Case 26 - Star River Electronics Ltd. Essay

1416 Words Apr 3rd, 2015 6 Pages
Janis Pastars
Dr. Muhammad R.K. Chishty
Advanced Corporate Finance
2 March, 2015

Case 26 – Star River Electronics Ltd.

Introduction

Star River Electronics is a joint venture between England’s Starlight Electronics Ltd. and an Asian venture-capital firm, New Era Partners. Star River Electronics is based in Singapore, and its mission was to manufacture CD-ROMs as a supplier to major software companies. Star River Electronics has gained fame in the industry for producing high quality discs. As the optical and multimedia products became more and more popular in the mid-1990s, CD-ROM manufacturing industry experienced rapid growth during this time. Due to this effect, small manufacturers overreacted, creating oversupply that
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Star River’s banker has said that the company was growing beyond its financial capabilities, meaning that Star River might not be able to pay off the loan within a reasonable period. To figure out company’s capabilities and financial stability, Ms. Koh has requested forecasted financial statements for the years of 2002 and 2003. If forecasted financial situation would not allow firm to pay off the loans, Star River would have to ask for an additional injection of equity from its owners, New Era Partners and Star River Electronics U.K. In order to get an approval, Koh has requested to examine what returns on book assets and book equity Star River will offer in the next two years and to identify the key-driver assumptions of those returns.

Analysis

Looking at the financial statements provided, we can see that sales-growth rate has been holding around 15 percent and is projected to stay at this rate. Inspecting company’s historic income statement, operating profit and net earnings seems to have an upward slope except the fiscal year of 2000, when a company suffered 21 percent increase in production costs and a 20 percent increase in Administrative and selling expenses. In addition, looking at the ratio analysis of historical financial statements, we can conclude that company’s operating margin has been decreasing over the years from 18.6% in 1998 to 16.1% in 2001. As well as return on equity and return on assets have decreased over the last four years

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