Star River Electronics Ltd.

Using the assumptions given in the case, all elements of income statement and balance sheet can be projected for next three years 2010, 2011 and 2012. Sales cycle of the products of the company is such that sales of a particular product increases initially for few years and then starts to decline as the new technology

General speaking, WACC is the rate that a company’s shareholders expect to be paid on average to finance its assets, and it is the overall required return on the firm as a whole. Therefore, company directors often use WACC to determine whether a financial decision is feasible or not. In this case, I will choose 9.38% as discount rate. The reason why I choose 9.38% as discount rate is because the estimated Debt/Equity is 26% under the assumptions by CFO Sheila Dowling, which is most close to 25% of Debt/Equity from the projected WACC schedule. There might be some flaws existing by using WACC as discount rate. As we know, the cost of debt would be raised significantly as the leverage increased. The investment will definitely increase the firm’s current debt. So, the cost of debt would not keep at 7.75%.

Be Our Guest’s balance sheet shows good signs of liquidity. Current Ratios for the past four years have remained above 1 proving that the company can handle its current liabilities. The current ratios are not extremely high (19941.27, 1995- 2.17, 1996- 1.15 and 1997- 1.16), but they can cover the current liabilities. It is important to note that the company is operating on a thin line because the current assets are barely covering the current liabilities. This is particularly unpleasant because we are dealing with a company operating in a seasonal business. It is a concern that the current ratio slightly eroded after 1995, and this is primarily due to Be Our Guest converting the bank line into long term debt in

Weighted Average Cost of Capital (WACC) is the combined rate at which a company repays borrowed capital and comes from debit financing and equity capital. WACC can be reduced by cutting debt financing costs, lowering equity costs, and capital restructuring. In order to minimize WACC, companies can issue bonds by lowering the interest rate they offer to investors as well as, cutting down

* Our company’s sales forecast has been based on performance from previous years along with market circumstances. We are looking at the future of the business objectively which we then can evaluate past to

The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comp­trol­ler currently uses for the company’s capital structure.

The Lawsons’ efficiency ratios are another section the bank will find troubling. The company’s age of payables has nearly tripled over the last four years. This can be detrimental to the company’s image and reliability including their reliability toward the bank if granted the loan. Along with increasing age of payables is increasing age of receivables and age of inventory. Indicating that Mr. Mackay is taking longer to collect his receivables and that he has purchased too much inventory. Too much inventory results can result in further issues

In order to find the WACC, we need to find the cost of the components of the capital structure and their proportion in the total capital.

2. Forecast the firm’s financial statements for 2002 and 2003. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? In order to forecast the financial statements of 2002 and 2003, the following assumptions need to be made. The growth of sales is 15%, same as 2001, which is estimated by managers. The rate of production costs and expenses per sales is constant to 50%. Administration and selling expenses is the average of last 4 years. The depreciation is $7.8 million per year, which is calculated by $54.6 million divided by 7 years. Tax rate is 24.5%, which is provided. The dividend is $2 million per year only when the company makes profits. Therefore, we assume that there will be no dividend in 2003. Gross PPE will be $27.3 million (54.6/2) per year. We also assume there is no more long term debt, because any funds need in the case are short term debt, it keeps at $18.2 million. According to the forecast, Star River needs external financing approximately $94 million and $107 million in 2002 and 2003, respectively. In order to analysis if the company can repay the debt, we need to know the interest coverage ratio, current ratio and D/E ratio. The interest coverage ratios through the forecast were 1.23 and 0.87 respectively, which is the danger signal to the managers, because in 2003, the profits even not

For current assets for each of the following three years, we are projecting the same percentage of 32% of sales. Assets that are constantly flowing in and out of a organization in the normal course of its business as cash converted into goods and then back into cash show small growth if any, in periods of time. The assets that are expected to last or be in use for less than one year will also show the small growth if any due their usage life expectancy. Because of these facts of our current assets, we will continue to use the projected 32% of sales as in previous years. Because this projection served correctly in previous years, we will again use it for the next three years. This decision is based on past accurateness and the consistency of the company.

The most important thing is that, according to our estimation, the next five-year we will get additional funds needed increasingly with no surplus funds; which means, our assets increase faster than our liabilities. Therefore, our company goes well in the short term future based on this model. In conclusion,

a.Any decision to invest in the new product line will require an estimate of the discount rate (i.e., WACC). When estimating a WACC you should be clear on the inputs you used to calculate the cost of equity, cost of debt, and the relative weights of equity and debt. For this analysis use the target debt-to-equity ratio that is sought by the board of directors. 3.Estimate the pro-forma financial statements (i.e., income statement and balance sheet) for the years 2010, 2011, and 2012 assuming that Flash takes the new investment project and finances the project with debt. What issues might arise if Flash only uses debt financing? If debt financing turns out to have problems what are Flash’s alternatives?

The company’s debt ratios are 54.5% in 1988, 58.69% in 1989, 62.7% in 1990, and 67.37% in 1991. What this means is that the company is increasing its financial risk by taking on more leverage. The company has been taking an extensive amount of purchasing over the past couple of years, which could be the reason as to why net income has not grown much beyond several thousands of dollars. One could argue that the company is trying to expand its inventory to help accumulate future sales. But another problem is that the company’s

Star River Electronics Ltd. is a large manufacturer and supplier of CD-ROMS based in Singapore. It was founded as a joint venture between an Asian venture capital firm, New Era Partners and Starlight Electronics Ltd, UK. It has enjoyed a great deal of success in the past, due in large part to their excellent reputation for producing high-quality discs.

BBC’s working capital policy was too conservative. This is apparent in their high level of net working capital with more than 4.2 million in 2010-2011 fiscal year. Although, the net working capital was in the positive figures, their assets were 10 time more than their liabilities. When further reviewing this figure it is because they have a large amount of inventory and accounts receivable. Their liquid assets to total assets ration was between 62% and 66%. Where industry bench marks are 30%.