A Maximising wealth should be the correct goal for a financial manager. Wealth maximisation takes a long-term perspective on corporate outcomes and considers potential risk and cash flows (Gitman, 14). Stanley Booker, owner of Track Software Ltd., according to the material provided, is focusing on maximising profit. This financial goal does not integrate the necessary factors such as timing, risk and cash flow in the decision process of corporate orientation and financial drive. Stanley's emphasis on profit maximisation can be seen by the evident increase in net profits over the six (6) year period 2001 - 2007 and as well through his contemplation regarding the recruitment of a software designer. Such recruitment would show a reduction in short term earnings, which is a clear indication of the lack of consideration of financial timing.
B An agency problem exists when managers place personal goals ahead of corporate goals (Gitman, 18). Since Stanley Booker owns 40% of the outstanding equity, the potential of an agency problem arising is considered to be unlikely at Track Software Ltd. Stanley has adequate holdings within the company to act within the firms best interests.
Earnings per share calculation:
YEAR
NET PROFIT
after taxes $
EPS
(NPAT / 50 000 shares)$
2001
2002
2003
2004
2005
2006
2007
(50 000)
(20 000)
15 000
35 000
40 000
43 000
48 000
0
0
0.30
0.70
0.80
0.86
0.96
Earnings per share (EPS), as seen calculated above, has steadily increased from 2003. This confirms that Stanley, as previously mentioned, is concentrating his efforts in profit maximisation. Based on this financial goal, results in higher EPS over a yearly period is preferred.
In using the provided financial data collated by Stanley, the resulted calculations of operating and free cash flows for the 2007 term are as below ($000).
Operating Cash Flow = Earnings before Interest - Taxes + Depreciation
OCF = EBIT - Taxes + Depreciation
OCF = $89 - 12 +11 = 88
OCF = $88
Free Cash Flow = OCF - net non-current asset investment - net current asset investment
NNCAI = Change in net non-current assets + depreciation
NNCAI = (132 - 128) + 11 = 15
NNCAI= 15
NCAI = Change in current assets - change in (accounts payable + accruals)
NCAI = 59 - (10+2) = 47
NCAI= 47
FCF = OCF - NNCAI - NCAI
FCF = $88 - 15 - 47 = 26
FCF = $26
In light of Track Software's current cash flow difficulties, the above financial data provides calculations showing good positive cash flow from operating activities. The $88 000 OCF is great enough to provide the cash needed for the required investment in both non-current assets and the increase in net working capital. The FCF figures show that the firm still has $26 000 accessible to pay the necessary creditors and equity holders meaning cash flow difficulties are currently maintained.
A ratio analysis best determines the firm's financial position and condition as it currently exists with comparison to past performance (time-series analysis) and relevant industry norm figures(cross-sectional analysis ). The below table is inclusion of ratio data calculations (See Appendix) and the relevant comparable evaluations. Evaluations are determinable by an ascending measure rating;
Time-Series (TS) Analysis (Declining/ Balanced/Improving)
Cross-Sectional (CS) Analysis (Poor/Fair/Good)
Ratio
Actual
Industry Avg 2007
Time-series
Cross-sectional
2006
2007
Net Working Capital
$21 000
$58 000
$96 000
Improving
TS
Poor
CS
Current Ratio
1.06
1.16
1.82
Improving
TS
Poor
CS
Quick Ratio
0.63
0.63
1.10
Balanced
TS
Poor
CS
Inventory Turnover
10.40
5.39
12.45
Declining
TS
Poor
CS
Average Collection Period
29.6 Days
35.8 Days
20.2 Days
Declining
TS
Poor
CS
Total Asset Turnover
2.66
2.80
3.92
Improving
TS
Poor
CS
Debt Ratio
0.78
0.73
0.55
Declining
TS
Poor
CS
Times Interest Earned
3.0
3.1
5.6
Balanced
TS
Poor
CS
Gross Profit Margin
32.1%
33.5%
42.3%
Improving
TS
Fair
CS
Operating Profit Margin
5.5%
5.7%
12.4%
Improving
TS
Poor
CS
Net Profit Margin
3.0%
3.1%
4.0%
Balanced
TS
Fair
CS
Return on Total Assets
80%
8.7%
15.6%
Improving
TS
Poor
CS
Return on Equity
36.4%
31.6%
34.74%
Declining
TS
Fair
CS
A Track Software's ability to satisfy its short term obligations; liquidity is reflected by the current ratio, net working capital and quick (acid-test) ratio. These calculations show figures have improved slightly or remained balanced or unchanged presenting positive cash flow but overall figures are significantly below industry average according to the cross-sectional analysis evaluation.
B The firm's activity rating, thus the speed with which various accounts are converted into sales or cash inflows or outflows (Gitman, 53) can be determined through the considerable decline of inventory turnover. Inventory turnover equates to nearly less than half from the previous year, resulting in a substantial difference to industry norm. These declines are also reflected within the average collection period figures. Total asset turnover improved slightly but is still also well below the 2007 industry average.
C The firm's debt; equity used to generate profits , is determined by debt ratio figures which have, as seen in the Ratio Analysis, improved slightly from 2006 but are higher than industry averages. The times interest earned ratio figures show a reasonable balance but as seen values are below norm.
D Track Software's profitability is determined by the firm's gross, operating and net profit margins, which are low compared to industry figures but in light of actual figures have improved slightly in 2007. Return on total assets has improved but is near half the industry average. Return on equity declined slightly and is now below average according to industry standards.
Track Software Limited, while showing improvement in most liquidity, debt and profitability ratios, should take steps to improve activity ratios, particular inventory turnover and accounts receivable collection as there is an evident difference in consideration to industry averages, hence the competition.
The expense of a new software developer will decrease short-term profitability but a good investment for the firm's long term potential is to be considered.
Since Stanley, as the financial manager has chosen to orientate the company along the goal of profit maximisation, as previously determined. The ability to add a new product, which the recruitment opportunity would provide would increase sales and lead to greater profits for the long term of Track Software Ltd. The recommendation I would provide is for Stanley to hire the software developer, this means in consideration to my recommendation proceedings would require Stanley to manage current finances and muster the on-hand cash to hire the developer.
