Star River Electronics LTD

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Presentation transcript:

Star River Electronics LTD Advanced Managerial Finance Spring 2013

Your general tasks are: Review the historical performance of the firm Forecast financing requirements for the next two years Exercise the forecasting model to identify key driver assumptions Estimate Star River’s WACC Analyze a proposed investment in a packaging machine

Specific tasks Assess the current financial health and recent financial performance of the company (what strengths and weaknesses would you highlight? 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? Explain the assumptions in your forecast.

Specific tasks What are the key driver assumptions of the firm’s future financial performance? That is, what aspects of the firm’s activities should Koh focus on especially? Estimate WACC. What methods did you use to estimate WACC? What are the key assumptions that especially influence WACC? What are the FCFs of the packaging machine investment? Should Kho approve the investment?

WACC WACC = wd (1-T) rd + we re + wp rp rd: re: Gordon growth model or DGM and CAPM rf Beta: need to find the asset beta of peer(s) and then relever it at Star River Electronics’ capital structure.

WACC wd and we: You need the market values of debt and equity to estimate the capital structure. Assume the market value of debt is equal to book value. It’s reasonable assumption since 80% of Star River’s debt carries a floating rate of interest.

WACC wd and we: You need the market values of debt and equity to estimate the capital structure. Assume the market value of debt is equal to book value. It’s reasonable assumption since 80% of Star River’s debt carries a floating rate of interest. Stor-Max Wintronics Star River Market value of debt = Book D/E x Book E x outstanding shares = 84,981+18200 Market value of equity = book value x M/B of peers Wd We

Analysis of the packaging machine investment WACC Firm must decide between buying the equipment now or waiting 3 years

Ability to repay Percentage of sales method Total interest expense: