Case - Star River Electronics Ltd
Questions-
1. Using financial ratios given in the case and other financial metrics, assess the current financial health and recent financial performance of the company? What picture are the ratios painting? What strengths and/or weaknesses would you highlight to Adeline Koh? What is the sustainable growth rate (SGR) for the firm? What is it telling you? What is the compounded annual growth rate (CAGR) in sales? What is that telling you?
2. What is the firm's free cash flow? What is the firm's cash conversion cycle? What picture of the firm's financial performance do these metrics paint? Develop a sources and uses of cash statement. What is the sources and uses statement telling you about the firm?
3. Calculate the historical ROIC for Star River. Does the trend suggest anything?
4. Forecast the firm's financial statements for 2002 and 2003.
Income Statement:
To develop your sales forecast 1. Use the outlook given in the case as one approach 2. Use linear trend extrapolation (See Excel book) to come up with a sales forecast for 2002 and 2003. Are the numbers different? If so, why?
For production costs: 1. Estimate based on the percent of sales for 2001. 2. Use linear trend extrapolation to come up with a production cost forecast for 2002 and 2003. Are the numbers different? If so, why?
For the remaining Income Statement items:
- Admin & Selling Expenses: Use percentage of sales
- Depreciation Expense (2002): estimate using by adding the depreciation charge for the New equipment to the total depreciation expense for 2001. Repeat for 2003.
- Interest expense: Assume equals 8%.
- Taxes: See foot note in Exhibit 1
- Dividends: Consistent with policy
For the remaining Balance Sheet Items:
- Capital Expenditures (CAPEX): Consistent with case instructions
- Cash: Percentage of Sales
- Accounts Receivable: Estimate using average of days in receivables
- Inventories: Estimate using average of the COGS
- Payables: Estimate using the average of the COGS
4. What will be the external financing requirements of the firm in 2002 and 2003? Can the firm repay its loan within a reasonable time period? Why? Why not?
Note: You will have two sets of forecast: one set will use the sales forecast based on Koh's outlook. The other will be based on the liner extrapolation of the sales and COGS. Is there any difference between the external financing needed on each method?
5. What is your pro-forma profitability, leverage, asset utilization and liquidity ratios? What are they telling you about the firm's ability to service the debt? What is the proforma Free cash Flow and CCC? What is the SGR?
6. In performing sensitivity analysis on your projections, what is the trend in EBIT at higher growth rates? What does this suggest? Also, what are the implications for financing the firm long term based on sensitivity analysis?
7. Was the banker correct in stating that the firm had grown beyond its capabilities?
8. Based on your analysis, what aspect of the firm's operations should Koh focus on especially?
9. What is the WACC for Star River? What are the key assumptions in estimating the WACC? Since the cost of debt is based on market yields, the pretax cost of debt (the yield to maturity - YTM) can be calculated from footnote 2 Exhibit 2.
Exhibit 5 shows the beta for comparable firms. Use that information to estimate the beta for Star River. Also, note that financial leverage impacts the beta of a firm. So, the Beta for Star River will have to be re-levered to reflect the debt in its capital structure.
Step 1: Unlever the beta This unlevered beta captures the degree of risk in the firm's operations before financing:
βunlevered = βunlevered/[1+(1-t)D/E]
Step 2: Relever the beta:
βlevered = βunlevered[1+(1-t)D/E]
10. Compare the historical ROIC and the proforma ROTC for 2002 and 2003. Is value being created? What does the ROIC -WACC spread tell us?
11. How should the firm be restructured? What should Koh do?
Attachment:- Assignment.rar