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Mm0057 Financial Management Midterm Exam: No. 1 - Track Software, Inc
Mm0057 Financial Management Midterm Exam: No. 1 - Track Software, Inc
1 a. Question: On what financial goal does Stanley seem to be focusing? Is it the correct goal? Why or Why not?
a. Answer: According to the text, my opinion towards the goal that Stanley focused on is towards maximizing profits whi
maintaining his total ownership of the company. In business sense, it is highly correct to be focusing on maximizing profi
it is a business which means it need to generate revenue which then can be used to increase the overall performance of
company and thus increasing the potential profit the company could have. Yet, his second focus which is to keep his 100
ownership of the company is not a good goal. In class we learn that it is much more profitable to have part of the compa
funded by investors. This could help him to bounce in case he face some loss, where the share of his investors could abso
of this loss therefore Stanley can use his fund to bounce back.
Question: Calculate the firm's earnings per share (EPS) for each year, recognizing that the number of shares of commo
2 stock outstanding has remained unchanged since the firm's first inception. Comment on EPS performance in view of
responses in (1)
Answer: to answer this, kindly refer to the table on N29 about EPS per for each years.
As we can see that the EPS after Track Software, Inc. experience setback in the first year, the EPS gradually increasing w
means that the company actually gain more revenue which is in line to Stanley's focus to maximize profit. in this particu
calculation we can see that by the help of investors, the company could grow steadily to recoup its previous loss. yet,
expecting that Stanley would like to hire developer, the profits might reduce since part of the revenue now used as paym
for the hired-developer which in return will decrease the EPS
3 Question: Use the financial data presented to determine Track's operating cash flow (OCF) and free cash flow (FCF) in
evaluate your finding in light of Track's current cash flow difficulties.
Answer: to answer the question, kindly refer to the calculation on N41 (OCF, FCF). (result is in $.000)
As we can see that both Operating Cashflow (OCF) and Free Cash Flow (FCF) results are both positive. This actually show
Track Software, Inc. is generating cash to cover for the company's operating expense and investment in asset. but as the
mentioned that Stanley experiencing hard time to pay firm's bill in timely manner perhaps its because the payment for t
projects is not a one time payments which according to the calculation he should not need to be worried since the cash
are resulting in positive number
Answer: to answer the question, kindly refer to the calculation on N41 (OCF, FCF). (result is in $.000)
As we can see that both Operating Cashflow (OCF) and Free Cash Flow (FCF) results are both positive. This actually show
Track Software, Inc. is generating cash to cover for the company's operating expense and investment in asset. but as the
mentioned that Stanley experiencing hard time to pay firm's bill in timely manner perhaps its because the payment for t
projects is not a one time payments which according to the calculation he should not need to be worried since the cash
are resulting in positive number
4 Question: Analyze Firm's financial condition in 2012 as its relate to (1) Liquidity, (2) Activity, (3) Debt, (4) Profitability,
(5) Market. evaluate the firm in cross-sectional and time-series basis.
Answer: to answer the question, kindly refer to the calculation on N56 (OCF, FCF).
(1) Liquidity
Looking at the table, we see that in 2012 in terms of liquidity, the firms growing steadily. We can see from the curre
ratio where we can see increase (+0.10) from previous year, while the quick ratio is the same.
(2) Activity
In terms of activity, the total asset turnover is growing (+0.14) yet, inventory turnover and collection period is
deteriorating both from previous year and compared to industry
(3) Debt
the debt ratio is decreasing from the previous year (-0.05) and still far compared to industry. on the other hand we
that time interest ratio increased slightly (+0.07) from previous year. this means that the company using more of its own
money to generate revenue compared to previous year instead of that of creditors. Still, the numbers are pretty far to
industry average
(4) Profitability
We see that most of the componen that measure up profitability is increasing from previous year, Profit margin inc
by (+1.45%) while Operating interest margin increased by (+0.24%) and lastly, Net Profit Margin increased by (+0.10%).
company ROA also having slight increase from previous year (+0.68%), But ROE decreasing (-5.18%). perhaps this is caus
the limitiation of profit generating since the firms actually need additional developer to help deliver the needs which co
then increase the profit of the company and then increase the ROE. Compared to Industry, Track's Profit margin is stead
closing the gap with the industry's avg. while OPM, NPM, ROA and ROE require more of the company's effort to get to
industry's average
(5) Market
In the market, the PE ratio is increasing from previous year and even above the industry average. this signify that
investors think highly of Track's or that the price it self is over-valued. looking at the performance and other company
financial, where some is decreasing while some other increasing, perhaps the latter is true. This also supported by the
Market/Book Ratio since its also decreasing both from previous year and also remain lower compared to industry ave
which means that investor think that the stock price is currently over-valued compared to the company's performanc
5
Question: What recommendation would you make to Stanley regarding hiring a new software developer?
Answer: Looking at the financials, I think it is crucial for the company to actualy hire software developer considering the
current performance is self-limitting the company from reaching higher profit and meets the demand. To do this, Stanle
could use the financials and create projections for future financials to entice Stakeholders to agree with the hiring. It is
estimated that by having 1 new hire, would increase the performance at the cost of decrease in EPS for peiod of time
6
Question: An investor wanted to buy 100% of the firm and believed that he could extract $5,000 per year in cash from
company in perpetuity, what would be the amount the investor willing to pay for the firm if the required return on th
investment is 10%
Perpetuity = Cashflow/interest rate
Perpetuity = $5,000/10%
Perpetuity = $ 50,000.00
The amount that the investor should pay if he wants to receive $5,000 in perpetuity would be $50,0000
7 Question: Assuming the FCF generated continue forever, what are you willing to pay if you want to receive perpetual
of FCF with required return of 10% on investment
Perpetuity = Cashflow/interest rate
Perpetuity = $20,200/10%
Perpetuity = $ 202,000.00
The amount that I would pay if i wants to receive the FCF in perpetuity with 10% required return would be $202,0000
al? Why or Why not?
wards maximizing profits while
focusing on maximizing profit since
e the overall performance of the
ocus which is to keep his 100%
ble to have part of the company
are of his investors could absorb part
ty, (3) Debt, (4) Profitability, and Calculation for Financial Analysis
Financial Formula
be $50,0000
Answer:
Cost of Debt:
- Sale of $1,000 bond
$1000 - (average discount + floatation cost)
$1,000 - ($45 + $32) = $ 923.00
- Coupon Payment (I) = $1,000 x 0.105 = 105
- Before Tax Cost of Debt:
rd = [I + (Par Value - Nd/n)/(Nd + (Par Value/2))]
rd = [105 +((1000-923)/20)/((923+1000)/2))]
rd = 11.32%
- After Tax Cost of Debt:
ri = rd x (1-T)
ri = 11.32% x (1-0.4)
ri = 6.79%
Answer:
Kp = Dp / Pn --> Dp = Dividend payment, Pn
Kp = (0.095*$95)/($95-$7)
Kp = 9.02/$88
Kp = 10.25%
Answer:
Ri = Rf + β (Rm - Rf)
Ri = 0.04 + (1.3 x (0.13 - 0.04))
Ri = 15.7%
Answer:
WACC = (Wd x Kd)(1-tax) + (Wp x Kp) + (Wc x Kc)
WACC = (0.30 x 0.069) + (0.20 x 0.1025) + (0.50 x 0.157)
WACC = 0.0207 + 0.0205 + 0.785
WACC = 0.8262
5 A. Question: Assuming that the debt financing costs do not change, what effect would a shift to a more highly
leveraged capital structure consisting of 50% long-term debt. 0% preferred stock and 50% common stock have on
the risk premium for Eco’s common stock? What would be Eco’s new cost of common equity?
Answer:
Ke = Rf + (Rm-Rf)β
Ke = 0.04 + (0.13 - 0.04)1.5
Ke = 0.04 + (0.09*1.5)
Ke = 17.5%
New Cost of Common Equity = Ke - Ri = 17.5% - 15.7% = 1.8%
Answer:
New WACC = (0.50 x 0.069) + (0.050 x 0.175)
New WACC = (0.0345 + 0.0875)
New WACC = 0.122
C. Question: Which capital structure – the original one or this one seems better? Why?
Answer:
We see that using the existing/current capital structure Eco Company could have it cheaper cost of equity. But, by
changing the capital structure by adding debt financing could absorb the risk of the company when loss occured.
Looking at decreased WACC also means that the company could get capital cheaper than current. It is indeed risky
with the fact that company will now have more debt to pay that could decrease dividend, but the fact that the lower
WACC could lead to higher market value of the company which means the stockholders will be benefited as well with
the change. thus, i would suggest the company to take change to the new capital structure with 50% Long-Term Debt
and 50% Common Stock.
o a more highly
mon stock have on
of equity. But, by
en loss occured.
t. It is indeed risky
e fact that the lower
enefited as well with
50% Long-Term Debt
MM0057 FINANCIAL MANAGEMENT MIDTERM EXAM
VAN YULIAR HARYONANDA PRATAMA. 29320060
Therefore, the net cash flow each year including operating cash flow, nwc, and after tax are:
Time Cashflow
0 $ (94,915,000)
1 $ 25,912,500
2 $ 31,446,900
3 $ 31,869,900
4 $ 68,981,300
5 $ (1,736,000)
6 $ (4,650,000)
Conclusion
The company may take the project since the NPV of the new project resulted in positive number
Year 5 Year 6
$ 2,800,000 $ 7,500,000
--> Using MARCS table of 7 years
$ (2,800,000) $ (7,500,000)
$ (1,064,000) $ (2,850,000) --> Using 38% tax rate
$ (1,736,000) $ (4,650,000)
$ - $ -
$ (1,736,000) $ (4,650,000)