The Mega One Software Corporation was organized to develop software products that would provide Internet-based firms with information about their customers.
finance
Description
The Mega One Software Corporation
was organized 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
received an undergraduate degree in computer sciences and information systems
from a major northeastern university four years ago. The Omega Subscriber Software Product was
developed, test marketed with the help of two of her classmates; Mega 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 Mega One to 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 issue long-term debt.
The interest
rate on the bank loan is 10 percent. For
long-term debt, the real interest rate is estimated to be 3 percent; the
inflation premium is 4 percent; and Mega One’s default/liquidity risk premium
over government bonds is estimated to be 7 percent. The cost of common equity was estimated using
the risk-free long-term government bond rate and a stock investment risk
premium of 13 percent.
Arlene has
now reached the point of being able to consider whether Mega 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 2016.
