Star River Electronics Essay
Star River Electronics was founded as a joint venture between Starlight Electronics Ltd., United Kingdom, and an Asian venture-capital firm, New Era Partners. Star River Electronics produced CD-ROMS as a supplier to major software companies. In the last two years, CD-ROM sales have grown at a healthy rate, however, their unit prices have dropped due to the introduction of digital video discs (DVD’s). Tasked with a declining trend in CD-ROM usage, and a growing usage of DVD’s in the market, Star River hoped that their newly installed capacity would help them stay in the market and increase their proportion of revenue from DVD’s.
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Star River’s WACC was found to be 10.92%. Since Star River is privately held, we had to identity similar firms that operate in the same industry as Star River. We decided on using Wintronics, Inc. because they have a similar growth rate, and like Star River, was a leading producer of CD-ROM’s but has experienced a decline in their sales level, however, they are much larger in terms of equity. The cost of debt and cost of equity of Wintronics was found to 6.46% and 12.96%, respectively. There’re two major assumptions that are central to computing the WACC. They are that the financing policy is held constant, and that the firm invests in assets that are in the same risk-level of the firm.
The packaging-machine investments free cash flows are in our appendix for waiting to buy the packaging machine and buying the packing machine now. Our cash flows were discounted using our