The management team is headed by Ms. Alma Serah, who serves as the president of the venture and controls about 35% of the ownership of the firm.Ms. Alma Serah is planning to leverage equity capital with debt during the years 2023, 2024 and 2025. She is keen to know whether ALMA.com will add economic value. Therefore, in order to assess the effects of its leveraging debt strategy, ALMA.com prepared a projected Statement of Financial Position (Balance Sheet) and Income Statement for the years 2023, 2024 and 2025 based on certain assumptions and events that are likely to happen in the future.

The interest rate on capital lease is 5%. The average expected interest rate on the bank loan during 2023 - 2025 is 4%. For long-term debt, the real interest rate is estimated to be 3%; the inflation premium is 4%; and ALMA.coms default/liquidity risk premium over government bonds is estimated to be 5%. The cost of common equity was estimated using the risk-free long-term government bond rate plus investment risk premium of 5.8%. The income tax rate = 40%.

Following are the projected statements of income and financial position for 2023, 2024 and 2025:

Alma.com

Projected Statement of Income (2023 2025)

INCOME STATEMENT	2023	2024	2025
Revenues	$3.44M	$7.50M	$12.30M
Cost of Goods Sold	2.55	5.20	8.72
Gross Profit	0.89	3.30	3.58
General and Marketing Expenses	0.26	0.34	0.36
Research and Development	0.05	0.05	0.05
Depreciation	0.06	0.09	0.12
EBIT	0.57	1.87	3.05
Interest Expense	0.07	0.11	0.18
EBT	0.50	1.76	2.87
Income Taxes	0.20	0.70	1.15
Net Income (Loss)	0.30	1.06	1.72

Alma.com

Projected Statement of Financial Position (2023 2025)

BALANCE SHEET	2023	2024	2025
Cash	$ 1.15 M	$ 1.87 M	$ 3.95 M
Accounts Receivable	0.35	1.00	1.50
Inventories	0.50	0.48	1.40
Total Current Assets	2.00	3.35	6.85
Net fixed assets*	0.15	0.35	0.57
Total Assets	2.15	3.70	7.42
Accounts payable	0.44	0.59	1.13
Accrued Liabilities	0.16	0.38	0.52
Total Current Liabilities	0.60	0.97	1.65
Capital Lease Liability*	0.13	0.30	0.60
Bank Loan	0.12	0.45	0.70
Long-Term Debt	0.20	0.50	1.50
Total Non-Current Liabilities	0.45	1.25	2.80
Total Liabilities	1.05	2.22	4.45
Venture Capital	1.00	1.00	1.00
Additional Paid-in Capital	0	0.30	0
Retained Earnings	0.10	0.18	1.97
Total Equity	1.10	1.48	2.97
Total Liabilities and Equity	2.15	3.70	7.42

1. Determine the financial structure weights from ALMA.coms 2025 statement of financial position for the three interest-bearing debt components and the common equity.

2. Calculate ALMA.coms weighted average cost of capital (WACC)

3. Estimate ALMA.coms economic value added (EVA). Did ALMA.com expect to build or destroy economic value in 2025? [Hint: Consider whether ALMA.com is adding economic value in terms of its net operating profit after taxes (NOPAT)* and its weighted average cost of capital (WACC).

4. Alma.com investors have been approached by an outside investor who wants to invest $3.0M in the venture at the end of 2021. What percentage of ownership in the venture should ALMA.com investors give up to the outside investor for a $3.0M new investment? Alma.com financial analysts predict that Operating Cash Flows are expected to be $0.21M in 2022, $0.55M in 2023, $0.60M in 2024 and $0.76M in 2025. The analysts further predict that the companys cash flows are expected to grow at 1% annual rate indefinitely beyond 2025. [Hint: Use Projected Free Cash Flow].