Question

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 and? Tabor, 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 5.3?-percent sales? reduction, where sales declined from $5.8 million to $5.5 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 $34 per share at the end of 2014 to $17 per share at the conclusion of? 2015! Financial information for? W&T for both years is shown in the popup window,

?,

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 10.5 percent.

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

?,

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?

W and T Corporation
Income Statement ($ thousands) for the Years Ended 12/31/2014 and 12/31/2015
	2014		2015
Sales	$5,800		$5,500
Cost of goods sold	-3,700		-3,500
Gross profits	$2,100		$2,000
Operating expenses:
Selling, general, and administrative expenses	-800		-750
Depreciation expenses	-320		-490
Total operating expenses	($1,120)		($1,240)
Operating income (earnings before interest and taxes)	$980		$760
Interest expense	-200		-275
Earnings before taxes (taxble income)	$780		$485
Income taxes	-312		-194
Net income	$468		$291
Additional information:
Number of common shares outstanding	160		160
Dividends paid to stockholders	$73		$73
Market price per share	$34		$17
W and T Corporation, Balance Sheet ($ thousands) for 12/31/2014 and 12/31/2015
ASSETS				2014			2015
Cash				$200			$495
Accounts receivable				700			925
Inventories				700			680
Other current assets				125			160
Total current assets				$1,725			$2,260
Gross fixed assets				$4,750			$4,850
Accumulated depreciation				-1,800			-2,200
Net fixed assets				$2,950			$2,650
Total assets				$4,675			$4,910
LIABILITIES (DEBT) AND EQUITY
Accounts payable				$400			$540
Short-term notes payable				250			350
Total current liabilities				$650			$890
Long-term debt				1,350			1,450
Total liabilities				$2,000			$2,340
Common equity:
Common stock				$1,000			$1,000
Retained earnings				1,675			1,570
Total common equity				$2,675			$2,570
Total liabilities and equity				$4,675			$4,910

Answer 1