Financial Analysis of Track Software Limited

a) Since Stanley started Track Software limited in 2005, it is observed that the net profit has increased between 2006 and 2011 suggesting that his primary goal is to maximise profit. The methods being used in the decision making in regards to the employment of a software designer also reflect so much on his financial goal. From the case perspective and analysis, the financial goal being utilised by  Stanley is correct, and this is because to maximise profit he does not need to integrate risk, cash flow as well as wealth maximisation in the decision making process.

b) The likelihood of a potential agency problem existing is close to nil and this because the majority of the outstanding equity of the firm is owned by Stanley (about 40 percent). In known cases, these problems have been known to occur when the managers decide to put their personal goals before the corporate goals, and the chances of such happening at Track Software Limited is close to impossible.

Question 2

The earnings per share (ESP) are calculated as after taxes net profit per a thousand shares and as illustrated by the table 1 below it has increased gradually over between 2006 and 2011. This could be attributed to the fact that during the same period the net profits have been growing steadily. The results thus confirm that Stanley is putting his effort into ensuring that profit is maximised accordingly.

Table 1: Earning Per Share

After Taxes Net Profit ($)

Earnings Per Share/100,000 Shares ($)

-50,000.00

0

-20,000

0

15,000.00

0.15

35,000.00

0.35

40,000.00

0.4

43,000.00

0.43

48,000.00

0.48

Question 3

According to table 2 which present the calculations conducted on Microsoft Excel in regards to operating activities, we can confirm that Track Software is providing or giving a decent positive cash flow. The estimate also goes ahead and suggests that the operating cash flow of the firm is sufficient enough to be able to fund the fixed assets and even improve the net worth of working capital. The cash is also adequate to pay, equity holders as well as creditors since it has $26,000.00.

Table 2: Operating Cash Flow Calculations

(OCF)

EBIT - Taxes + Depreciation

EBIT

$89,000.00

Taxes

$12,000.00

Depreciation

$11,000.00

OCF

$88,000.00

FCF

OCF - Fixed Assets Investment (NET)-Current Assets Investment (Net)

OCF

$88,000.00

NFAI

15,000.00

NCAI

47,000.00

FCF

$26,000.00

NFAI

Change in Fixed Asset + Depreciation

NCAI

Change in current assets - Change in accruals and Payable

Question 4

The firm’s analysis of its financial condition in regards to liquidity suggests that it has remained stable or improved slightly, according to the current, acid test as well as the net working ratios. The firms therefore in 2011 operates below its average. When the same is however measured using the activity within the same year, it is noted that the inventory turnover has degraded substantially and when compared to the company’s average it is worse. The collection period is also an essential aspect of the firm’s activity and has degenerated to the point that it is worse than the average of the industry. However, on a positive note, the total asset turnover has slightly advanced though below the industry’s average.

The debt ratio in 2011 improved considerable, but it is also higher than the industry’s average. On the same note, it is also observed that the time interest ratio remains table. However, it is below the average for the sector. In regards to profitability, it is observed from the table below that the operating, gross and net profit margins advanced slightly in 2011 but like it is the case with the other financial conditions within the same year are below the average of the industry. The same trend is observed for return on an asset but a different pattern for return on equity which seems to decline. With such an insight the company should, therefore, put in place measures to improve activity ratios.

Table 3: Financial Conditions Analysis

Ratio

2010

Industry Average 2011

Cross-Sectional

Series Time

Current

1.06

1.82

Poor

Improving

Inventory Turnover

10.4

12.45

Poor

Deteriorating

Working Capital (Net)

$21,000.00

$96,000

Poor

Improving

Quick

0.63

1.1

Poor

Stable

Total Asset Turnover

2.66

3.93

Poor

Improving

Average Collection Period

29.6 (Days)

20.2 (Days)

Poor

Deteriorating

Time Interest (Earned)

3

5.6

Poor

Stable

Debt Ratio

0.78

0.55

Poor

Decreasing

Operating Profit Margin

5.50%

12.40%

Poor

Improving

Gross Profit Margin

32.10%

42.30%

Fair

Improving

Net Profit (Margin)

3.00%

4.00%

Fair

Stable

ROA

80%

15.60%

Poor

Improving

ROE

36.40%

34.70%

Poor

Deteriorating

Question 5

The recommendation I would make to Stanley is to find funds to hire the software designer since he or she will facilitate the introduction of a new product into the market. This would in turn increase sales thus maximising profit which is the financial goal of Stanley.

Integrative Case 2 Lasting Impression Company

Question 1

a) An initial investment of Lasting Impression Company, as well as its decision to choose between Press A and B, is analysed using multiple capital technique budgeting. It is essential to understanding that Lasting Impression has an existing press and therefore for them to purchase a new Press, the after effect sale of the current Press needs to be calculated. From the analysis and calculation, the after sale tax for the old press is valued at $298,400.00. Using the cash flow, on the other hand, the initial investment needed for the first Press (A) is about $662,000.00 while that for the second Press (B) is $361,600.00. Unlike Press B, Press A required about $90,400 net working capital increase. The tax on sale for the old press is valued at $121,600.00 Some of the calculations are illustrated by table 4, 5 and 6 below to shade light on how the capital budgeting technique was useful in coming up with the initial investment.

Table 4: Initial Investments for the Presses

Item (Cost $000)

Press A

Press B

Old Press

$400.00

$400.00

New Press

$870.00

$660.00

Old Press (Proceeds)

$420.00

$420.00

Old Press (Book Value)

$116.00

$116.00

 Sale (Gain)

$304.00

$304.00

Liability (Tax)

$121.60

$121.60

Investment

$90.40

$0

Initial Net

$662.00

$361.60

Table 5: Old Press Tax on Sale

Sale Price ($000)

  $420.00

Value (Book) ($400,000 - (0.2 + 0.32 + 0.19) * $400,000)

 $    (116.00)

Gain

 $      304.00

Tax Rate

40%

Old press (Tax Sale)

 $      121.60

Table 6: Net Working Capital Change

Column1

 Column2

Cash ($000)

 $        25.40

Accounts Receivable

 $      120.00

Inventory

 $      (20.00)

Current Assets (Increase)

 $      125.40

Current Liabilities (Increase)

 $      (35.00)

Net Working Capital

 $        90.40

b) Having calculated the annual cash flow, initial investment and the net working capital it was easy to come up with an operating Cash flows for Press A as well as B. For Press A at the end of the fifth year it is estimated that the operating Cash flow will be valued at $449, 460.00 while that of Press B will be $206,880.00. The latter would be a subsequent increase if compared to year four, three and two. The calculations leading to such a conclusion is as illustrated by the table below.

Table 7: Depreciative OCF

Column1

Column2

Column3

Column4

Year Press A $000

Cost

Cost (Rate)

Depreciation

1

 $             870.00

20.00%

 $                            174.00

2

 $             870.00

32.00%

 $                            278.40

3

 $             870.00

19.00%

 $                            165.30

4

 $             870.00

12.00%

 $                            104.40

5

 $             870.00

12.00%

 $                            104.40

6

 $             870.00

5.00%

 $                              43.50

 $                            870.00

Column1

Column2

Column3

Column4

Year Press B $000

Cost

Cost Rate

Depreciation

1

 $             660.00

20.00%

 $                            132.00

2

 $             660.00

32.00%

 $                            211.20

3

 $             660.00

19.00%

 $                            125.40

4

 $             660.00

12.00%

 $                              79.20

5

 $             660.00

12.00%

 $                              79.20

6

 $             660.00

5.00%

 $                              33.00

 $                            660.00

Column1

Column2

Column3

Column4

Year (Current) $000

Cost

Cost (Rate)

Depreciation

1

 $             400.00

12.00%

 $                              48.00

2

 $             400.00

12.00%

 $                              48.00

3

 $             400.00

5.00%

 $                              20.00

4

 $                    -  

 $                                   -  

5

 $                    -  

 $                                   -  

6

 $                    -  

 $                                   -  

 $                            116.00

Table 8: Increment OCF

Column1

Column2

Column3

Column4

Column5

Column6

Column7

Year Press A $000

EBIT

Dep.

EBT

EAT

Current Cash Flow

Incremental

1

 $        250.00

 $           174.00

 $             76.00

 $      45.60

 $      219.60

 $       91.20

2

 $        270.00

 $           278.40

 $             (8.40)

 $      (5.04)

 $      273.36

 $       91.20

3

 $        300.00

 $           165.30

 $           134.70

 $      80.82

 $      246.12

 $       80.00

4

 $        330.00

 $           104.40

 $           225.60

 $    135.36

 $      239.76

 $       72.00

5

 $        370.00

 $           104.40

 $           265.60

 $    159.36

 $      263.76

 $       72.00

6

 $                -  

 $             43.50

 $           (43.50)

 $    (26.10)

 $        17.40

Column1

Column2

Column3

Column4

Column5

Column6

Column7

Year Press B $000

EBIT

Dep.

EBT

EAT

Old Cash Flow

Incremental Cash Flow

1

 $        210.00

 $       132.00

 $         78.00

 $        46.80

 $      178.80

 $       91.20

2

 $        210.00

 $       211.20

 $         (1.20)

 $        (0.72)

 $      210.48

 $       91.20

3

 $        210.00

 $       125.40

 $         84.60

 $        50.76

 $      176.16

 $       80.00

4

 $        210.00

 $         79.20

 $       130.80

 $        78.48

 $      157.68

 $       72.00

5

 $        210.00

 $         79.20

 $       130.80

 $        78.48

 $      157.68

 $       72.00

6

 $                -  

 $         33.00

 $       (33.00)

 $      (19.80)

 $        13.20

Column1

Column2

Column3

Column4

Column5

Column6

Year Current $000

EBIT

Dep.

EBT

EAT

Cash Flow

1

 $       120.00

 $         48.00

 $          72.00

 $           43.20

 $      91.20

2

 $       120.00

 $         48.00

 $          72.00

 $           43.20

 $      91.20

3

 $       120.00

 $         20.00

 $        100.00

 $           60.00

 $      80.00

4

 $       120.00

 $120,000.00

 $   72,000.00

 $    72,000.00

5

 $       120.00

 $120,000.00

 $   72,000.00

 $    72,000.00

6

 $               -  

 $               -  

 $               -  

 $                -  

c) In the calculation of Terminal Cash flow, other financial aspects were included in the calculation, and they cover the internal rate of return (IRR), payback period, and net present value (NPV). All these are components of the capital budgeting technique, and from the calculation, the terminal cash flow for Press A was found to be $257,800.00 while that of Press B was $121,200.00. The results of the calculation are presented in the table below.

Cash Flow (Terminal) ($000)

Press A

Press B

Old Press

 Liquidation

$400

$330

$150

Profit from Sale

$356.5

$297

$150

BV at Liquidation

$43.5

$33

$0

Tax Liability

$142.6

$118.6

$60

Net  Terminal Cash Flows

$347.8

$211.2

$90

Recall NWC Investment

$90.40

$0

$0

Net Proceeds from Sale

$257.40

$211.20

$90

Net Incremental TCF

$257.80

$121.20

Question 2

The figure below illustrates a time on the relevant cash flow stream of the Presses proposed for purchase. The primary assumption made during the initiation of the timeline is that they terminated at the end of the fifth year so as not to exaggerate the possible outcome.

Question 3

From the excel calculation and the table presented below the payback of Press A is 4.04 while that of B is 3.68.  The net present value on the other hand for A is $35,738.82 while that of Press B is $30,105.88. With those in mind, therefore, the IRR of A is estimated to be 15.85 percent which differs from IRR of B at 17.06 percent.

Particulars

Press A

Press B

Cumulative Cash Flows

Column1

Press A

Press B

Investment $ 000

 $    (662)

 $    (361.6)

 $     (662)

 $        (361.6)

Cash Inflows:

Year 1

 $             128.400

 $               87.600

 $     (661.87)

 $        (361.51)

Year 2

 $             182.160

 $             119.280

 $     (661.68)

 $        (361.39)

Year 3

 $             166.120

 $               96.160

 $     (661.52)

 $        (361.29)

Year 4

 $             167.760

 $               85.680

 $     (661.35)

 $        (361.21)

Year 5

 $      257.99

 $      121.28

 $     (403.36)

 $        (239.92)

Question 4

The diagram below represents the NPV profile, and it suggests that Press A is ideal more when the capital cost is less than 14.59 percent while B is favored when the capital cost is greater than 14.59 percent.

Question 5

If a firm has unlimited funds, then they should acquire Press A, and when the firm is subjected to rationing in regards to capital, then they should obtain Press B according to the NPV profile in the previous question.

Question 6

The recommendation would need to be measured by means of quantifiable techniques such as risk adjustments concession rates then the outcome equated to Press B for a verdict to be prepared.

Reference

Dokas, I., Giokas, D., & Tsamis, A. (2014). Liquidity efficiency in the Greek listed firms: a financial ratio based on data envelopment analysis. International Journal of Corporate Finance and Accounting (IJCFA), 1(1), 40-59.