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 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 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 firm's financial performance between the two years. In addition to the financial information included in the case, the company's chief financial officer, Mike Smith, has estimated the company's 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?
APPLYING RATIO ANALYSIS
EVALUATING A FIRM'S FINANCIAL PERFORMANCE
DATA
Warehouse Distribution, Inc.

Transcribed Image Text:

2012 2013 Change $300 $495 $195 Cash 6.4% 9.7% Accounts receivable 17.9% 15.0% 215 700 915 12.8% Inventories 15.3% 180 780 600 3.1% Other current assets 2.7% 35 160 125 S1,725 36.9% $2,350 $625 Total current assets 46.1% $4,650 99.5% $4,950 97.1% $300 Gross fixed assets Accumulated depreciation -36.4% -43.1% (500) (2,200) (1,700) Net fixed assets $2,950 $2,750 ($200) 63.1% 53.9% 100.0% $5,100 Total assets $4,675 $425 100.0% LIABILITIES (DEBT) AND EQUITY Accounts payable $400 8.6% $640 12.5% $240 Short-term notes payable 5.3% 5.9% 50 250 300 Total current liabilities $650 13.9% $940 18.4% $290 Long-term debt S1,250 26.7% $1,325 26.0% $75 Total liabilities $1,900 40.6% $2,265 44.4% $365 S1,100 23.5% $1,100 21.6% SO Common stock (par & paid in capital) Retained earnings 35.8% 34.0% 60 1,675 1,735 Total common equity $2,775 59.4% $2,835 55.6% $60 Total liabilities and equity $4,675 100.0% $5,100 100.0% $425