In Partial Fulfillment
Of the Course Requirement
In Management Financial Planning
Professor Raymond Queddeng
November 17, 2007
I. CASE BACKAGROUND
Star River Electronics (SRE) was a joint venture company between Starlight Electronics Ltd., and an Asian venture-capital firm, New Era Partners. The company was based in Singapore, and was engaged into the manufacturing of CD-ROMs which it supplied to major software companies.
The CD-ROM manufacturing industry grew rapidly in the mid-1990s due to the popularity of optical and multimedia products. Because of the emergence of small, but aggressive players, CD-ROM prices were pushed down by as much as 40%. Corporate consolidations followed suit as less efficient producers were affected by the industry shakeout.
Amidst this industry development, SRE headed by CEO Adeline Koh, was confronted by a number of management-related problems, which were mostly financial in nature. Questions concerning the company’s growth potentials, as well as the need for additional investments in new technology (e.g. Digital Video Discs or DVDs) and more efficient equipment have been raised to the attention of Ms. Koh.
II. AREAS FOR CONSIDERATION
1. Developments in the CD-ROM manufacturing industry/environment • During the mid-1990s, there was an oversupply of CD-ROM products which pushed prices down by as much as 40%; • Less efficient producers consolidated for survival; • DVDs became increasingly popular because of their bigger storage capacity (14x more) than CD-ROMs. In fact, a study was done by Global Industry Analysts, Inc., which predicted that by 2005, DVDs would comprise 59% of the total optical disc-drive shipments while CD-ROMs would account for the remaining 41%.
2. Star River’s capabilities
• SRE’s sales posted double-digit growth from 1999 to 2001 amidst a strongly competitive environment; • The company had begun experimenting on DVD manufacturing, but DVD accounted for less than 5% of SRE’s total sales by end of fiscal year 2001.
3. Other Concerns:
• SRE’s bank was of the opinion that the company is growing too fast beyond its financial capabilities. CAGR of the company’s sales from 1998 to 2001 is at 13.8%; • The company was given a proposal to invest in a new packaging equipment which promised to provide labor cost savings (in terms of overtime) and better packaging efficiency. Investment would be made by 2002.
III. PROBLEM STATEMENT
Given the situation, what would be the financial projections for Star River Electronics in 2002 and 2003?
1. To compute for the Sustainable Growth Rate of SRE, and assess whether the company’s projected sales growth is indeed beyond its financial capabilities or not;
2. To compute for the appropriate Weighted Average Cost of Capital (WACC) that SRE should use in its DCF analysis of the possible equipment purchase;
3. To ascertain whether SRE should invest in the new packaging equipment in 2001 or wait for 3 more years before making the purchase;
4. To prepare a simple financial forecast of SRE’s performance for the next two years based on the initial assumptions as agreed by Adeline Koh and Andy Chin, and incorporating the decision on whether to purchase the new packaging equipment or not;
5. To determine the funding requirements (debt) of SRE during the said period;
6. To compute for the Return on Assets and Return on Equity of Star River in 2002 and 2003.
V. CASE ANALYSIS
1. How is the company’s financial health and financial performance?
2. What are the key assumptions that should be used for SRE’s financial forecast 2002 and 2003?...
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