Star River Electronics Ltd.

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Star River Electronics Ltd. is a large manufacturer and supplier of CD-ROMS. It was founded as a joint venture between New Era Partners and Starlight Electronics Ltd. It has enjoyed a great deal of success in the past decade, due in large part to their excellent reputation.

Star River does need to address several issues with the recent resignation of their former CEO. Digital Video Disks are expected to cut into the CD-ROM market in the very near future, and with only 5% of their sales coming from this area, Star River needs capital expenditures to increase their capacity in this sector. To finance this expenditure, they can use either debt or equity. Also, a new packaging machine which would cut down on labor
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The second task that needed to be finished was to forecast the income statement and the balance sheet for the next two years. We grew sales at a 15% rate, which is the stated rate from Koh. Also, in forecasting the balance sheet, we only showed debt financing for the capital expenditure of the DVD manufacturing equipment, which was the requested structure. The forecasted balance sheet shows that there is a problem with current assets covering current liabilities. The way we showed the financing of the capital expenditure was to keep the current weights of short-term borrowings and long-term borrowings consistent with 2001. If Star River continues with their current borrowing structure, they will not be able to cover all of their current obligations.

The third request was to come up with reasonable forecasts of book value return on equity and return on assets. The main drivers in these forecasts are the growth assumption in sales and the hurdle rate we calculated, as well as the cash flows to the firm.

The last request we addressed was to determine if the cost of waiting 3 years in investing in the new packaging equipment outweighed purchasing now. To help compare these two scenarios, we had to determine an appropriate WACC. In calculating our WACC, we took a weighted cost of our short-term debt and long-term debt to determine the appropriate borrowing rate. To determine the

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