Financial Goals of Track Software Limited
The rise in net income from 2005 to 2011 denotes that the focus of Stanley has always been on maximisation of profit level. The technique that he has been following in choosing to employ a software designer signifies this financial goal as well. A long-term perspective is needed for maximisation of wealth by taking into consideration cash flows and risk. However, in case of profit maximisation, these influential dynamics are not integrated while undertaking management decisions (Benson, Faff and Smith 2014). Thus, it could be stated that Stanley has been using the accurate financial goal.
In the words of Fields (2016), agency problem could be defined as a conflict of interest evident in any relation, in which one party is expected to act so that the other party is benefitted. From the financial perspective, agency problem denotes a conflict of interest between the management and the shareholders of a business organisation. In case, the interest of the shareholders is on immediate gains, the decision of appointing the software developer could result in an agency problem, as the earnings would be reduced leading to lower earnings per share. However, if the shareholders are interested actually in wealth maximisation over a timeframe, they would be able to analyse the reasons behind the recruitment of the software developer. In such situation, no agency problem is expected to take place.
The above table clearly makes it evident that the earnings per share of Track Software Limited have increased steadily over the years. The notable improvement could be observed in 2007, as the earnings per share became positive to $0.15 from ($0.20) in 2006. This clearly validates the fact that Stanley has been concentration on the profit maximisation goal.
With the rise in assets and earnings, the adjustments are made in cash flows as well. As the OCF is adequate, Track Software Limited is generating positive cash flow from its operating expenses. Moreover, the organisation has generated free cash flow amounting to $20,200 in 2011, which could be utilised for paying its investors, owners and creditors (Floyd and List 2016). Therefore, the cash flow troubles of the organisation are observed to decline at a steady rate.
The following ratios are computed for Track Software Limited for the year 2011 and they are compared with the industrial average of the same year:
Liquidity ratios:
Both current ratio and quick ratio of Track Software Limited are lower than the industrial average in the year 2011. However, slight improvement in liquidity position could be observed in 2011 compared to 2010. This might be the right time to make timely bill payments (France 2016). However, the cash flows are significantly lower compared to the industrial average. This might be due to the fact that the organisation has collected amounts from the customers at later dates.
Operating and Free Cash Flow of Track Software Limited
Activity ratios:
Slight improvement could be observed in total asset turnover ratio of the organisation in 2011; however, it is considerably below the industrial average. Moreover, decline could be observed in inventory turnover and average collection period and they are below the industrial average as well. The sales have not changed much over the year along with rise in inventory and cash. Hence, the overall collections of the organisation have declined massively over the year. This denotes that the organisation is needed to increase its employee base and it needs to extend its product line as well (Gitman, Juchau and Flanagan 2015).
Debt ratios:
Improvements could be observed in debt ratio and times interest earned ratio; however, Track Software Limited has failed to match the industrial standard.
Profitability ratios:
The profit margins of the organisation have increased slightly over the year. The return on assets is well below the industry average; however, improvement could be observed. Thus, even though it has made improvements, it is yet to come up to the industrial standard. However, decline could be observed in return on equity and it is well below the industrial standard.
Even though Track Software Limited has improved its financial position in 2011, it is not able to match the industry averages. Hence, the management of the organisation is needed to enhance specific ratios like average collection period and inventory turnover (Loughran and McDonald 2016).
It has been evaluated that Track Software Limited has earned profit over the periods and Stanley has been contented with the record earnings of $48,000 in 2011. However, this amount has not been adequate in settling bills timely. Despite the fact that a new software developer would enhance the product, the expense of the organisation would increase as well. Hence, Stanley is advised to hold the recruitment of a software developer until more money is generated by the organisation. For initiation, some expenses need to be minimised. As the focus of Stanley is on maximising profits, the employee would be recruited after some time in future (Scholes 2015). This would assist in boosting the sales revenue of Track Software Limited, which would increase its profit level in future (Gippel, Smith and Zhu 2015).
In accordance with the above table and figure, it could be stated that when the cost of capital is lower than 31%, Press A would need to be selected by Lasting Impressions Company. However, the last rate on which Press B could be selected would be anywhere below 23%. Despite the cost of capital provided as 14%, no conflicting interest is inherent in press rankings. The value of Press A is greater in contrast to that of Press B and thus, the former would be preferred over Press B using NPV method. This is because in terms of both NPV and IRR, the return from Press A would be higher in contrast to return from Press B.
If the organisation has unlimited funds, the preference would be provided to Press A. However, if the organisation is subject to capital rationing, preference might be provided to Press B. In this context, it needs to be mentioned that capital rationing is the method of exercising restrictions on new projects or investments undertaken by an organisation (Statman 2018). More precisely, it assists in selecting the most profitable projects or investments in relation to investment decisions.
In order to gauge risk, a quantitative technique needs to be used. For instance, the quantitative technique could be in the form of risk-adjusted rates of discount or certainty equivalents (Lin 2016). After this, it is crucial to contrast the net present value of Press A with that of Press B and accordingly, a decision needs to be undertaken.
References:
Benson, K., Faff, R. and Smith, T., 2014. Fifty years of finance research in the Asia Pacific Basin. Accounting & Finance, 54(2), pp.335-363.
Fields, E., 2016. The essentials of finance and accounting for nonfinancial managers. Amacom.
Floyd, E. and List, J.A., 2016. Using field experiments in accounting and finance. Journal of Accounting Research, 54(2), pp.437-475.
France, R., 2016. Finance for Purchasing Managers: Understanding the Financial Impact of Buying Decisions. Routledge.
Gippel, J., Smith, T. and Zhu, Y., 2015. Endogeneity in accounting and finance research: natural experiments as a state-of-the-art solution. Abacus, 51(2), pp.143-168.
Gitman, L.J., Juchau, R. and Flanagan, J., 2015. Principles of managerial finance. Pearson Higher Education AU.
Lin, K.H., 2016. The rise of finance and firm employment dynamics. Organization Science, 27(4), pp.972-988.
Loughran, T. and McDonald, B., 2016. Textual analysis in accounting and finance: A survey. Journal of Accounting Research, 54(4), pp.1187-1230.
Scholes, M.S., 2015. Taxes and business strategy. Prentice Hall.
Statman, M., 2018. Behavioural Finance Lessons for Asset Managers. The Journal of Portfolio Management, 44(7), pp.135-147.
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