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Software, Inc. Seven years ago, Jason Fernando, after 15 years as a public accountant with a major accounting firm, started Software Inc. in 2006. In the preceding two years he had developed a sophisticated cost-accounting software program that became Software’s initial product offering. As the firm grew, Jason intended to develop and expand the software product offerings which would relate to streamlining the accounting processes of medium- to large-sized manufacturing companies. Software Inc. experienced losses during its first 2 years of operation 2006 and 2007 however, its profits increased steadily from 2008 to the present (2013). The firm's profit streams and dividend payments are summarized in Table l. Jason started the firm…show more content…
You need to evaluate the firm on both a cross-sectional and a timeseries 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. 7. 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 FCF 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 Dividends 2006 $(60,000) 0 2007 (40,000) 0 2008 30,000 0 2009 40,000 4,000 2010 48,000 5,000 2011 65,000 6,000 2012 70,000 8,000 2013 80,000 10,000 Table 2 Software Inc Income Statement For the Year Ended December 31, 2013 ($000) Sales $ 1,800 Cost of Goods Sold 1,230 Gross Profits 570 Less Operating Expenses Selling Expense $ 200 General and Administrative Expenses 200 Depreciation 40 Total Operating Expenses 440 Operating Profit $ 130 Less Interest Expense 30 Net profit before Taxes 100 Less Taxes 20% 20 Net Profit
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