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Construction Management Essay



Stanley’s focus is on maximizing profits. This is the correct goal because the goal of anyfirm, and therefore its financial manager, should be to maximize its value and by extensionthe wealth of the shareholders.

There is potential for an agency problem if Stanley decides to go ahead and invest in thesoftware developer. This investment will cause a temporary decrease in the earnings per share (EPS) of the firm which will mean fewer earnings at the present time for thestakeholders. This may be a problem if the goal of the shareholders is to gain moneysooner than later. However, it the goal of the shareholders is simply to maximize wealth,there may not be an agency problem since the goal of the financial manager, Stanley, is the same as the shareholders’.

b. Since there is no preferred stock; Earnings available for common stockholders= Net Profit After Taxes No of shares of common stock outstanding = 50 000

EPS = NPAT/ no. of shares of common stock outstanding

EPS show a steady increase over the past five years indicating that Stanley is achieving hisgoal of maximizing profits.

c. Operating

Cash Flow

(OCF) for 2012OCF = {Earnings Before Interest and Taxes×(1– Tax rate)} + Depreciation OCF = {EBIT × (1– T)} + Depreciation
= {$89 000 × (1 – 0.20)} + $11 000
= $82 200

Free Cash Flow (FCF) for 2012
FCF = OCF1– Net Fixed Assets Investments – Net Current Assets Investment FCF = OCF – NFAI – NCAI
NFAI = Change in net fixed assets + Depreciation= ($132 000– $128 000) + $11000 = $15 000
NCAI = Chance in current assets – Change in (Accounts Payable + Accruals) = ($421 000 – $62 000) – {($136 000 + $27 000) – ($126 000 + $25 000)}=$47 000 FCF = $82 200 – $15 000 – $47 000
= $20 200

Both the operating cash flow and the free cash flow are positive indicating that Stanley wasable to generate adequate cash flow to cover both operating expenses and investments inassets. There was also $20 200 left over to pay to investors.


(1) Upon what financial goal does Stanley seem to be focusing? Is it the correct goal? Why or why not? Stanley seems to be focusing on profit maximization, in another word the EPS performance. It is not the correct goal, as profits do not necessarily result in cash flows available to the stockholders, only when earnings increases are accompanied by increased future cash flows would a higher stock price be expected, therefore the stockholders’ wealth would be maximized.

(2) Could a potential agency problem exist in this firm? Explain. There is a potential agency problem exist in this firm. First of all, he owns only 40% of the firm, but he manages actively all aspects of its activities and the other stockholders are not active in management of the firm, so he is an agent of the other owners. Secondly he is reluctant to take more than moderate risk, which might jeopardize his goal of profit maximization and reduce his personal wealth, so there is a conflict between owner wealth maximization and his personal goals.

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Upon what financial goal does Stanley seem to be focusing? Is it the correct goal? Why or Why not? The financial goal that Stanley seems to be focusing on is maximizing the profitability of Track Software Inc. which is apparent in years 1997 to 2003 increases in net profit from ($50,000) to $48,000 respectively. His financial goal of profit maximization was also evident in his hesitance to hire a software developer because this would result in a salary cash outflow of $80,000 per year and lower the Earnings Per Share(EPS) in years to come.

Par:(1)Stanley is focusing on maximizing profit, as shown by the increase in net profits over theperiod1997 to 2003. His dilemma about adding the software designer, which would depress earnings for the near term, also demonstrates his emphasis on this goal .Maximizing wealth should be the correct goal for a financial manager. Wealth maximization takes a long-term perspective and also considers risk and cash flows .Profits maximization does not integrate these three factors (cash flow, timing, risk) in the decision process

(2) An agency problem exists when managers place personal goals ahead of corporate goals. Since Stanley owns 40% of the outstanding equity, it is unlikely that an agency problem would arise at Track Software


Maximization of shareholder wealth, which means maximization of share price,should be theprimary goal of the firm. Unlike profit maximization, this goalconsiders timing, cash flows, andrisk. It also reflects the worth of the owners’investment in the firm at any time. It is the value theycan realize should theydecide to sell their shares.


Yes, there appears to be an agency problem. Although compensation for management is tied toprofits, it is not directly linked to share price. In addition,management’s actions with regard topollution controls suggest a profitmaximization focus, which would maximize their earnings,rather than an attemptto maximize share price

Eco Plastics Company ECO Plastics
Established in 2000, ECO Plastics Ltd is the UK’s leading and highest quality plastic bottle recycler producing plastics for soft drinks and milk bottles.


In March 2011, the company signed a ten-year joint venture deal, a first in the UK drinks manufacturing industry, to supply the global enterprise with high quality food-grade recycled material (rPET). In order to achieve Coca-Cola’s target of including 25% rPET in all plastic packaging within Great Britain by 2012, ECO Plastics needed to expand their premises. Jonathan Short, Managing Director of ECO Plastics Ltd said, “We were thrilled to sign the joint venture deal with a company of the calibre of Coca-Cola and begin the next important step for our business. All we needed to do was secure the additional capital required to expand our premises and fund our operations.”


ECO Plastics approached a number of finance providers but found that due to the economic climate, lending was restricted. “It was difficult at first to find the financial backing we needed to expand our business and meet the needs of our exciting venture with Coca-Cola,” said Mr. Short. “We approached Close Brothers and discussed a structured finance solution, tailored to meet our specific business requirements. The deal was primarily a leasing contract, secured against our existing assets which incorporated invoice finance to fund our operations during the expansion.”


The combined asset-based financial platform of £18million provided by Close Brothers Invoice Finance and Close Brothers Leasing supported the construction and operation of the expansion to ECO Plastics’ processing plant, which completed in 2012. “Without Close Brothers, we would have been unable to fulfil our agreement with Coca-Cola which would have not only been devastating to our business, but to the industry as a whole,” said Mr. Short. “Working with Close Brothers has afforded us with the opportunity to expand our business and realise our true growth potential as we continue to work toward becoming the world-leader in sustainable packaging.”

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