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.
STOR-Max Corp Wintronics, Inc. Star River Electronics LTD
Market Value of Debt
Market Value of Equity
Wd
We
• 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.
Stor-Max
Market value of = Book D/E x Book E x
debt
outstanding shares
Market value of
equity
Wintronics
Star River
= 84,981+18200
= book value x M/B
of peers
Wd
•
We
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.
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: