Star River Case Analysis

Star River Case Analysis

Status of Company

Star River Electronics has not been preforming well over the last four years. While sales have increased, net profit has continued to be low at 5% in 2000 and 7% in 2001. The company is highly levered with debt at 2 times that of equity. The Company also has a current ratio that is less than 1 which means that current liabilities is larger than their current assets. Inventory is also increasing moving from $23M in 1998 to $64M in 2001. The company has gotten themselves into a liquidity issue. Their short-term debt borrowing has also increased year over year. Original short-term borrowings in 1998 were $29M but in 2001 this has increased to $85M. The line has been increasing due to the fact that the company’s current liabilities have been outpacing current assets.

In Appendix D I have included the 2000 and 2001 financials along with the proforma 2002 and 2003 income and balance sheets. It is projected that for both 2002 and 2003, current liabilities will still remain higher than current assets. Based off the assumptions used I have predicted that short term borrowings would need to increase to $106M in 2002 and increase further to $132M in 2003. The increase does not necessarily need to come in the form of short-term debt but could also be a new term loan. It might be best to get an injection of equity from the investors as a lifeline for this company. Performing a sensitivity analysis on the proforma statements should growth rate in sales drop to 5%, net income for 2002 will decrease to $5M and $3M in 2001 compared to $7M and $8M with the 15% increase.

WACC

Since Star River is a private company information from five public companies was used to calculate WACC. The size of the companies had a wide range of size, ranges of growth and range of sales of CD or DVD’s. I chose to use all five for comparison sake as it gives more information to analyze.

To find the value of equity I first took the total amount of equity in Star River in 2001. To find the average book value per share I took average of the five public companies, which came out to $6.89. I then also took the average of the five companies market price per share, which came to $26.53. Finally I took the market price per share divided by the average book value per share, which came to $3.85. I then multiplied this against the 2001 equity for Star River.

To find the value of debt I simply added the short and long term debt on Star River’s balance sheet to get $103,181. With these two figures I was able to find that 64% of Star Rivers assets are made up of equity and debt makes up the remaining 36%.

Value of Equity