Introduction
Astral Records, North America manufactures compact disk mainly as a subcontractor to the most important recording companies. The company had been established as a joint venture between the firms that includes Astral Records Ltd and an American venture-capital firm, Bendini, Lambert, and Locke (BLL). However, Astral Records Ltd was well known in the market for producing the highest quality compact disks. The easy entry in the market led to the competitive price among the disk Replicators.
Problems
Since the first day of Sarah Conner at Astral Records, North America as a chief executive officer (CEO), she faced many problems related to the management at the company. Additionally, the several issues that were faced by the Sarah, were financial in nature at the first day of her job as a CEO. These issues may include either making financial decision or analyzing the outcomes that have major financial consequences for the company. The most important challenges that Sarah Conner was facing in addressing the most prominent issues that impact the profitability and growth of the company.
In addition to this, she also need the analysis of five tasks review of historical performance of the firm and financial forecast for the next two years performance in order to analyze the financial situation of the company and evaluation of forecasting model to identify key-driver assumptions. The estimation of weighted-average cost of capital for the company as well as analyze a proposed investment in a packaging machine, were some other issues that Sarah Conner needed to analyze in order to improve the performance of the Astral Records North America.
Situation Analysis of the conditions faced by Sarah Conner
Financial Situation of the Company
When Sarah Conner was hired as a CEO of the company the financial situation she faced, includes the profitability ratios of the company that showed decreased during the time period of four years from the year 1990 to 1993.These profitability ratios include operating profit margin that declined from 23.4% to 17.1% and return on sales reduced from 7.9% to 5.5% during the period of four years. The Return on sales showed decreased from 18.35% to 14.5% as well as return on assets decreased from 4.4% to 3.3%.
The debt to equity ratio of the Astral Records, North America has increased which showed that the company had been aggressive with its debt growth. The debt to total assets ratio of the company also increased during the four year period, which showed that the most of the assets are financed through debts that makes the company greatly leveraged. EBIT/interest ratio showed that the firm has better interest exposure in order to pay off its interest expense. The asset unitization ratios of the company showed that it effectively used its assets in order to generate the revenue .However, it includes sales/assets, sales growth rate, assets growth rate, days in receivable, payables to COGS and inventories to COGS.
The current ratio of the company in the year 1990 was 1.01 while in the year 1993 it was 1.21 indicated that the Astral Records, North America do not have sufficient resources to pay off its obligations. On the other side, the quick ratio of the company in the year 1990 was 0.39 whereas in the year 1993 it was 0.36 showed that the liquidity position was not satisfactory during the period from 1990 to 1993 (Exhibit 1).
Projected Income Statement
In the year 1993 when the Sarah Conner joined the company, the net sale of the company has shown better performance from the previous years. In addition to this, the net earnings of the company it also showed enhancement. In order increased and analyzed the financial performance of the company, the forecasted income statement of the company for the year 1994 and 1995 has been evaluated. The expected revenue of the company in the year 1994 was 45,761 while expected revenue in 1995 was 52,625 thousand dollars. This forecasted revenue of both the years indicated that the sales of the Astral Records, North America may improve the productivity and profitability of the company (Exhibit 2).
Investment in New Packaging Equipment
Sarah Conner has to make an important decision about the investment in the purchase of new packaging equipment while replacing the current equipment in order to enhance the production level of the company. To replace the equipment it requires the company to purchase the packing equipment either now or to purchase after waiting three years. The Net present value of purchasing new equipment now is (598,410) whereas if the company decided to purchase it after three years, then the present value of the new equipment will be (686,899). However, it would be favorable for the Astral Records................
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This event allows students to "show their abilities in financial forecasting and analysis, and analysis of investment projects. It offers a nice omnibus account of key tools and concepts. In August 1993, a new CEO joins this small manufacturer of CDs, to discover that the company in the midst of the financial crisis caused by rapid growth. The Director General asked the analyst to help the five objectives: (1) review the historical activity of the firm, (2) forecast the funding requirements for the next two years, and (3) to carry out forecasting models to identify key drivers of assumptions, and (4) assess the Astral at weighted average cost capital, and (5) to review the proposed investments in the packaging machine. Student, as an analyst should offer ideas and recommendations based on the work.
This Darden study. "Hide
by Robert F. Bruner, Kenneth Eades, Robert M. Conroy Source: Darden School of Business 9 pages. Publication Date: August 22, 1994. Prod. #: UV0076-PDF-ENG
