This case considers the sudden and very large drop in the market value of equity for Krispy Kreme Doughnuts, Inc., associated with a series of announcements made in 2004. Those announcements caused investors to revise their expectations about the future growth of Krispy Kreme, which had been one of the most rapidly growing American corporations in the new millennium. Your task is to evaluate the implications of those announcements and to assess the financial health of the company. This case provides an early exercise in financial statement analysis and lays the foundation for two important financial themes: the concept of financial health, and the financial-economic definition of value and its determinants.
Suggested Questions for Advance Assignment
1.What are the definition and purpose of an income statement, as shown in case Exhibit 1? What are the definition and purpose of a balance sheet as shown in case Exhibit 2? How are the two statements related? In answering the questions above, highlight some of the following accounting choices and sources of variation in reported results in (i) Cash and cash equivalents, (ii) Accounts receivables, (iii) Inventories, (iv) Property, plant, and equipment, (v) Goodwill and other intangibles, (vi) Revenues, and (vii) Expenses
2.Are Krispy Kreme’s financial statements exact? Does management have any discretion over how those accounts are estimated?
3.What can the historical income statements (case Exhibit 1) and balance sheets (case Exhibit 2) tell you about the financial health and current condition of Krispy Kreme Doughnuts, Inc.? Clues: Discuss Krispy Kreme’s growth; DuPont Analysis; liquidity, leverage, and profitability; and peer comparisons (Refer case Exhibits 7, 8 and 9)
4.How can financial ratios extend your understanding of financial statements?
5.Is Krispy Kreme financially healthy at year-end 2004? Given your assessment of Krispy Kreme’s health, why did its stock price drop by 80% between 2003 and 2004?
6.What is the source of intrinsic investment value in this company? Does this source appear on the financial statements?
7.Review the events since the date of the case. See the company’s Web site for updates on its financial information (http://www.krispykreme.com).