ALPHA ONE SOFTWARE CORPORATION
The Alpha One Software Corporation was organised to develop software products that would provide Internet-based firms with information about their customers. As a result of initial success, the venture’s premier product allows firms with subscriber bases to predict customer profiles, retention, and satisfaction.
Arlene Lo received an undergraduate degree in computer sciences and information systems from a major university four years ago. The Omega Subscriber Software Product was developed, plus test marketed with the help of two of her classmates; Alpha One Software Corporation was then up and running within one year. Venture capital was obtained for start up operations; a second round of venture financing helped Alpha One to move through its survival stage. Product success in the marketplace has allowed the venture to achieve such rapid sales growth that it is now able to get bank loans and issue long-term debt. The tax deductible interest rate on the bank loans is 10 percent. An effective cost for the long-term debt now needs to be determined; the cost of common equity was estimated using a risk-free rate of 7 percent and a risk premium of 13 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). Based on the most recent years’ financial statements (below), Arlene is interested in answering the following:
A. What is Alpha One’s NOPAT? Why does NOPAT differ from the earnings after taxes?
B. Estimate the effective before-tax cost of the long-term debt.
C. Estimate the effective after-tax cost of the bank loan and the long-term debt.
D. Estimate the cost of common equity capital.
E. Determine the financial structure weights for the two interest-bearing debt components and the common equity.
F. What is Alpha One’s WACC?
G. Also using the ratios discussed in the textbook, assess the health of the firm based upon 2-3 key ratios and your findings from the above questions.
H. Briefly explain what factors are likely to have a particular impact upon the WACC estimates for entrepreneurial firms that have not yet reached the maturity stage of their venture life cycle.

Alpha One Software Corporation
Income Statement Year to 30 June2011

Net Sales $1,500,000
Cost of Goods Sold -850,000
Gross Profit 650,000
General & Administrative Expenses -250,000
Marketing -206,000
Depreciation -50,000
Earnings Before Interest and Taxes 144,000
Interest -84,000
Earnings Before Taxes 60,000
Income Taxes (@ 40% rate) -24,000
Earnings After Taxes 36,000
Dividends 0
Retained Earnings for the year $36,000

Alpha One Software Corporation
Statement of Financial Position 30 June 2011
(Balance Sheet)
Cash $20,000
Accounts Receivable 250,000
Inventories 350,000
Total Current Assets 620,000
Non-current Assets, Net Book Value 480,000
Total Assets $1,100,000

Accounts Payable 125,000
Accrued Liabilities 125,000
Notes Payable (bank loan repayable) 100,000
Total Current Liabilities 350,000
Long-Term Debt 500,000
Common Stock (20,000 shares) 100,000
Retained Earnings 150,000
Total Liabilities & Equity $1,100,000

Note
Assume that 100% capital allowances (deductible tax depreciation) are available with respect to the acquisition of $30,000 of non-current assets in the year to 30 June 2011. All interest charges and other expenses were tax deductible for that same year. The corporation is subject to a 40% tax rate on its taxable income.

ALPHA ONE SOFTWARE CORPORATION The Alpha One Software Corporation...