Astral Records Ltd Case Report
- Please assess the current financial health and recent financial performance of the company. What strengths and/or weaknesses would you highlight to Sarah Conner? The group managed to pick out a few factors to check the current financial health and recent financial performance of the company but they did not point out the total sales from income statements are increase. The thing we did not like was from the presentation point of view the group didn’t show us a good assessment of the situation like their report, and during the presentation, it is so hard to catch the point of the question. The group gives us impressive numbers which we thought is from evaluating the financial situation but from the case exhibits. They didn’t mention the situation of the company (CEO been killed) they only talking about the numbers, in this point of view the group focus on numbers too much on this question. And in our opinion, it will be better if they put some graphs to show the trend. The trend can show us the financial health. The confusing part is they didn’t go to the point of the question directly. They didn’t give us a certain answer in the first part of question one. The good part is from the report; we can see the group really focused on this question compared to the rest of the questions, besides the answer to the first question is much better comparing the presentation. It will be good if they are not only showing the numbers but also available to explain the numbers. From the report we can see clearly about the EBITDA ratio however we cannot find anything from the presentation. Here is the copy from the report: “In operating management, we used gross profit and EBITDA ratios. We use EBITDA ratio to better evaluate Astral financial condition- companies have different distribution and pricing policies which lead to the different cost structure. ” The ratios showed really clear in the report, and they think it is the most important ratio to see the financial health however they did not show anything during the presentation.
- Please forecast the financial statements of the firm for 1994 and 1995. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period? The purpose of this question was to detect the skills of preparing financial forecasts. However, during the presentation, the group did not show us how to forecast but only numbers again. The audience may lose interest to follow. And it is also to catch the point during the presentation. Besides the group’s answer to this question, in the presentation and report, assume too much as they just mentioned; “Sales growth: 15%, Dividends, Fixed-assets, Interest expense, Production cost & expense and Admin & selling expense” In our point of view there is no need to assume too many unchanged numbers. And more assumption means more incorrect of the result. For example here is no need to assume stable interest expensively. During the presentation, when people asking why using the numbers they said just because of assumption. The growth rate they were using is 15% and they give no reason, however, the 15% is from the expected growth rate not only from the assumption. Considering all the previous calculations is from assumptions and we must agree but if they do it more carefully and using less assumption it will be much better to compare the thing they have now.
- What are the key driver assumptions of the firm’s future financial performance? What are the managerial implications of those key drivers? That is, what aspects of the firm’s activities should Conner especially focus on? Question 3 is not clear during the presentation however they showed everything in their report.
- What is Astral’s weighted average cost of capital (WACC)? What methods did you use to estimate the WACC? What key assumptions especially influenced the WACC? Question 4 looks correct, but they didn’t show us numbers and we feel like the result is from heaven. After checking the report we found out they use the wrong data. What they wrote in their report: ‘‘WACC was calculated using the following inputs; Using information from the comparables, Haris-Bershel and Donaldson, Inc E = Equity = average outstanding shares of the two comparables used multiplied by their average book value per share D = Debt= long-term debt E(re )= cost of equity = Gordon growth model= average comparable dividend, 10% growth, the average comparable share price D(re) = cost of debt= LIBOR + 1%” They have to tell us the number they were using whatever during the presentation or in the report. The most confusing part is the cost of equity. There are 2 ways to calculate the cost of equity: And they were choosing the first way. They were using the different dividends and we even cannot find out the number they use. And they feel the number incorrect so they even divided by 2 to make the number similar to what we usually use during the lecture. In our case we got all the numbers to evaluate the cost of equity and the different ways should show similar numbers of cost of equity. So our calculation of the cost of equity=risk-free return (6%)+beta(1. 45)*(average stock return(0. 8)-risk free return)=8. 9% And WACC=5. 1. This part of the present is the worst and people cannot understand the point during the presentation. The report is not enough explanation. As you can see the group’s method would be not only confusing themself but provided them with the wrong answer.
- What are the free cash flows of the packaging machine investment? Should Conner approve the investment? The Group did not answer this question at all. It was not clear where there it actually is better to buy a machine later or not. They did not compare the two situations, just put not clear assumption. Therefore here is a proposition of an alternative approach that in our opinion makes it clearer. The discount rate used for calculation is the WACC from the previous question. If you look at the totals and the differences between them it becomes quite clear that buying the machine now will result in cost only 718,401 in terms of all cost for 10 years projection. At the same time, the present value of all sawing to be made is higher by 280,028 if the machine is to be bought now. Evidently looking at these numbers will make you conclude that it is in fact worth to but the new equipment now. However, it is important to look at the general condition of the company. Keeping that in mind we must say that even thou the calculation would suggest to buy it now the company would have to finance it with a loan. It already has a lack of cash so making it even worst by investing another million is not the best idea. Especially that they can buy it any time in the future I would first deal with their shortage of cash and excess of account receivables and inventories. Then it will be time to think about new investment in the equipment.
