chapter 3, prepare a financial analysis of Warehouse Distribution, Inc., comparing the firms financial performance between the two years. In addition to the financial information included in the case, the companys chief financial officer, Mike Smith, has estimated the companys average cost of capital for all its financing to be 10.5%.

Based on your analysis would you recommend doing business with Warehouse Distribution, Inc., based on their financial strength? Support your recommendation because the board will want to know why?

What three questions will you ask the executive leaders of Warehouse Distribution, Inc. to evaluate whether or not they operate the company based on biblical principles?

What answers would give you confidence that they do operate Warehouse Distribution on biblical principles?

Warehouse Distribution, Inc., Income Statements

	2012	2013
Sales	$ 5,700	$ 5,400
Cost of goods sold	(3,700)	(3,600)
Gross Profits	$ 2,000	$ 1,800
Operating expenses:
Selling and G & A expenses	(820)	(780)
Depreciation expenses	(340)	(500)
Total operating expenses	$ (1,160)	$( 1,280)
Operating profits	$ 840	$ 520
Interest expense	(200)	(275)
Earnings before taxes (taxable income)	$ 640	$ 245
Income taxes	(230)	(65)
Net Income	$ 410	$ 180
Additional information:
Number of common shares outstanding	150	150
Dividends paid to stockholders	$120	$120
Market price per share	$36	$18

Warehouse Distribution Inc.

	2012	2013
ASSETS
Cash	$300	$495
Accounts receivable	700	915
Inventories	600	780
Other current assets	125	160
Total current assets	$1,725	$2,350
Gross fixed assets	$4,650	$4,950
Accumulated depreciation	(1,700)	(2,200)
Net fixed assets	$2,950	$2,750
Total assets	$4,675	$5,100
LIABILITIES (DEBT) AND EQUITY
Accounts payable	$400	$640
Short-term notes payable	250	300
Total current liabilities	$650	$940
Long-term debt	1,250	1.325
Total liabilities	$1,900	$2,265
Common equity:
Common stock	$1,100	$1,100
Retained earnings	1,675	1,735
Total common equity	$2,775	$2,835
Total liabilities and equity	$4,675	$5,100