Integrative Case

Topics: Financial ratios, Generally Accepted Accounting Principles, Financial ratio Pages: 6 (1584 words) Published: March 4, 2012
Answer to question no-a
It seems that Track Software LTD. is focusing on mainly in profit maximization rahter than the overall shareholder value maximiaztion. In every year except first two years firm’s pofit has been increased but per share value of the firm dit not increase that much. This is not a right goal for the company. A firms main purpose is to maximize the shareholder wealth not to increase profit. a(2).

There is some potential problem exist in the firm. The firm is now mostly managed by the original founder of the firm rather than an independent agent. Though, Stanley believes that if he hires a software developer, firm’s longterm situation will be much better. In the fear of firm’s probable decrease in EPS, financial constraint and Stanley’s one way view,he did not hire a software developer. He is working as an agent for the firm but he is not doing what he is supposed to do. Answer to Question No-b

EPS= Net Profit after Tax/ Number of common shares outstanding

Year| Net Profit After Tax| # of common shares outstanding| EPS| 2000| Rs. -50000| 50,000 | (1.00)|
2001| -20000| 50,000 | (0.40)|
2002| 15000| 50,000 | 0.30 |
2003| 35000| 50,000 | 0.70 |
2004| 40000| 50,000 | 0.80 |
2005| 43000| 50,000 | 0.86 |
2006| 48000| 50,000 | 0.96 |

Except first two year firm’s EPS has been increased, but share price did not increase with that rate .The firm’s EPS has been increasing in every year, still it has been struggling for cash to repay its debt. It indicates how a profitable firm can be in difficult position. Answer to Question No-C

Operating Cash Flow(OCF) in 2006= Net Profit After Tax + Depriciation and Amortization
=Rs. 48000+11000
=Rs. 59000
OCF measure of how well a company’s current liabilites can be covered by the cash flow generated from that firm’s operation. In case of Track Software, Ltd. the amount is not that much. Free Cash Flow(FCF) in 2006 = OCF-NFAI-NCAI

=Rs. 59000-15000-47000
=Rs. -3000
Net Fixed Asset Investment(NFAI) in 2006 = Rs. 15000
Net Current Asset Investment(NCAI) in 2006= Rs. 47000
Even though Track Software Limited had a positive Ner Profit After Tax, its investment in operating capital resulted in a negative free cash flow. Since free cash flow represents what is available for distribution to investores, but incase of Track Software Ltd. there was nothing. Inspite of that firm provided dividend to its shareholders over the last three consecutive years.

Answer to Question No-d
d(1) Liquidity Ratio
Liquiity ratios measure the firm’s ability to meet its shortm term debt. Firm’s supplier can get the very good idea just looking at its Liquidity ratios. Firm’s ability to meet the short term debt obligation gives supplier an idea what is the firms current financial standing regarding the ability to meet short term obligation. Whether or not particular firm can get the credit purchase it also depends on this. Ratio Name| Firm 2005| Firm 2006| Industry 2006|

Current Ratio| 1.06| 1.16| 1.82|

Current ratio expresses current assets in relation to current liabilites. If a firm has a higher current raio, it indicates higher liquidity. Current ratio of Track Software Ltd. has increased from 2005 to 2006. Though it has increased in 2006 but still well below the industry average. Normally current ratio 1.0 is good for the firm, in case of software industry may be a bit high that is why industry average of that industry is 1.82.

Ratio Name| Firm 2005| Firm 2006| Industry 2006 |
Quick Ratio| 0.63| .63| 1.10|

The quick ration is more conservative than the current ratio becasue it considers only the more liquid assets. Like current ratio, higher Quick ratio also means higher liquidity of the firm. Firm’s quick ratio...
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