After graduating from college in December 2011, Alyssa Randall started her career at the G& S Corporation, a small- to medium- sized warehouse distributor in Nashville, Tennessee. The company was founded by Jack Griggs and Johnny Stites in 1998, after they had worked together in management at Wal-Mart. Although Randall had an offer from Sam’s Club, she became excited about the opportunity with G& S. Griggs and Stites, as CEO and VP- marketing, respectively, assured her that she would be given every opportunity to take a leadership role in the business as quickly as she was ready. In addition to receiving a competitive salary, Randall 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 would receive 1 percent of the firm’s EVA each year, to be paid half in stock and half in cash. In any year that the EVA is negative, she will not receive a bonus. Also, the firm’s stock is traded publicly on the American Stock Exchange. The year of 2012 turned out to be a good year financially for the business. But in the ensuing 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 company’s 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 G& S for both years is shown below, 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 G& S, comparing the firm’s financial performance between the two years. In addition to the financial information provided below, 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.
b. What conclusions can you make from your analysis?
c. How much will Randall’s bonus be in 2012 and 2013, both in the form of cash and stock? How many shares of the stock will Randall receive?
d. What recommendations would you make to management?