Home Value stores operates 264 membership warehouse stores in the United States, Europe and

Asia. The company offers low prices on a limited selection of household and grocery products.
In the past year, sales increased by approximately 10.8 percent and net earnings increased by 6.4
percent. The company opened only two stores in 2020 and 2021 and closed one of its stores due
to poor performance. Jack Davidson and Michael Prine are on the board of directors of Home
Value and serve on the company's compensation committee. At a recent lunch meeting, they
discussed the company's performance. (See the table for a balance sheet and an income
statement). Both were pleased with the increase in profit and decided recommend a contract
extension and a substantial six-figure bonus for the company's CEO. They anticipated, however,
that the third member of the compensation committee, Tanya Barrett, would object to the bonus.
Tanya believes that accounting profit is a poor measure of future firm performance. In her
opinion, the company should be focused on what it is doing today to create future value for
shareholders. She has also pointed out that, although the company showed quarterly profit
increases, it's stock profit remained flat.
a. To prepare for an upcoming board meeting, Tanya has asked you to evaluate financial
performance for 2020 and 2021, taking into account both the level of investment and the cost of
capital. Specifically, she would like you to calculate the level of profit (loss) that was earned in
excess of the amount required given the investment in the company has had superior financial
performance?

b. In fiscal 2022, the CEO of the Home Value store retired. His successor is concerned that
warehouse managers do not understand how their actions are linked to the company’s strategy
and how they can affect future firm value. In his opinion, while monthly earnings are important,
managers are focused almost exclusively on how their actions affect these numbers. Suggest a
performance measurement technique that can be used to address new CEO’s concerns. 

COMPARATIVE FINANCIAL STATEMENT: HOME VALUE STORES (IN THOUSANDS)

  2021 2020
Sales $26360000 $23800000
Merchandise Cost 20680000 17900000
Operating, general and administrative 3220000 3600000
Rent 235000 220000
Depreciation and Amortization 211000 200500
Interest Expense 110000 90000
Total 24456000 22010500
Net Earnings 1523200 1431600
Assets    
Cash & Temporary Investments 90000 60000
Receivables 358000 202000
Inventories 1944000 1405000
Prepaid & other current assets 193000 118000
Total current assets 2585000 1785000
Land 260000 140000
Building & equipment (net) 640000 450000
  900000 590000
total assets 3485000 2375000
Liabilities & shareholders equity    
Accounts Payable 540000 500000
Current portion of long term debt 91000 80000
Accrued income tax 98000 89000
Total Current liabilities 729000 669000
Long-term debt 810000 600000
Total Liabilities 1539000 1269000
Shareholder's Equity    
Common STock  775000 674000
Retained earnings 1171000 432000
Total shareholder's equity 1946000 1106000
Total liabilities and shareholder's equity 3485000 2375000

The new CEO of Home Value Stores could use the Economic Value Added (EVA) performance
measurement technique to address his concerns. Firm's that use EVA typically tie bonus compensation
to the measure. Thus, managers become very focused on achieving high levels of EVA.
EVA is a measure of a company's economic profit, which is the difference between its operating profit
and its cost of capital. This performance measurement technique would help to align managers' actions
with the company's strategy and show how their actions can affect future firm value. EVA is arrived at by
deducting operating earnings from capital expenditures. This method of measuring performance
accounts for the time worth of money to provide a more precise picture of a business's profitability. EVA
is beneficial as a performance metric since it emphasizes the importance of creating value for
shareholders. This method of measuring performance considers the cost of capital and stresses the
significance of maximizing shareholder value. Additionally, EVA is a straightforward method of analyzing
performance. This method of performance evaluation relies on transparent and comprehensible
financial statements.
OR,

The new CEO of Home Value Stores could use the Balanced Scorecard to evaluate performance since
both ROI and EVA are backward-looking financial measures as these discuss accomplishments and/or
failures of the past only.
An approach to performance measurement that also focuses on what managers are doing today to
create future shareholder value is the balanced scorecard. It is a set of performance measures
constructed for four dimensions of performance that are financial, customer, internal processes, and
learning and growth.
1. Having financial measures is critical, they have a great effect on the evaluation of the company by
shareholders and creditors.
2. Customer measures examine the company's success in meeting customer expectations.
3. Internal process measures examine the company's success in improving critical business processes.
4. Learning and Growth measure examine the company's success in improving its ability to adapt,
innovate, and grow.
Financial measure is backward-looking while remaining measures, Customer, Internal process and
learning and growth, are forward-looking and are predictive of future success.
A company using a balanced a scorecard will develop three to five performance measures for each
dimension. To the extent possible, the measures on the balanced scorecard should be tied to a
company's strategy for success.