Finance, Financial Management

Assignment Help:
#qSeven years ago, after 15 years in public accounting, Stanley Booker, CPA, resigned his posiition
as Manager of Cost Systems for Davis, Cohen, and O''''''''Brien Public Accountants and started
Track Software, Inc., In the 2 years preceding his departure from Davis, Cohen ans O''''''''Brien,
Stanley has spent nights and weekends developing a sophisticated cost-accounting software
program that became Track''''''''s initial product offering . As the firm grew, Stanley planned to develop
and expand the product offerings - all of which would be related to streamlining the processes of
medium-to-large sized manuufacturers.

Although Track experienced losses during its first two years of operation - 2000 to 2001 - its
profit has increased steadily from 2002 to the present (2006). The firm''''''''s profit history, including
dividend payment contributions to retained earnings is summarized in Table 1.

Stanley started the firm with $100,000 investment - his savings of $50,000 as equity and a
$50,000 long term loan from the bank. He had hoped to maintain his initial 100 percent ownership
in the corporation, but after experiencing a $50,000 loss during the first year of operation (2000)
he sold 60 percent of the stock to a group of investors to obtain needed funds. Since then, no
other stock transactions have taken place. Although he owns only 40 percent of the firm, Stanley
actively manages all aspects of its activities; the other stockholders are not active in management
of the firm. The firm''''''''s stock was valued at $4.50 per share in 2005 and at $5.28 per share in 2006.



TABLE 1

Contribution
Net Profits Dividends to Retained
after Taxes Paid Earnings
Year (1) (2) (3)
2000 $ (50,000) $ - $ (50,000)
2001 (20,000) - (20,000)
2002 15,000 - 15,000
2003 35,000 - 35,000
2004 40,000 1,000 39,000
2005 43,000 3,000 40,000
2006 48,000 5,000 43,000




Stanley has just prepared the firm\s 2006 income statement, balance sheet and statement of retained
earnings, shown in Tables 2 , 3 and 4, along with the 2005 balance sheet, In addition, he has complied
the 2005 ratio values and industry average ratio values for 2006, which are applicable to both 2005 and
2006 and are summarized in Table 5. He is quite pleased to have achieved record earnings of $48,000
in 2006, but he is concerned about the firm''''''''s cash flows. Specifically, he is finding it more and more
difficult to pay the firm''''''''s bills in a timely manner and generate cash flows to investors - both creditors
and owners. To gain insight into these cash flow problems, Stanley is planning to determine the firm''''''''s
2006 operating cash flow (OCF) and free cash flow (FCF).




Stanley is further frustrated by the the firms'''''''' inability to afford to hire a software developer to complete
development of a cost estimation package that is believed to have "blockbuster" sales potential.
Stanley began development of this package 2 years ago, but the firm''''''''s growing complexity has forced
him to devote more of his time to administrative duties, thereby halting the development of this product.
Stanley''''''''s reluctance to fill this position stems from his concern that the added $80,000 per year in
salary and benefits for the position would certainly lower the firm''''''''s earnings per share (EPS) over the
next couple of years. Although the project''''''''s success is in no way guaranteed , Stanley believes that
if the money were spent to hire the software developer, the firm''''''''s sales and earnings would significantly
rise once the 2 to 3- year development, production, and marketing process was completed.


Table 2
Track Software, Inc.
Income Statement ($000)
For the Year Ended December 31, 2006

Sales revenue $ 1,550
Less: Cost of goods sold 1,030
Gross profits 520
Less: Operating expenses
Selling expenses $ 150
General and administrative expenses 270
Depreciation expense 11
Total operating expense 431
Operating profits (EBIT) 89
Less: Interest expense 29
Net profits before taxes 60
Less: Taxes (20%) 12
Net profits after taxes 48



Table 3
Track Software, Inc.
Balance Sheet ($000)
As at December 31, 2006
31-Dec
Assets 2006 2005
Current Assets
Cash $ 12 $ 31
Marketable securities 66 82
Accounts receivable 152 104
Inventories 191 145
Total Current Assets 421 362
Gross Fixed Assets 195 180
Less Accumulated depreciation 63 52
Net fixed assets 132 128
Total assets 553 490


Liabilities and Stockholders'''''''' Equity
Current Liabilities
Accounts payable 136 126
Notes payable 200 190
Accruals 27 25
Total Current Liabilities 363 341

Long term debt 38 40
Total liabilities 401 381

Stockholders'''''''' Equity
Common stock (50,000 shares outstanding
@$.40 par value 20 20
Paid-in-capital in excess of par 30 30
Retained earnings 102 59
Total stockholders'''''''' equity 152 109

Total liabilities and stockholders'''''''' equity 553 490





Table 4
Track Software, Inc.
Statement of Retained Earnings ($000)
For the Year Ended December 31, 2006


Retained earnings balance, January 1, 2006 $ 59
Add: Net profits after taxes for 2006 48
Less: Cash dividends on common stock paid during 2006 5
Retained earnings balance, December 31, 2006 102



















Table 5
Industry
Actual Average
Ratio 2005 2006
Current ratio 1.06 1.82
Quick ratio 0.63 1.10
Inventory turnover 10.40 12.45
Average collection period 29.6 days 20.2 days
Total asset turnover 2.66 3.92
Debt ratio 0.78 0.55
Times interest earned ratio 3.00 5.60
Gross profit margin 32.10% 42.30%
Operating profit margin 5.50% 12.40%
Net profit margin 3.00% 4.00%
Return on total assets (ROA) 8.00% 15.60%
Return on common equity (ROE) 36.40% 34.70%
Price/earnings (P/E) ratio 5.20 7.10
Market/book (M/B) ratio 2.10 2.20



With all of these concerns in mind, Stanley set out to review the various data to develop strategies that
would help to ensure a bright future for Track Software. Stanley believed that as part of this process , a
thorough ratio analysis of the firm''''''''s 2006 results would provide important additional insights.

1.)
(b) Calculate the firm''''''''s earnings per share (EPS) for each year, recoginizing that the number of
shares of common stock outstanding has remained unchanged since the firm''''''''s inception.
Comment on the EPS performance in view of your response in part a.
(d) Analyze the firm''''''''s financial condition in 2006 as it relates to (1) liquidity, (2) activity, (3) debt
(4) profitability, and market, using the financial statements provided in Tables 2 and 3 and the
ratio included in Table 5. be sure to evaluate the firm on a cross sectional basis.
uestion..

Related Discussions:- Finance

Explain about the corporate reorganisations, Corporate Reorganisations ...

Corporate Reorganisations This topic deals principally with mergers and takeovers. It's very highly examinable. The discussion areas overlap with business strategy paper so don

What is accumulated depreciation?, What is accumulated depreciation? De...

What is accumulated depreciation? Depreciation is the provision of an asset's initial cost over time.  Accumulated depreciation is the sum of all the depreciation expense that

Define interbank currency trading worldwide use us dollar, Why does most in...

Why does most interbank currency trading worldwide involve the U.S. dollar? Answer:  Trading in currencies worldwide is in opposition to a common currency which has international

Total revenue change, Write an essay explaining that the quantities of good...

Write an essay explaining that the quantities of goods and services that we can produce are limited by both our available resources and by technology. Assume we want to increase

What is estate tax, Q. What is Estate Tax? Estate Tax - Tax on the valu...

Q. What is Estate Tax? Estate Tax - Tax on the value of a DECENDENT'S taxable estate, usually defined as the decedent's ASSETS less LIABILITIES and certain expenses that may in

Estimate the montly deposite, Mr. Moore will be 35 years at the end of the ...

Mr. Moore will be 35 years at the end of the month and he wishes to retire in 25 years. He plans to invest in a mutual fund earning 7.5 percent annual return compounded monthly an

Explain the various key determinants of initial project cost, Question 1 Th...

Question 1 There are several elements which you can take into consideration, while budgeting a project. Describe these elements Question 2 Explain the different methods/source

Explain the procedure for cost benefit analysis, Question 1: i) Pe...

Question 1: i) Performance budgeting is the best budgeting system. Discuss. ii) Why there is a need for implementing MTEF in the Mauritian Public Sector? Questi

Define mutually exclusive projects, Provide three examples of mutually excl...

Provide three examples of mutually exclusive projects. Mutually exclusive projects are projects which participate against each other for our selection.  If a organization and fir

Analysis of financial plans, Part 1: Contingency plan Create contingency pl...

Part 1: Contingency plan Create contingency plans for the following scenarios: > One of your highly qualified consultants has given three months notice and is planning to move to a

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd