I For each of the two proposed replacement presses, determine: a initial investment b operating net cash inflows c terminal cash flow (Note: At the end of year 5).
BFA728 FINANCE FOR MANAGERS
You are required to analyse financial information and apply relevant financial techniques and knowledge to make financial decisions and recommendations. These decisions and recommendations need to be communicated clearly in written form.
1200 words maximum - this requirement refers to the written analysis section of the assignment only and is a -maximum-. Students will not be penalised for using fewer words and making their report more succinct. If you submit over-length work there will be an automatic 10% penalty of the total possible marks for this assessment. Title pages, calculations section, reference lists and any appendices are NOT included in the word count.
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Seven years ago, after 15 years in public accounting, Stanley Booker, FCPA, resigned his position as manager of cost systems for Davis, Cohen and O`Brien Public Accountants and started Track Software Limited. In the two years preceding his departure from Davis, Cohen and O`Brien, Stanley had 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 software product offerings—all of which would be related to streamlining the accounting processes of medium- to large-sized manufacturers.
Although Track experienced losses during its first two years of operation—2005 and 2006—its profit has increased steadily from 2006 to the present (2011). The firm`s profit history, including dividend payments and contributions to retained earnings, is summarised in Table l .
Stanley started the firm with a $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% ownership in the corporation, but after experiencing a $50 000 loss during the first year of operation (2005), he sold 60% of the shares to a group of investors in order to obtain needed funds. Since then, no other share transactions have taken place. Although he owns only 40% of the firm, Stanley actively manages all aspects of its activities; the other shareholders are not active in the management of the firm. The shares closed at $4.50 in 2010 and at $5.28 in 2011.
Stanley has just prepared the firm`s 2011 income statement, balance sheet and statement of retained earnings, shown in Tables 2, 3 and 4, along with the 2010 balance sheet. In addition, he compiled the 2011 ratio values and industry average values, which are applicable to both 2010 and 2011. These are summarised in Table 5. Stanley is quite pleased to have achieved record earnings of $48 000 in 2011, 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. To gain insight into these cash flow problems, he is planning to prepare the firm`s 2011 operating cash flow and free cash flow.
Stanley is further frustrated by the firm`s 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 two 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 rise significantly once the two- to three-year development, production and marketing process was completed.
With all these concerns in mind, Stanley set out to review the various data to develop 2 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 2011 results would provide important additional insights.
1 a On what financial goal does Stanley seem to be focusing? Is it the correct goal? Explain
2 Calculate the of shares issued performance
4 b Could a potential agency problem exist in this firm? Explain.
LaMmce, et al. Princ,`ples of on 2018-08-22
firm`s earnings per share (FPS) for each year, recognisjng that the number has remained unchanged since the firm`s inception. Comment on the EPS view of your response to question la.
Finance eBook. Austrafia. ProQuest Cenaai.
one Introduction to managerial finance
3 Use the financial data presented to determine Track`s operating cash flow (OCF) and free cash flow (FCF) in 2011. Evaluate your findings in light of Track`s current cash flow difficulties.
4 Analyse the firm`s financial condition in 2011 as it relates to a liquidity, b activity, c debt and d profitability, using the financial statements provided in Tables 2 and 3 and the ratio data included in Table 5. Be sure to evaluate the firm on both a cross-sectional and a time-series basis.
What recommendation would you make to Stanley about hiring a new software developer? Relate your recommendation here to your responses to question la.
Profit, dividend and retained earnings, 2005—2011
Track Software Limited
Contribution to retained earnings
Net profits after taxes Dividends paid
Year (1) (2) (3)
2005 ($50 000) so ($50 000)
2006 (20 000) (20 000)
2007 15 000 15 000
2008 35 000 35 000
2009 40 000 1000 39 000
2010 43 000 3000 40 000
2011 48 000 5000 43 000
Income statement ($000)
Track Software Limited for the year ended 31 December 2011
140 enc-e. etal. Principles of MarngeriaJ Finance eBook, ProQuest Centralon Z01&-UB-zz 17:40:58.
Pearson (a 2011 — gn144253642s 6th editon
Balance sheets ($000)
Track Software Limited 31 Deccmber
Cash $12 $31
Marketable securities 66 82 Accounts receivable 152 104
Inventories 191 145
Total current assets $421 $362
Gross non-current assets $195 $180 Less Accumulated depreciation 63 52
Net non-current assets $132 $128
Total assets $553 $490
Liabilities and shareholders` equity
Accounts payable $1 36 $126
Notes payable 200 190
Accruals 27 25
Total current liabilities $363 $341
Long-term debts $38 $40 Total liabilities $401 $381
Ordinary shares (100 000 shares) $50 $50
Retained earnings 102 59
Total shareholders` equity $152 $109
Total liabilities and shareholders` equity $553 $490
one Introduction to managerial finance
Ratio 2010 2011
Current ratio 1.06 1.82 Quick ratio 0.57 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 3.0 5.6
Gross profit margin 32.1% 42.3 0/0
Operating profit margin 5.5%
Net profit margin 4.0%
Return on total assets 8.0% 15.6%
Return on equity 36.4 CYO
Price/earnings ratio 10.5 11 Market/book ratio 4.1 4
Lasting Impressions Company
Lasting Impressions (LI) Company is a medium-sized commercial printer of promotional advertising brochures, booklets and other direct-mail pieces. The firm`s major clients are Melbourne- and Perth-based advertising agencies. The typical job is characterised by high quality and production runs of over 50 000 units. LI has not been able to compete effectively with larger printers because of its older, inefficient presses. The firm is currently having problems in meeting run-length requirements and quality standards cost effectively.
The general manager has proposed the purchase of one of two large six-colour presses designed for long, high-quality runs. The purchase of a new press would enable LI to reduce its cost of labour and therefore the price to the client, putting the firm in a more competitive position. The key financial characteristics of the existing press and the two proposed presses are summarised below.
Old press: Originally purchased three years ago at an installed cost of $400 000, it is being depreciated using a prime cost (straight-line) method over a 10-year effective life. The old press has a remaining economic life of five years. It can be sold today to net $460 000 before taxes. If the old press is retained, it can be sold to net $150 000 before taxes at the end of five years.
Press A: This highly automated press can be purchased for $830 000 plus $40 000 in installation costs. It will be depreciated using the prime cost (straight-line) method over a five-year effective life. At the end of the five years, the machine could be sold to net $400 000 before taxes. If this machine is acquired, it is anticipated that the following current account changes would result.
Cash + $25 400
Accounts receivable + 120 000
Inventories - 20 000
Accounts payable + 35 000
Press B: This press is not as sophisticated as press A. It costs $640 000 plus $20 000 in installation costs. It will be depreciated using the prime cost (straight-line) method over a five-year effective life. At the end of five years, it can be sold to net $330 000 before taxes. Acquisition of this press will have no effect on the firm`s net working capital investment.
three Long-term investing decisions
I For each of the two proposed replacement presses, determine:
a initial investment b operating net cash inflows c terminal cash flow (Note: At the end of year 5).
2 Using the data developed in question l, find and depict on a time line the relevant cash flow stream associated with each of the two proposed replacement presses, assuming that each is terminated at the end of five years.
3 Using the data developed in question 2, apply each of the following decision techniques: a payback period (Note: Ignore any terminal cash flows at the end of year 3) b net present value c internal rate of return.
4 Draw NPV profiles for the two replacement presses on the same set of axes; discuss conflicting rankings of the two presses, if any, resulting from the use of NPV and IRR decision techniques.
5 Recommend which, if either, of the presses the firm should acquire if the firm has:
a unlimited funds b capital rationing.
6 What is the impact on your recommendation of the fact that the operating net cash inflows associated with press A are characterised as very risky in contrast to the low-risk operating net cash inflows of press B?
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