B D E Integrative Case Bright Works SOFTWARE Seven years ago, after 15 years in public accounting, Bob Booker, CPA, resigned his position as a Manager of Cost Systems for Davis, Cohen, and O'Brien Public Accountants and started Bright Works Software, Inc. In the 2 years preceding his departure from Davis, Cohen, and O'Brien, Bob had spent nights and weekends developing a sophisticated cost-accounting software program that became Bright Works' initial product offering. As the firm grew, Bob 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 Bright Works experienced losses during its first 2 years of operation - 2004 and 2005 - its profit has increased steadily from 2006 to the present (2010). The firm's profit history, including dividend payments and contributions to retained earnings, is summarized in Table 1. Bob started the firm with a $100,000 investment - his savings of $50,000 as equity and a $50,000 long-term loan form the bank. He had hoped to maintain his initial 100 percent ownership in the corporation, but after experiencing a $50,000 loss during the first year of operation (2004), he sold 60 percent of the stock to a group of investors to obtain needed funds. Since then, no other stock transactions have taken place. Although he owns only 40 percent of the firm, Bob 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 $4.50 per share in 2009 and $5.28 per share in 2010 Bob has just prepared the firm's 2010 income statement, balance sheet, and statement of retained earnings, shown in Tables 2 (below), 3 and 4 (below), along with the 2009 balance sheet. In addition, he has compiled the 2009 ratio values and industry average ratio values for 2010, which are applicable to both 2009 and 2010, and are summarized in table 5. He is quite pleased to have achieved record earnings of $48,000 in 2010, but he is concerned about the firm's cash flows. Specifically, he is finding it more and to pay the firm's bills in a timely manner and generate cash flows to investors - both creditors and owners. To gain insight into these cash flow problems, Bob is planning to determine the firm's 2010 operating cash flow (OCF) and free cash flow (FCF). more dif Bob 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. Bob 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. Bob'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 this project's success is in no way guaranteed, Bob 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. Table 1 Bright Works Software, Inc Earnings Per Share (EPS) Since inception Year 2004 2005 2006 2007 2008 2009 2010 Net Profils After Taxes ($50,000.00) ($20,000.00) $15,000.00 $35,000.00 $40,000.00 $43,000.00 $48,000.00 Common Dividends Paid $0.00 $0.00 $0.00 $0.00 $1,000.00 $3,000.00 $5,000.00 Contribution to retained earnings ($50,000.00) ($20,000.00) $15,000.00 $35,000.00 $39,000.00 $10,000.00 $43,000.00 Table 2 Bright Works Software, Inc Income Statement ($000) For The Year Ended December 31, 2010 $1,550 $1,030 $520 Sales revenue Less: Cost of goods sold Gross profits Less: Operating Expenses Selling Expense General and administrative expenses Depreciation Expense Total operating expense Operating profits (EBIT) Less Interest expense Net profits before taxes $150 $270 $11 $431 $89 $29 $60 Less: Taxes (20%) Net profits after taxes $12 $48 Note: Earnings / Share = Earnings available to common shareholdersumber of shares outstanding Total number of shares outstanding = 50,000 Bright Works Software, Inc Balance Sheet ($000) Assets Cash Marketable securities Accounts Receivable Inventories Total Current Assets Gross fixed assets Less: Accumulated Depreciation Net fixed assets - Total Assets 2010 12 66 152 191 $421 2009 31 82 104 145 $362 180 52 128 $490 195 132 $553 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable Notes Payable Accruals Total current liabilities Long term debt Total liabilities Stockholders' equity Common stock (50,000 shares outstanding at $0.40 par value Paid in capital in excess of par Retained earnings total stockholders' equity - Company Book Value Total liabilities and shareholders equity 136 200 $ 27 $363 $38 $401 126 190 25 $341 $40 $381 20 30 102 $152 $553 20 30 59 $109 $490 Stock Price per share $5.28 $4.50 Bright Works Software, Inc Statement of Retained. Earnings ($000) for the Year Ended December 31, 2010 Retained earnings balance (January 1, 2010 Plus: Net profits after taxes (for 2010) Less: Cash dividends on common stock (aid durin Retained earnings balance (December 31, 2010) $59 48 5 $102 2010 Comparisons with 2010 VS 2009 Vs Industry Table 5 Ratio Current Ratio Quick Ratio Inventory Turnover Average Collection Period Total assotturnover Debt ratio Times interest earned Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Return on common equity (ROE) Price Earnings Ration (P/E) ratio Marko Book (M/B) ratio 2009 106 063 10.40 29 60 2.66 0.78 3.0 32 10% 5.50% 3.00% 8.0096 36 40% 5.23 2.06 Industry 1.82 11 12.45 20.20 3.92 0.55 56 42 30% 12.40% 400% 15.60% 34 70% 22 TO DO A. (1) Upon what financial goal does Bob seem to be focusing?Is it correct goal or not? If yes, explain why it is correct. If not, explain why it is wrong and what is the correct one.(10 pts) Word Limit: 80 words. D E F G A. (2) Could a potential agency problem exist in this firm? Yes or No? Explain (10 pts) Word Limit: 60 words. B. Calculate the firm's earnings per share for each year, recognizing that the number of shares of common stock outstanding has remained unchanged since the firm's inception. Comment on the EPS performance in view of your response in part a. (14 pts) 7 Note: Do not subtract common dividends (only preferred dividends) to calculate EPS EPS (NPAT/5 Net Profits After Show your calculation within colls 0,000 For example. Col C118 = C17 18 Year Taxes Shares) Simply typing in numbers get O mark 2004 2005 2006 122 2007 123 2008 124 2009 125 2010 128 127 Comment(Word Limit: 30 words) 19 20 121 Introduction to Corporate Finance - Evaluation Project(1) 3 of 16 Introduction to Corporate Finance C. Use the financial data presented to determine Bright Works' operating cash flow (OCF) and free cash flow (FCF) in 2010. Evaluate your findings in light of Bright Works 128 current cash flow difficulties (16 pts) 129 SHOW THE FOMULAR AND CALCULATION PROCESS 130 131 132 134 139 140 141 (142 143 Comment on your findings (Word Limit: 80 words): 145 146 147 148 149 Introduction to Corporate Finance D. Analyze the firm's financial condition in 2010 as it relates to (1) liquidity, (2) activity, (3) debt, (4) profitability, (5) market, 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. ( 40 pts). Fill in the table 5 and for Industry Comparisons use poor, fair, ok, good. 152 For year to year comparison use improving, stable, or deteriorating. Comparison with 2010 results vs. 2009 vs. Industry 153 Table 5 154 Ratio 2009 2010 Industry 155 Current Ratio 106 1 82 456 Quick Ratio 0.63 11 157 Inventory Turnover 10.40 12.45 158 Average Collection Period 29.60 20.20 159 Total asset turnover 266 3.92 160 Debt ratio 0.70 055 161 Times interest earned 30 5.6 182 Gross profit margin 32 10% 42 30% 163 Operating profit margin 5 50% 12 40% 164 Net profit margin 300% 400% 165 Return on total assets (ROA) 8.00% 1500 166 Return on common equity (ROE) 30.409% 34.70% 167 Price Earnings Ratio (PE) ratio 523 7.1 168 Market Book (MB) ratio 200 22 169 show calculation process in cells.g. 0154-A1/C3 (at lease when I click the cell I should be able to see it.) 170 171 Comment on Liquidity/ Leverage/ Profitability/ Turnover/ Market 172 WORD LIMIT: 300 WORDS Bob 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. Bob 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. Bob'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 this project's success is in no way guaranteed, Bob 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. Table 1 Bright Works Software, Inc Earnings Per Share (EPS) Since inception Year 2004 2005 2006 2007 2008 2009 2010 Net Profils After Taxes ($50,000.00) ($20,000.00) $15,000 00 $35,000.00 $40,000.00 $43,000.00 $48,000.00 Common Dividends Paid $0.00 $0.00 $0.00 $0.00 $1,000.00 $3,000 00 $5,000.00 Contribution to retained earnings ($50,000.00) ($20,000 00) $15,000.00 $35,000.00 $39,000.00 $10,000.00 $43,000.00 B 76 E. What recommendation would you make to Bob regarding hiring a new software 77 developer? Relate your recommendation here to your response in part a. (10 pts) 78 WORD LIMIT: 80 WORDS 179 180 181 182 183 Introduction to Corporate Finance - Evaluation Project(1) 5 of 16 B D E Integrative Case Bright Works SOFTWARE Seven years ago, after 15 years in public accounting, Bob Booker, CPA, resigned his position as a Manager of Cost Systems for Davis, Cohen, and O'Brien Public Accountants and started Bright Works Software, Inc. In the 2 years preceding his departure from Davis, Cohen, and O'Brien, Bob had spent nights and weekends developing a sophisticated cost-accounting software program that became Bright Works' initial product offering. As the firm grew, Bob 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 Bright Works experienced losses during its first 2 years of operation - 2004 and 2005 - its profit has increased steadily from 2006 to the present (2010). The firm's profit history, including dividend payments and contributions to retained earnings, is summarized in Table 1. Bob started the firm with a $100,000 investment - his savings of $50,000 as equity and a $50,000 long-term loan form the bank. He had hoped to maintain his initial 100 percent ownership in the corporation, but after experiencing a $50,000 loss during the first year of operation (2004), he sold 60 percent of the stock to a group of investors to obtain needed funds. Since then, no other stock transactions have taken place. Although he owns only 40 percent of the firm, Bob 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 $4.50 per share in 2009 and $5.28 per share in 2010 Bob has just prepared the firm's 2010 income statement, balance sheet, and statement of retained earnings, shown in Tables 2 (below), 3 and 4 (below), along with the 2009 balance sheet. In addition, he has compiled the 2009 ratio values and industry average ratio values for 2010, which are applicable to both 2009 and 2010, and are summarized in table 5. He is quite pleased to have achieved record earnings of $48,000 in 2010, but he is concerned about the firm's cash flows. Specifically, he is finding it more and to pay the firm's bills in a timely manner and generate cash flows to investors - both creditors and owners. To gain insight into these cash flow problems, Bob is planning to determine the firm's 2010 operating cash flow (OCF) and free cash flow (FCF). more dif Bob 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. Bob 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. Bob'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 this project's success is in no way guaranteed, Bob 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. Table 1 Bright Works Software, Inc Earnings Per Share (EPS) Since inception Year 2004 2005 2006 2007 2008 2009 2010 Net Profils After Taxes ($50,000.00) ($20,000.00) $15,000.00 $35,000.00 $40,000.00 $43,000.00 $48,000.00 Common Dividends Paid $0.00 $0.00 $0.00 $0.00 $1,000.00 $3,000.00 $5,000.00 Contribution to retained earnings ($50,000.00) ($20,000.00) $15,000.00 $35,000.00 $39,000.00 $10,000.00 $43,000.00 Table 2 Bright Works Software, Inc Income Statement ($000) For The Year Ended December 31, 2010 $1,550 $1,030 $520 Sales revenue Less: Cost of goods sold Gross profits Less: Operating Expenses Selling Expense General and administrative expenses Depreciation Expense Total operating expense Operating profits (EBIT) Less Interest expense Net profits before taxes $150 $270 $11 $431 $89 $29 $60 Less: Taxes (20%) Net profits after taxes $12 $48 Note: Earnings / Share = Earnings available to common shareholdersumber of shares outstanding Total number of shares outstanding = 50,000 Bright Works Software, Inc Balance Sheet ($000) Assets Cash Marketable securities Accounts Receivable Inventories Total Current Assets Gross fixed assets Less: Accumulated Depreciation Net fixed assets - Total Assets 2010 12 66 152 191 $421 2009 31 82 104 145 $362 180 52 128 $490 195 132 $553 Liabilities and Stockholders' Equity Current Liabilities Accounts Payable Notes Payable Accruals Total current liabilities Long term debt Total liabilities Stockholders' equity Common stock (50,000 shares outstanding at $0.40 par value Paid in capital in excess of par Retained earnings total stockholders' equity - Company Book Value Total liabilities and shareholders equity 136 200 $ 27 $363 $38 $401 126 190 25 $341 $40 $381 20 30 102 $152 $553 20 30 59 $109 $490 Stock Price per share $5.28 $4.50 Bright Works Software, Inc Statement of Retained. Earnings ($000) for the Year Ended December 31, 2010 Retained earnings balance (January 1, 2010 Plus: Net profits after taxes (for 2010) Less: Cash dividends on common stock (aid durin Retained earnings balance (December 31, 2010) $59 48 5 $102 2010 Comparisons with 2010 VS 2009 Vs Industry Table 5 Ratio Current Ratio Quick Ratio Inventory Turnover Average Collection Period Total assotturnover Debt ratio Times interest earned Gross profit margin Operating profit margin Net profit margin Return on total assets (ROA) Return on common equity (ROE) Price Earnings Ration (P/E) ratio Marko Book (M/B) ratio 2009 106 063 10.40 29 60 2.66 0.78 3.0 32 10% 5.50% 3.00% 8.0096 36 40% 5.23 2.06 Industry 1.82 11 12.45 20.20 3.92 0.55 56 42 30% 12.40% 400% 15.60% 34 70% 22 TO DO A. (1) Upon what financial goal does Bob seem to be focusing?Is it correct goal or not? If yes, explain why it is correct. If not, explain why it is wrong and what is the correct one.(10 pts) Word Limit: 80 words. D E F G A. (2) Could a potential agency problem exist in this firm? Yes or No? Explain (10 pts) Word Limit: 60 words. B. Calculate the firm's earnings per share for each year, recognizing that the number of shares of common stock outstanding has remained unchanged since the firm's inception. Comment on the EPS performance in view of your response in part a. (14 pts) 7 Note: Do not subtract common dividends (only preferred dividends) to calculate EPS EPS (NPAT/5 Net Profits After Show your calculation within colls 0,000 For example. Col C118 = C17 18 Year Taxes Shares) Simply typing in numbers get O mark 2004 2005 2006 122 2007 123 2008 124 2009 125 2010 128 127 Comment(Word Limit: 30 words) 19 20 121 Introduction to Corporate Finance - Evaluation Project(1) 3 of 16 Introduction to Corporate Finance C. Use the financial data presented to determine Bright Works' operating cash flow (OCF) and free cash flow (FCF) in 2010. Evaluate your findings in light of Bright Works 128 current cash flow difficulties (16 pts) 129 SHOW THE FOMULAR AND CALCULATION PROCESS 130 131 132 134 139 140 141 (142 143 Comment on your findings (Word Limit: 80 words): 145 146 147 148 149 Introduction to Corporate Finance D. Analyze the firm's financial condition in 2010 as it relates to (1) liquidity, (2) activity, (3) debt, (4) profitability, (5) market, 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. ( 40 pts). Fill in the table 5 and for Industry Comparisons use poor, fair, ok, good. 152 For year to year comparison use improving, stable, or deteriorating. Comparison with 2010 results vs. 2009 vs. Industry 153 Table 5 154 Ratio 2009 2010 Industry 155 Current Ratio 106 1 82 456 Quick Ratio 0.63 11 157 Inventory Turnover 10.40 12.45 158 Average Collection Period 29.60 20.20 159 Total asset turnover 266 3.92 160 Debt ratio 0.70 055 161 Times interest earned 30 5.6 182 Gross profit margin 32 10% 42 30% 163 Operating profit margin 5 50% 12 40% 164 Net profit margin 300% 400% 165 Return on total assets (ROA) 8.00% 1500 166 Return on common equity (ROE) 30.409% 34.70% 167 Price Earnings Ratio (PE) ratio 523 7.1 168 Market Book (MB) ratio 200 22 169 show calculation process in cells.g. 0154-A1/C3 (at lease when I click the cell I should be able to see it.) 170 171 Comment on Liquidity/ Leverage/ Profitability/ Turnover/ Market 172 WORD LIMIT: 300 WORDS Bob 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. Bob 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. Bob'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 this project's success is in no way guaranteed, Bob 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. Table 1 Bright Works Software, Inc Earnings Per Share (EPS) Since inception Year 2004 2005 2006 2007 2008 2009 2010 Net Profils After Taxes ($50,000.00) ($20,000.00) $15,000 00 $35,000.00 $40,000.00 $43,000.00 $48,000.00 Common Dividends Paid $0.00 $0.00 $0.00 $0.00 $1,000.00 $3,000 00 $5,000.00 Contribution to retained earnings ($50,000.00) ($20,000 00) $15,000.00 $35,000.00 $39,000.00 $10,000.00 $43,000.00 B 76 E. What recommendation would you make to Bob regarding hiring a new software 77 developer? Relate your recommendation here to your response in part a. (10 pts) 78 WORD LIMIT: 80 WORDS 179 180 181 182 183 Introduction to Corporate Finance - Evaluation Project(1) 5 of 16
