Star River Electronics Ltd

Star River Electronics Ltd.

Team 14 Constantine Brocoum

Star River Electronics Ltd. Page 1 Courtney Delia Stephanie Doherty David Dubois Radu Oprea December 19th, 2009

Contents

Star River Electronics Ltd. Page 2 Objectives This report seeks to answer the following five questions about Star River Electronics Ltd.: 1. Assess the current financial health and recent financial performance of the company. What strengths and/or weaknesses would you highlight to Adeline Koh? 2. 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? 3. What are the key driver assumptions of the firm’s future financial performance? What are the managerial implications of those key drivers? That is, what aspects of the firm’s activities should Koh focus on especially? 4. What is Star River’s weighted-average cost of capital (WACC)? What methods did you use to estimate WACC? What are the key assumptions that especially influence WACC? 5. What are the free cash flows of the packaging machine investment? Should Koh approve the investment?

Star River Electronics Ltd. Page 3 Management Summary

Item 1 Sub 1.1 Sub 1.2 Conclusion

Financial Forecast for 2002 and 2003

Star River Electronics Ltd. Page 4 Historical Balance Sheets (Fiscal Year Ended June 30)

(SGD 000) 2002 2003

Assets: Cash (36,923) (81,682) AR/Sales Accounts receivable 30% 36,585 42,072 Inventory/COGS Inventories 122% 107,695 118,853 Total current assets 107,356 79,243

Assets/Sales Gross property, plant & equipment 112% 136,582 157,070 Depreciation/Assets + 54.6/7 Accumulated depreciation 38% (44,101) (51,886) Net property, plant & equipment 92,481 105,183 Total assets 199,837 184,426

Liabilities and Stockholders' Equity: Short-term borrowings (bank)1 84,981 84,981 AP/COGS Accounts payable 24% 21,186 23,381 Other accrued liabilities 21,318 21,318 Total current liabilities 127,485 129,680

Remains the same Long-term debt2 18,200 18,200 + Retained earnings Shareholders' equity 54,152 36,546 Total liabilities and stockholders' equity 199,837 184,426

Historical Income Statements Fiscal Year Ended June 30

(SGD 000) 2002 2003

Sales 15% 121,948 140,241 Operating expenses: Growth rate Production costs and expenses 50% 88,274 97,420 Admin. and selling expenses 23% 28,048 32,255 COGS/Revenue + 54.6/2 Depreciation 11% 13,414 15,426 SGA/Revenue Total operating expenses 129,737 145,102 Depreciation/Revenue Operating profit (7,788) (4,861) Interest expense 7% 7,223 7,223 Earnings before taxes (15,011) (12,084) IE/(liabilities+investmets) Income taxes* 24% 2,595 3,218 Net earnings (17,606) (15,302) Income taxes/EBIT

Star River Electronics Ltd. Page 5 Conclusion

It is understandable now why Star River was seen as “growing beyond its financial capabilities”. The company needs an infusion of capital in order to maintain the actual growth rate. It is unlikely the firm would recover unless inventories are reduced, especially in the context of weakened demand for CD-ROMs and the associated risk of having to deeply discount or even write them off. Another item to correct is the Production costs and expenses, currently running at 50% of the revenue. The management has expressed concerns with outdated packaging equipment and the use of the more expensive second and third shift to catch up with production. An investment here would probably turn profitable in the context of healthy sale numbers. Having to invest an additional 54.6 million into DVD production equipment, with no immediate 2002 2003 impact on production, is really detrimental to the cash balance. (36,923) (81,682) . Without 2002 2003 this investment, the cash balance would look like (2,369) (19,828) .

Item 3 Sub 3.1 Sub 3.2 Conclusion

Star River WACC

STOR-MAX Corp is seen as comparable in product offering and performance with Star River, thus the Beta Asset for STOR-MAX Corp would be relevant in calculating the Equity Beta for Star River.

EquityBeta = AssetBeta * (1 + D/E)

Star River Electronics Ltd. Page 6 WACC Calculation

STOR-MAX Corp used as comparison Asset Beta Stor-max 1.67 Equity Beta 5.344 Risk free rate (tr) 3.60% p. 321 Expected return on market 9.60% p. 324 Corporate tax rate (tc) 22.6% p.322 Cost of equity (re) 35.66% CAPM Cost of debt (rd) 5.750% p. 321 Debt/Equity 2.2 p. 322 Wdebt 0.688 Wequity 0.313

WACC 14.205%

Item 5

Appendices

Star River Electronics Ltd. Page 7