After graduating from college in December 2014, Eizabeth Arce started her career

Question

After graduating from college in December 2014, Eizabeth Arce started her career at the W&T Corporation, a small- to medium-sized warehouse distributcr 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 52-percent sales reduction, where sales declined from S6.0 million to S5.7 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 $40 per share at the end of 2014 to S20 per share at the conclusion of 2015!

Explanation / Answer

Soln :

Now, we need to calculate here the Earning per share = Net income/total shares outstanding and then P/E = price/ EPS

Here Intangible assets are 0, hence book valeu = Total assets - total liability

Economic value added = NOPAT - WACC *(Total Assets - current liabilities)

WACC = cost of debt *debt ratio*(1-tax rate) + cost of equity* equity ratio

Cost of debt = Net income/ Total liabilities = 760/1900 = 0.40 in 2014 and 0.267 in 2015

in 2014 WACC = 0.4* 0.23*0.65 + 0.24 *0.6256 = 20.96%

In 2015 , WACC = 0.267*0.24*0.65 + 0.19*0.5837 = 15.28%

Operating income*(1-Tax rate)

EVA = 884 - 20.96% *4325 = -22.32 in 2014

EVA in 2015 = 754 - 15.28% *4260 = 103.06

Arce bonus in2014 is nil as EV is negative

Arce bonus in 2015 = 1% of EVA = 1% of 103 = 10.3 in thousands

No. of stocks received by arce = 5153/20 = 258 (approx.)

Ratios Value Formula 2014 2015 Current Ratio 2.57 2.61 current assets/current liabilities Acid test ratio 1.60 1.51 Quick ratio = (Current assets - inventories-othr assets)/current liabilities Days in receivables 48.67 58.59 Accounts receivables* 365/Credit sales Days in Inventories 62.57 97.33 Inventory *365/cost of goods sold Operating return on Assets 0.27 0.22 EBIT/Total assets oprating profit margin 0.28 0.29 Operating income/Revenue, operating income here = gross profit - SGA expenses Total asset turnover 1.18 1.10 Sales/Total assets Fixed asset turnover 1.90 2.07 Sales/Fixed assets Debt Ratio 0.23 0.24 total debt/total assets Times Interest Earned 8.95 6.07 EBITDA/interest payable ROE 0.239 0.19 Net Income/equity

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