Tuesday, October 15, 2019

Track Software Inc. Essay Example for Free

Track Software Inc. Essay 1.) Stanley’s financial goal he seems to be focusing on is maximizing profits. This is the correct goal because the goal of any firm and therefore its financial manager, should be to maximize its value and by extension the wealth of the shareholders. 2.) There is potential for an agency problem if Stanley decides to go ahead and invest in the software developer. This investment will cause a temporary decrease in the earnings per share of the firm which will mean fewer earnings at the present time for the stakeholders. This may be a problem if the goal of the shareholders is to gain money sooner than later. Since, the goal of the shareholders is simply to maximize wealth, there may not be an agency problem since the goal of the financial manager, Stanley, is the same as the shareholders. B. Since there is no preferred stock; Earnings available for common stockholders ≠¡ Net profit after taxes. No of shares of common stock outstanding = 50,000 Earnings per share = ______Net profit after taxes____________ No. of shares of common stock outstanding EPS show a steady increase over the past five years indicating that Stanley is achieving his goal of maximizing profits. C. Operating Cash Flow (OCF) for 2012 OCF = {Earnings before Interest and Taxes Ãâ€" (1 – Tax rate)} + Depreciation OCF = {EBIT Ãâ€" (1 – T)} + Depreciation = {$89 000 Ãâ€" (1 – 0.20)} + $11 000 = $82 200 Free Cash Flow (FCF) for 2012 FCF = OCF1 – Net Fixed Assets Investments – Net Current Assets Investment FCF = OCF – NFAI – NCAI NFAI = Change in net fixed assets + Depreciation = ($132 000 – $128 000) + $11 000 = $15 000 NCAI = Chance in current assets – Change in (Accounts Payable + Accruals) = ($421 000 – $62 000) – {($136 000 + $27 000) – ($126 000 + $25 000)} =$47 000 FCF = $82 200 – $15 000 – $47 000 = $20 200 Both the operating cash flow and the free cash flow are positive indicating that Stanley was able to generate adequate cash flow to cover both operating expenses and investments in assets. There was also $20 200 left over to pay to investors. 1.) Liquidity Although the liquidity of the firm has improved slightly (current ratio) or remained steady (quick ratio), the firm’s performance is considerably below average. 2.) Activity The total asset turnover of the firm has improved but the inventory turnover and average collection period has deteriorated. The activity of the firm is also considerably below the industry average. 3.) Debt The debt ratio decreased in the times interest earned ratio improved. This indicates that the firm used more of its own money to generate profit in 2012 (rather than that of its creditors) and its ability to make contractual interest payments has improved. However, the firm fails to measure up to the industrial average yet again. 4.) Probability The gross, operating and net profit margin and the return on total assets (ROA) have improved slightly showing that the profitability of the firm is fairly stable, demonstrating little improvement. Even so, these ratios are all still subpar. The return of common equity (ROE) has deteriorated, falling to below the industrial average. 5.) Market The firm’s P/E ratio improved but remained bellowed the industry average, showing that the investors are gaining confidence in the firm’s future performance. The M/B ratio fell below, from above the industrial average in 2011 to below in 2012 but still remains fair. E. Stanley should try to find the money to hire the software developer since the ratios show that the firm should be performing better for a firm in this particular industry. In addition, the â€Å"blockbuster† sales potential implies a potential for increased profitability which falls in line with Stanley’s focus. F. The present value of a perpetuity creating a cash flow of $5 000 per year with a 10% interest rate =_____Cash Flow____ Interest Rate  = $5,000 = $50 000  .10 The investor would be willing to pay $50 000 for the firm. G. The present value of a firm generating a perpetual stream of free cash flow of $20 200 per year with an interest rate of 10 % = ___Cash Flow___ Interest Rate  =__$20,200__ =$202,000  .10  I would be willing to pay $202 000 for the firm.

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