Question: As a financial analyst employed by a consulting firm, SoftwareCo has recruited you to assess the
Question:
Question:
As a financial analyst employed by a consulting firm, SoftwareCo has recruited you to assess the viability of a joint venture with PlatformCo, another software company. PlatformCo runs a platform that links clients in need of custom software solutions with software developers. A software program called SoftwareCo can automate certain of the routine operations that developers perform, like testing, debugging, and code deployment. SoftwareCo's product is something that PlatformCo is interested in incorporating into its platform and making available to its clients as an optional extra.
The following terms would be included in the proposed partnership:
PlatformCo would purchase the license to use SoftwareCo's product from SoftwareCo for a fixed fee of $10 million year.
Customers of PlatformCo would pay 10% more than the project fee in order to use SoftwareCo's product.
PlatformCo and its clients would receive technical assistance and upkeep for their product from SoftwareCo.
Here is the information that has been sent to you regarding the two companies:
SoftwareCo had revenues of $50 million and operating expenses of $40 million in the last year. It expects to grow its revenues by 20% per year for the next five years. Its operating margin is expected to remain constant at 20%. It has no debt and its cost of equity is 15%.
PlatformCo had revenues of $100 million and operating expenses of $80 million in the last year. It expects to grow its revenues by 10% per year for the next five years. Its operating margin is expected to remain constant at 20%. It has a debt-to-equity ratio of 0.5 and its cost of capital is 12%.
The average project fee on PlatformCo’s platform is $10,000 and the average duration is 3 months. PlatformCo expects that 20% of its customers will opt for using SoftwareCo’s product if it is available.
Your task is to evaluate the financial impact of the partnership on both SoftwareCo and PlatformCo and make a recommendation on whether they should proceed with it or not.
Auditing Cases An Interactive Learning Approach
ISBN: 9780134421827
7th Edition
Authors: Mark S Beasley, Frank A. Buckless, Steven M. Glover, Douglas F Prawitt