VIETNAM NATIONAL UNIVERSITY

HCMC UNIVERSITY OF TECHNOLOGY

MASTER OF BUSINESS ADMINISTRATION

CORPORATE FINANCE
GROUP ASSIGNMENT

CASE 26: STAR RIVER ELECTRONICS LTD.

Group members:
Truong Bao Thach – 2170312 - thach.truong.imp21@hcmut.edu.vn
Pham Thanh Trung – 2170297
Truong Minh Chuong – 2192005
Dang Vinh Hien – 2192007
Lecturer: Dr. Nguyen Thu Hien

HCM City, 01/2022

ROLES AND WORK DELEGATION OF GROUP MEMBERS

Members Roles Comments

Trương Bảo Thạch - Assign tasks Met deadline
- 2170312 - Case summary & Question 1.
Historical performance assessment and
positive and negative insights
- Rewrite majority of Question 2.
- Create powerpoint slides
Đặng Vinh Hiển Question 2. Financial forecast of Star Needed major
- 2192007 River Electronics Ltd.’s performance adjustment of
for next 2 years (2002 and 2003) calculation and writing
Phạm Thành Trung - Question 3. Estimate WACC Met deadline, no
- 2170297 - Check Question 4. adjustment made
Trương Minh Chương Question 4. Assess the new packaging Met deadline, no
- 2192005 machine investment adjustment made

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 TABLE OF CONTENTS
Heading Page
Roles and work delegation of group members i
Table of contents ii

PART 1. CASE SUMMARY 1

PART 2. CASE ANALYSIS 2

2.1. Historical performance of Star River Electronics Ltd. assessment and positive
and negative insights 2
2.2. Financial forecast of Star River Electronics Ltd.’s performance for next 2 years
(2002 and 2003) 5
2.3. Estimate weighted average cost of capital (WACC) 6
2.4. Assess the new packaging machine investment 8

APPENDICES 9

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PART 1. CASE SUMMARY
Star River Electronics Ltd. is a large manufacturer and supplier of CD-ROMS based
in Singapore. It was founded as a joint venture between an Asian venture capital firm,
New Era Partners and Starlight Electronics Ltd, UK. It has enjoyed a great deal of
success in the past, due in large part to their excellent reputation for producing high-
quality discs. But due to recent emerge of Digital Video Disks (DVDs) Star River
Electronics does need to face some problems. The conditions got worsen with the
recent resignation of their former CEO.
The new CEO Adeline Koh needs to face these problems. Digital Video Disks
(DVDs) are expected to cut into the CD-ROM market in the very near future, but with
5% of their sales coming from this area. Star River needs capital expenditures to
increase their capacity in this sector. To finance this expenditure, they can use either
debt or equity. Also, a new packaging machine which would cut down on labor and
overhead costs has been proposed, and Star River needs to know whether to approve
the purchase now, or wait three years, where new equipment would have to be
purchased to handle the projected growth rates.
Finally, a weighted average cost of capital needs to be estimated for the firm, which
will help to answer this question of whether to wait or buy this equipment at the
present time. In order to ensure the continuation and financial stability of Star River
Electronics Ltd. chief executive officer Adeline Koh must convince the Company’s
banker, to grant an extension on the Company’s loan as the Company stands to
improve its performance through DVD production (and possibly, the purchase of new
packaging equipment). Here is the summary of financial questions facing Koh:
 Historical performance of Star River Electronics Ltd. assessment and positive
and negative insights
 Financial forecast of Star River Electronics Ltd. ’s performance for next 2
years (2002 and 2003)
 Estimate weighted average cost of capital (WACC)
 Assess the new packaging machine investment

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2. CASE ANALYSIS

2.1. Historical performance of Star River Electronics Ltd. assessment and

positive and negative insights
For historical analysis, a ratio analysis of 4 years has been provided and a trend for
next 2 years on the basis of these ratios has been shown in Exhibit 3.
2.1.1. Profitability ratios
Return on Equity: ROE measures the rate of return on the ownership interest
(shareholders’ equity) of the common stock owners.
It measures a firm’s efficiency at generating profits from every unit of shareholders’
equity (also known as net assets or assets minus liabilities). ROE shows how well a
company uses investment funds to generate earnings growth. Star River has had a
decent return on equity ranging from 11.7% to 16.7%.
Return on Assets: The return on assets (ROA) percentage shows how profitable a
company’s assets are in generating revenue. This tells us what the company can do
with what it has, i.e. how many dollars of earnings they derive from each dollar of
assets they control. Return on assets gives an indication of the capital intensity of the
company, which will depend on the industry; As Star River requires large initial
investments it generally has lower return on assets, ranging from 3.0% to 5.2%.
2.1.2. Leverage ratios
Debt-To-Equity Ratio: The debt-to-equity ratio (D/E) is a financial ratio indicating the
relative proportion of shareholders’ equity and debt used to finance a company’s
assets. Star River’s last year (2001) standing D/E ratio was 2.2 which is higher than its
industry practice. A high debt/equity ratio generally means that the company has been
aggressive in financing its growth with debt. This can result in volatile earnings as a
result of the additional interest expense.
Debt-To-Capital Ratio: The debt-to-capital ratio gives users an idea of a company’s
financial structure, or how it is financing its operations, along with some insight into
its financial strength. The higher the debt-to-capital ratio, the more debt the company
has compared to its equity. Star River has always depended much on debt for its
financing and the trend shows this ratio may get higher in future. Star River, with high
debt-to-capital ratios, may show weak financial strength because the cost of these
debts may weigh on the company and increase its default risk.
2.1.3. Asset utilization ratios
Asset turnover (Sales-to-Assets): Asset turnover is a financial ratio that measures the
efficiency of a company’s use of its assets in generating sales revenue or sales income

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to the company. The higher the number the better. Star Rivers asset turnover has been
decent over the years.
Inventory turnover (Inventory-to-COGS): is the Percentage of cost of sales
attributable to average inventory. A decreasing number indicates higher efficiency in
use of resources; an increasing number suggests potential cash flow problems due to
greater sums tied up in inventory. In the analysis, we found that there is a significant
inventory problem. Star River’s inventory to COGS was as high as 119.30% in the last
year. What it shows is that the inventory that they are creating is becoming outdated
before they are able to sell it. Payable to COGS The ratio analysis of Star River shows
that they have been able to decrease their payables account, meaning they are paying
more of their obligations at the current time.
Days in Accounts Receivable: The days in accounts receivable is, as the name implies,
the calculation of how many days of cash are locked up in receivables. Receivables
are the money is that is owed the company. This calculation shows the average
number of days it takes to collect your accounts receivable. Another problem we
found with their ratios is that they are having problems collecting on their receivables.
What this will ultimately lead to is a cash inflow problem.
2.1.4. Liquidity ratios
Current ratio: The current ratio is a financial ratio that measures whether or not a firm
as enough resources to pay its debts over the next 12 months. It compares a firm’s
current assets to its current liabilities. Star River’s current ratio indicates that it cannot
cover its current obligations totally with its current assets. Low values (less than 1),
however, do not indicate a critical problem. If an organization has good long-term
prospects, it may be able to borrow against those prospects to meet current
obligations. Moreover, current ratio of Star River from 1998 to 2001 had continuously
increased, suggesting that Star River had improved and could keep improving its
ability to cover short-term obligations.
Quick ratio: The quick ratio measures a company's ability to meet its short-term
obligations with its most liquid assets and therefore excludes inventories from its
current assets. Opposite to the trend of current ratio, quick ratio of Star River
decreased over time. This indicate that the company’s inventories increased during the
period, and excess inventory could tie up cash flow and represent a loss of revenue
(products depreciate over time).
2.1.5. Insights of overall financial health
For the positives, there are some main things to highlight: the increase in ROA and
ROE, the continued high growth rate for sales and assets, and the high current and
quick ratios.

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  The ROE increased from 11.7% in 2000 to 15.2% in 2001.
 Additionally, the ROA increased from 3.0% to 3.9%.
 However, ROA is still below its 1999 and 1998 level.
 Sales continuously grew (11.4% in 1999, 15.6% in 2000, and 14.5% in 2001),
however earnings did not grow with sales.
 Company managed to stay profitable over the past five years.
 Company issued dividends to shareholders on a consistent basis.
For the negatives, we would highlight the increase in debt and interest expense. A
significant weakness of the company lies in the fact that it needs to borrow money for
current operations. In addition, the cash shortage problem could stem from the fact
that the company is having a hard time collecting payments from customers, which
would help lower interest expenses if collected more efficiently. These when
combined with the need for capital expenditure (new packaging equipment) may be
too much for the company to handle. Overall, the company’s financial position is
precarious. They are taking on too much debt while making large capital expenditures.
Star River’s financial health is relatively weak and can become weaker if it decides to
borrow money to acquire new equipment.

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 2.2. Financial forecast of Star River Electronics Ltd.’s performance for next 2
years (2002 and 2003)
The second task that needed to be finished was to forecast the income statement and
the balance sheet for the next two years.
[Appendix: Excel File Question 2]
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.
The firm would not be able to pay its loan because to achieve the 15% sales growth
rate and all the changes which that would bring, Star River will require 17.043 million
SGD in 2002 and 36.024 million SGD in 2003. This amount of external financing
needed does not seem to indicate that the company would be able to pay off any loans
that it will be signing in the near future due to its requiring of financing, most likely
more debt, to reach its maximum 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 almost 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.

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 2.3. Estimate weighted average cost of capital (WACC)
Value of Equity (E)
From Exhibit 2 Book value of Equity= 47,004
6.39 27.48
From Exhibit 5 Market/Book of peer average= ( + ¿ /2= 4.14
1.46 7.06
E= Book value of Equity x Market/Book of peer average = 47,004 x 4.14 = 194,596
Value of Debt (D)
From Exhibit 2
D = Short term Debt + Long term Debt= 84,981 + 18,200= 103,181
Weight of Equity (We)
We= E/ (E+D)= 194,596/(194,596+103,181)=65.3%
Weight of Debt (Wd)
Wd=D/ (E+D)= 103,181//(194,596+103,181)= 34,7%
Cost of Debt (Kd)
From note of Exhibit 2

Face Value (FV) $100

Coupon Payment = 5.75%/2 x 100 $2.88

Nper = 4yrs x 2 8

Present value $97

YTM = Rate 3.31%

Annual rate = 3.23% x 2 6.62%

 Kd= 6.62
Levered Beta
From Exhibit 5
 For Wintronics
Market value of Debt= Book D/E x Book value per shares x Numb of shares out
= 1.7 x 1.46 x 177.2 = 439.8
Market value of Equity= Market price per share x Numb of share out
= 6.39 x 177.2 = 1132.3

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Debt/ Equity= 0.3884
Levered Beta
1.56
Unlevered B= 1+ (1−Tax rate ) x Valueof Debt = =1.21
1+ (1−0.245 ) x 0.3884
Value of Equity
 For Stor-Max
Market value of Debt= 1.3x7.06x89.3= 819.5954
Market value of Equity= 27.48x89.3= 2453.964
Debt/ Equity= 0.334
1.67
Unlevered B = =1.33
1+ (1−0.245 ) x 0.334
 For Star-River
Unlevered B= Average of peer unlevered Betas= (1.21+1.33)/2 = 1.27
Value of Debt
Levered B = Unlevered B x ( 1+ (1-Tax rate) x
Value of Equity
103.2
= 1.27 (1+(1-0.245)x ¿=1.78
194.6

From Exhibit 5  Market risk Premium = 6%

From Exhibit 2  current Singapore 10-year T-bond rate = 3.6%
Cost of Equity (Ke)
Ke= Risk free Rate + Levered B x Risk Premiuim
= 0.036 + 1.78 x 0.06 = 0.1428
Weighted Average Cost of Capital (WACC)
WACC = Wd x Kd (1- Tax) + We x Ke
= 34.7% x 6.62% (1-24.5%) + 65.3% x 14.3%
= 0.1107= 11.1%

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 2.4. Assess the new packaging machine investment
[Appendix: Excel File Question 4]
Due to which the company is considering investing in a new packaging machine
which will help bring down costs as current packaging machine is often shut down for
repairs and cannot cater to all types of packaging needs which is leading to a
significant mismatch between production speed and packaging speed. More often than
not, workers on package machine have to overtime to bring synchronization between
production and packaging process. Not only so, the existing machine will not be able
to cater to company's needs for packaging three years hence because it just cannot
cater to all types of packaging needs and to the volume of packaging that would be
required because of consistent growth in the production. Further, buying a new
machine now, in addition to saving costs and labor time, also makes sense since the
machine is going to be costlier every year. Considering that the new machine can be
made to work indefinitely if appropriate level of maintenance is there, it makes sense
to invest now than three years from today.

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 APPENDICES
Related calculations are computed in the EXCEL file attached in RAR file.