Star River Electronics Ltd Case Solution

Despite an increase in sales, the unit price of CD-ROMs has decreased as a consequence of price rivalry and the introduction of DVDs. A DVD may store 14 times as much data as a CD-ROM, making it a serious threat to the CD-ROM industry. Compared to DVDs, CD-ROMs shipped 93% more copies in 1999. However, according to research, this percentage would drop to 41% by 2005, while the DVD market share will rise to 59%. In 2001, Star River's DVD sales accounted for less than 5% of total sales, a figure it aimed to raise in the future.

2. Overview

New CEO Adeline Koh was appointed in July 2001 following the resignation of the President and CEO of Star River. Decisions she had to make about the company's finances would have long-term ramifications. As a result, she had a meeting with Andy Chin, a new employee, to go through some concerns. Koh is asking for an extension on the loan to Star River. For this, she asks the colleague a few pertinent questions about the business, which she then presents to the banker. A two-year prognosis of the company's financial performance, assuming a 15% annual sales growth rate, is what she wants. 

DVD manufacturing equipment will be purchased and any external finance will come from debt. Koh notes that if the research shows that Star River is unable to repay its debts, an equity infusion from the company's shareholders is required. Only if she can demonstrate that the investment will generate a profit will she be permitted to do so. This is why she asks the Chin to identify and provide suggestions based on key driving assumptions. In the end, the factory manager requested that Koh purchase packing equipment. The new machine, according to the plant manager, should be purchased now to save money in the future, as it will reduce labour costs and improve production. 

If the investment in the packaging machine is warranted, Chin must also calculate Star River's weighted average cost of capital. Investigate if Star River Electronics Ltd. can take on more debt, anticipate financial performance over the next two years, suggest solutions, and provide recommendations based on the findings (University of Virginia, 2016).

3. Statement of the Problem

As a joint venture between Starlight Electronics Ltd. and New Era Partners, Star River Electronics Ltd. (SRE), a Singapore-based CD, DVD, and Blu-ray disc maker, was established. The firm was established to generate high-quality optical discs for distribution to film companies and video game manufacturers. After creating CDs for the music business and personal data storage, they were obliged to shift into the DVD and Blu-ray market, which provides greater data storage capacity for movies and video games.