KASPERSKY CORPORATION

The Kaspersky 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 Io 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; Kaspersky Corporation was up and running within one year. Venture capital was obtained to start up operations; a second round of venture financing helped Kaspersky 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 Kaspersky$$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 Io has now reached the point of being able to consider whether Kaspersky 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 $2023.$

Kaspersky Corporation

Income Statement $2023$

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$

Balance Sheet $2023$

Cash $$20,000$

Accounts Receivable $250,000$

Inventories $350,000$

Total Current Assets $620,000$

Fixed Assets, Net $480,000$

Total Assets $$1,100,000$

Accounts Payable

$125,000$

Accrued Liabilities $125,000$

Notes Payable $100,000$

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$

Required:

This Question has eight parts. Answer Parts a$)$ to h$)$ below:

Question $3$ Part $($a$)$

Calculate Kaspersky$$s net operating profit after taxes $($NOPAT$).$ Why does the NOPAT differ from the earnings after taxes?

Question $3($b$)-$

Estimate the effective before$-$tax cost of the long$-$term debt.

Question $3($c$)-$

Estimate the effective after$-$tax cost of the bank loan and the long$-$term debt.

Question $3($d$)-$

Estimate the cost of common equity capital.

Question $3($e$)-$

Determine the financial structure weights from Kaspersky$$s $2023$ financial statements for the two interest$-$bearing debt components and the common equity.

Question $3($f$)-$

Calculate Kaspersky$$s weighted average cost of capital $($WACC$).$

Question $3($g$)-$

Determine the dollar cost of financial capital used.

Question $3($h$)-$

Estimate Kaspersky$$s economic value added $($EVA$).$ Did Kaspersky build or destroy economic value in $2023?$