STAR

RIVER ELECTRONICS LTD.

Synopsis
In July 2001, a new chief executive officer (CEO) joins this small manufacturer of CDROMs and DVDs to discover that the firm is in the midst of a financial crisis that was induced
by rapid growth. The CEO asks an analyst for help with five tasks:

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 Rivers weighted-average cost of capital

analyze a proposed investment in a packaging machine

Suggested questions
1. Assess the current financial health and recent financial performance of the company.
How well has Star River done in the past? How healthy is it now?What strengths and/or
weaknesses would you highlight to Adeline Koh?
2. Forecast the firms 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?
3. What are the key driver assumptions of the firms future financial performance? What are
the managerial implications of those key drivers? That is, what aspects of the firms
activities should Koh focus on especially?
4. What is Star Rivers weighted-average cost of capital (WACC)? What methods did you
use to estimate WACC? What are the key assumptions that especially influence WACC?
5. What are the free cash flows of the packaging machine investment? Should Koh approve
the investment? How did you analyze this issue?