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Star River Electronics LTD

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

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Star River Electronics LTD

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  1. Star River Electronics LTD Advanced Managerial Finance Spring 2013

  2. 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

  3. 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.

  4. 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?

  5. WACC • WACC = wd (1-T) rd + we re + wprp • 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.

  6. 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.

  7. 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.

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

  9. Ability to repay • Percentage of sales method • Total interest expense:

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