Track Software Case Study

Topics: Financial ratios, Generally Accepted Accounting Principles, Profit Pages: 7 (784 words) Published: February 11, 2014
 
a.
 
(1)
 
In this case study, Stanley’s focus is on maximizing profits. Yes he is correct. This should be the goal of any firm and any financial manager. He should be easily able to maximize the value and also extend the wealth of the shareholders or stockholders if he continues to maximize profits.

(2)
 
There is always potential for any agency problem. Should Stanley decide to invest in the software developer, an investment of this nature could cause decrease in earnings per share for the firm and that means fewer earnings at the present time for stakeholders. Let’s say for instance that the shareholders’ goals are to earn money at the present time, so money now instead of later, so that would be a problem. However if the shareholders’ goals are to maximize wealth over time, then there may not be an issue as they don’t need the wealth and earnings at the present state as Stanley’s job is the same as the shareholders at this point.

b.
 
The case study didn’t say there was any preferred stock and that everything remained unchanged. Stanley is doing his job and over the past 5 years according to EPS shows an increase, so:

Earnings available for common stockholders= Net profit after taxes
 No of shares of common stock outstanding = 50 000

Year
Earnings per share (EPS)
2006
$0
-------= $0
50,000
2007
$0
-------= $0
50,000
2008
$15,000
-------= $ .30
50,000
2009
$35,000
-------= $ .70
50,000
2010
$40,000
-------= $. 80
50,000
2011
$43,000
-------= $ .86
50,000
2012
$48,000
-------= $. 96
50,000

c.
Operating Cash Flow or OCF for 2012 is calculated by the following: OCF={Earnings before Interest and Taxes x (1-Tax Rate)}+ Depreciation OCF={Earnings before Interest and Taxes x(1-.20)}+ Depreciation OCF={$89,000 x {1-.20)} + $11,000

OCF=$82,200
Free Cash Flow or FCF for 2012
FCF=OCF1-Net Fixed Assets Investments-Net Current Assets Investment FCF=OCF-NFA1-NCA1

NFA1=Change in net fixed assets+Depreciation
NFA1=($132,000 - $128,000)+ $11,000
NFA1=$15,000
NCA1=Chance in current assets-Change in (Accounts Payable+Accruals) NCA1=($421, 000 - $62,000) – {($136,000 - $27,000) – ($126,000 - $25,000)} NCA1=$47,000

FCF=$82,200 - $15,000 - $47,000
FCF=$20,200
In this instance, both cash flow and free cash flow are positive. This covers both operating expenses and investment assets with $20,200 left over to do dividends or pay investors.

d.
(1) Liquidity- Although the firm is improving slightly based on the current ratio, it’s performance is below the industry average.

2012 Ratio
Time Series
Evaluation
Cross Sectional Evaluation
Current Ratio
$421,000=1.16
$363,000
Getting Better/Improving
Poor
Quick Ratio
$421,000-$191,000=1.16
$363,000
Steady
Poor

(2) Activity- The total overall asset turnover of this firm is improving but the inventory turnover and average collection period had decreased. The activity is also below industry average standard.

2012 Ratio
Time Series
Evaluation
Cross Sectional Evaluation
Inventory Turnover
$1,030,000=5.39
$191,000
Deteriorating
Very Poor
Average Collection Period
$152,000=35.79 days $1,550,000/365
Deteriorating
Poor
Total Asset Turnover
$1,550,000=2.80
$553,000
Improving
Poor

(3) Debt-This rate decreased in the times that interest earned ratio had improved. So as the firm used more of its own money to generate profit, rather than utilize its creditors, the ability to make contractual interest payments tended to improve. Although the firm still fails to be at the industry average.

2012 Ratio
Time Series
Evaluation
Cross Sectional Evaluation
Debt Ratio
$401,000=.73
$553,000
Decreasing
Poor
Times Interest...
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