Joan Chris is the Denver district manager of Stale- Mart, an old established chain of more than
Question:
All eight stores report to Chris, and like all Stale- Mart district managers, 50 percent of her compensation is a bonus based on the average return on investment of the eight stores (total profits from the eight stores divided by the total eight- store investment). Investment in each store is the sum of inventories, receivables, and leasehold improvements, net of accumulated depreciation.
She is considering a proposal to open a store in the new upscale Horse Falls Mall three miles from the Broadway store. If the Horse Falls proposal is accepted, the Broadway store will be closed. Here are data for the two stores (in millions of dollars):
Assume that the forecasts for Horse Falls are accurate. Also assume that the Broadway store data are likely to persist for the next four years with little variation.
Stale- Mart finds itself losing market share to newer chains that have opened stores in growth areas of the cities in which they operate. The rate of return on Stale- Mart stock lags that of other firms in the retail department store industry. Its cost of capital is 20 percent.
Required:
a. Calculate the return on total investment and residual income for the Broadway and Horse Falls stores.
b. Chris expects to retire in five years. Do you expect her to accept the proposal to open the Horse Falls store and close the Broadway store? Explain why.
c. Offer a plausible hypothesis supported by facts in the problem that explains why Stale- Mart is losing market share and also explains the poor relative performance of its stock price. What changes at Stale- Mart would you suggest to correct theproblem?
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of...
Step by Step Answer:
Accounting for Decision Making and Control
ISBN: 978-0078025747
8th edition
Authors: Jerold Zimmerman