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Alpha One Software Corporation Note: This Mini Case incorporates the calculation of a weighted average cost of capital ( WACC ) to determine whether the
Alpha One Software Corporation Note: This Mini Case incorporates the calculation of a weighted average cost of capital WACC to determine whether the Alpha One Software Corporation added economic value in The Appendix to Chapter will need to be covered first in order to complete this Mini Case. The Alpha One Software Corporation was organized to develop software products that would provide Internetbased firms with information about their customers. As a result of initial success, the ventures premier product allows firms with subscriber bases to predict customer profiles, retention, and satisfaction. Arlene lo received an undergraduate degree in computer science and information systems from a major northeastern university four years ago. The Omega Subscriber Software Product was developed and testmarketed with the help of two of her classmates; Alpha One Software Corporation was up and running within one year. Venture capital was obtained to start up operations; a second round of venture financing helped Alpha One move through its survival stage. Product success in the marketplace has allowed the venture to achieve such rapid sales growth that it now is able to get bank loans and to issue longterm debt. The interest rate on the bank loan is percent. For longterm debt, the real interest rate is estimated to be percent; the inflation premium is percent; and Alpha Ones defaultliquidity risk premium over government bonds is estimated to be percent. The cost of common equity was estimated using the riskfree longterm government bond rate and a stock investment risk premium of percent. Arlene lo has now reached the point of being able to consider whether Alpha One is adding economic value in terms of its net operating profit after taxes NOPAT and its weighted average cost of capital WACC Following are the financial statements for
ALPHA ONE SOFTWARE CORPORATION
INCOME STATEMENT
Net sales $
Cost of goods sold
Gross profit
General and administrative expenses
Marketing
Depreciation
Earnings before interest and taxes
Interest
Earnings before taxes
Income taxes rate
Earnings after taxes $ A Calculate Alpha One's net operating profit after taxes NOPAT Why does the NOPAT differ from the earnings after taxes?
B Estimate the effective beforetax cost of the longterm debt.
C Estimate the effective aftertax cost of the bank loan and the longterm debt.
D Estimate the cost of common equity capital.
E Determine the financial structure weights from Alpha One's financial statements for the two interestbearing debt components and the common equity.
F Calculate Alpha One's WACC.
G Determine the dollar cost of financial capital used.
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