Track Software Case Study
a. (1) In this case study, Stanley’s focus is on maximizing profits. Yes he is correct. This should be the goal of any firm and any financial manager. He should be easily able to maximize the value and also extend the wealth of the shareholders or stockholders if he continues to maximize profits.
(2) There is always potential for any agency problem. Should Stanley decide to invest in the software developer, an investment of this nature could cause decrease in earnings per share for the firm and that means fewer earnings at the present time for stakeholders. Let’s say for instance that the shareholders’ goals are to earn money at the present time, so money now instead of later, so that would be a problem. However if the shareholders’ goals are to maximize wealth over time, then there may not be an issue as they don’t need the wealth and earnings at the present state as Stanley’s job is the same as the shareholders at this point.
b. The case study didn’t say there was any preferred stock and that everything remained unchanged. Stanley is doing his job and over the past 5 years according to EPS shows an increase, so:
Earnings available for common stockholders= Net profit after taxes No of shares of common stock outstanding = 50 000
Year
Earnings per share (EPS)
2006
$0 -------= $0
50,000
2007
$0
-------= $0
50,000
2008
$15,000
-------= $ .30
50,000
2009
$35,000
-------= $ .70
50,000
2010
$40,000
-------= $. 80
50,000
2011
$43,000
-------= $ .86
50,000
2012
$48,000
-------= $. 96
50,000
c.
Operating Cash Flow or OCF for 2012 is calculated by the following:
OCF={Earnings before Interest and Taxes x (1-Tax Rate)}+ Depreciation
OCF={Earnings before
(2) There is always potential for any agency problem. Should Stanley decide to invest in the software developer, an investment of this nature could cause decrease in earnings per share for the firm and that means fewer earnings at the present time for stakeholders. Let’s say for instance that the shareholders’ goals are to earn money at the present time, so money now instead of later, so that would be a problem. However if the shareholders’ goals are to maximize wealth over time, then there may not be an issue as they don’t need the wealth and earnings at the present state as Stanley’s job is the same as the shareholders at this point.
b. The case study didn’t say there was any preferred stock and that everything remained unchanged. Stanley is doing his job and over the past 5 years according to EPS shows an increase, so:
Earnings available for common stockholders= Net profit after taxes No of shares of common stock outstanding = 50 000
Year
Earnings per share (EPS)
2006
$0 -------= $0
50,000
2007
$0
-------= $0
50,000
2008
$15,000
-------= $ .30
50,000
2009
$35,000
-------= $ .70
50,000
2010
$40,000
-------= $. 80
50,000
2011
$43,000
-------= $ .86
50,000
2012
$48,000
-------= $. 96
50,000
c.
Operating Cash Flow or OCF for 2012 is calculated by the following:
OCF={Earnings before Interest and Taxes x (1-Tax Rate)}+ Depreciation
OCF={Earnings before