Since then, no other stock transactions have taken place. Although he owns only 50 percent of the firm, Jason 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. 25 per share in 2012 and at $5. 00 per share in 2013. Jason has Just prepared the firm’s Income Statement, Balance Sheet, and Statement of Retained Earnings for 2013 as shown In Tables 2, 3, and 4.
He has also compiled the 2012 Financial Ratios and their corresponding Industry Averages which are applicable to both 2012 and 2013 and are summarized in Table 5. He is quite pleased to have achieved record earnings of $80,000 In 201 3, but Is concerned about the firm’s cash flows. Specifically, he Is ending It more and more difficult to pay the firm’s bills In a timely manner and generate cash flows. To gain insight into these cash flow problems, Jason is planning to determine the firm’s 2013 Operating Cash Flow (GOOF) and Free Cash Flow (FCC).
Jason 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. He 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. Season’s reluctance to fill this position stems from his concern that the added $60,000 per year in salary and benefits for the position would certainly lower the firm’s earnings per share (PEPS) over the next couple of years.
Although the project’s success is in no way guaranteed, he 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. With all of these concerns in mind, Jason sets out to review the various data to develop strategies that loud help to ensure a bright future for Software Inc. Stanley believes that as part of this 2 process, a thorough ratio analysis of the firm’s 2013 results would provide Important 1 OFF Required: 1 .
On what financial goal does Jason seem to be focusing? Is it the correct goal? Why or why not? 2. Could a potential agency problem exist in this firm? Explain. 3. Calculate the firm’s earnings per share (PEPS) for each year, recognizing that the number of shares of common stock outstanding has remained unchanged since the firm’s inception. Comment on the PEPS performance in view of your response in part 1 . 4. Use the financial data presented to determine Software’s Operating Cash Flow (GOOF) and Free Cash Flow (FCC) in 2013.
Evaluate your findings in light of the company’s current cash flow difficulties. 5. Analyze the firm’s financial condition in 2013 as it relates to (a) liquidity, (b) activity, (c) debt, (d) profitability, and (e) market, using the financial statements provided and the ratio data given . You need to evaluate the firm on both a cross-sectional and a timeserver basis. 6. What recommendation would you make to Stanley regarding hiring a new software developer? Relate your recommendation here to your responses in part 1 . . Software Inc. Paid $10,000 in dividends in 2013.
Suppose an investor approached Jason about buying 100% of his firm. If this investor believed that by owning the company he could extract $10,000 per year in cash from the company in perpetuity, what do you think the investor would be willing to pay for the firm if his required return on this investment is 8%? 8. Suppose that you believed that the FCC generated by Software Inc. In 2013 would continue indefinitely. What would you be willing to pay for the company if your required rate return is 8%. 3 Table 1 Software Inc profits and Dividends. 2006 – 2013 Year Net profit