Sterling Household Products Company Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

Sterling Household Products Company Case Study Analysis

In accordance with the concept that the cost of debt is always lower than the cost of equity; the cost of equity is calculated to be lower in comparison to the cost of debt, hence avoiding the violation of the concept. Furthermore, by using the 5.10% cost of debt and 8.5% cost of equity as well as the value of debt into the weighted average cost of capital formula; the WACC is calculated to be 6.63%.

4.2 IRR and MIRR

IRR for the project of acquisition shows 6.6209% and for the project of expansion; IRR is 11.2%.However, MIRR is 6% if the company opts to acquire “Montagne Medical Instruments Company” and it is 10% if the company starts producing six medical products. According to this calculation; it is apparent that the first projection is feasible and will increase the growth rate and market share, resulting in more profit generation.

4.3 Sensitivity Analysis

According to the calculations made in the analysis; it is determined that NPV and WACC have an inverse relationship, which means when WACC increases according to the data given in the case study; the NPV decreases,hence indicating that how the desired variables change when other variables are being changed, sowe have to analyze and find feasibility of two different projections after which the result extracted by us, is in favor of investing in the expansion and diversification of the company in order to produce medical products.

Conclusion and Recommendation

On the basis ofsensitivity analysis; it was determined that expansion plan is feasible to invest in, because it is showing positive NPV (Net Present value) while acquiring option doesn’t seem to be feasible enough because of its negative NPV (Net Present value) As WACC and NPV have negative relationship.Under such situation,after analyzing all the factors; we can conclude that “Sterling Household Products Company” needs to go for expansion and choose the expansion plan which the requirement of only $ 60 million as an investment, and then the company shouldstart producing a variety of medical products,such as:Teleological, Labyrinth, Stratus, Chiron, Pathogen and Vortex instead of acquiring “Montagne Medical Instruments Company” for $ 265 million, which is showing negative cash flows. (Fruhan, 2013).................................

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