Introduction

Astral Records was founded by Count Francisco Smirnovin the year 1967 who had a vision of building a new kind of record company. Astral Records
obtained a 50 room Georgian mansion on 187 acres near the top of the Cynwyr valley, England. The focus of the company was on developing their own
process rather than licensing CD technology from the largest manufacturers. Astral Records was the first company to produce CDs two years before than its
major competitors. The Count Francisco Smirnov expanded its business operations in the U.S market and Sir Maxwell S. Hammer’s ran the operations of U.S
that looked after every major decision.

Additionlly,the had 27 employees and profit of GBP 600,000 in the year 1980 where as in the year 1992, Astral Records had 500 employees and a pretax
profit of GBP 2.7 million on the sales of GBP 20 million. Astral Records initiated the use of new packaging system that used recyclable paper as well as its
current focused was on developing the skills in order to compress feature length motion pictures onto a standard 5 inch disc.

Problem statement

Since Sarah Conner joined at Astral Records as Chief Executive Officer after the tragic death of the Sir Maxwell S. Hammer’s, she faced several problems in
the company. However, the most important challenge for Sarah Conner was in deciding from where to start and what actions needs to take in order to
overcome the problems of the Astral Records. She also need to go through all the memos, phone messages, faxes and other correspondence in order to
prepare the report that are stored over the past week.

Challenges that need to be overcome

One of the challenges that needs to be addressed by Sarah Conner is a lawsuit against the company. Chief legal counsel of Master Vision, Richard Milhous
has offered a settlement on behalf of his company. The offer has a deadline of 24thAugust. The company has to decide from a cash payment of $5 million or
a 4% per-disc royalty over the next 10 years of production as settlement.

Another crucial decision pending is about the financial structure of the company. As the debt limit is reached and there is an offer for renewal of the
revolving credit agreement at an increased commitment up to $0.6 million, which previously was up to $0.5 million. All the other conditions are same. The
bank increased the credit limit by seeing the financial needs of the company, and due to the fact that the business will be out of the bank loan at least 45
days during the next 12 months. This decision is also important because of the need of the new packaging equipment and also because the company is out
of the bank currently. Some major decisions are also linked with the financial position of the company.

The company is overdue a payment by 90 days to the supplier of Resins, Polycarbonate Substrate. The company owes them an amount of $ 27,914.22. The
company has to pay this amount by 26 August 1993 to avoid the stoppage in supply of resins which will ultimately affect the production processes.
The company has two options related to packaging material of the discs. Richard Cory, the treasurer, is of the view that there is a great opportunity of
buying a new packaging equipment. This equipment having cost of $ 1 million will increase the value of firm by $ 0.2 million. This will also help in increasing
the production. But this can be financed by the renewal of revolving credit agreement. The second option is put forward by Phil Kreutzman of the
purchasing department. He has a new plastic supplier who can cut the total cost of goods sold by 20%. It has an advantage that it is biodegradable in 10
years as well as a disadvantage that the package is not serviceable after three to five years of normal usage.

Some other issues which Sarah Conner has to face include the request of Human Resource Manager to hire 20 shift workers immediately. This request is
made because there is an increase in production, and to cater the needs, staff personnel’s require an increase in pay due to strain they face. Otherwise the
only option left is hiring the new workers without any delay. Another issue is about the research and development project. The Project Future Vision is at
the breakthrough and the research team is very confident that they will succeed in their efforts to develop the new technology. This technology will give a
boost to the sales. But they will need $ 3.5 million within the next month to carry on this project..................

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This case is in the basket exercises. Sarah Conner only on the management Astral, a successful compact disc manufacturer with some looming challenges.
Previously run by an autocratic manager, Astral is paralyzed after the death of Sir Maxwell S. Hammer. Sarah Connor must work through a stack of
messages, memos, and faxes, and to decide where to start and what to do. "Hide
by Lynn A. Isabella, Forbes Ted Source: Darden School of Business 38 pages. Publication Date: January 1, 1993. Prod. #: UV3095-PDF-ENG

Introduction

Astral Records North America is a compact disk manufacturing company that was founded as a joint venture between the two companies that are Astral
Records Ltd and an American venture-capital firm Bendini Lambert and Locke (BLL). Astral Records North America is familiar in the industry for generating
and manufacturing the highest quality compact disks. The main objective of the company is to manufacture the compact disks to main recording companies
as a subcontractor.

Sarah Conner is hired as a Chief Executive Officer (CEO) at Astral Records North America after the tragic death of the president and CEO of Astral Records
North America. Since the first day she joined the company, she faced a lot of problems that were ranging from the management of the company to making
financial decisions related to the Astral Records North America future. Therefore, in order to overcome the problems of the company, Sarah Conner
requested to Louis Tang to address the most important issues of the company.
Case Analysis

The report covered the following issues:

 Assessment of the current and recent financial health of the Astral Records North America.

 Evaluation of the Astral Records North America forested financial statement for the year 1994 and 1995.

 Key driver assumptions of the firm’s future financial performance.

 Free cash flows analysis of the packing machine investment.

 Calculations for weighted Average Cost of Capital (WACC).

Question 1

Assessment of the current and recent financial health of the Astral Records North America

The financial health of the company was not satisfactory when Sarah Conner joined the Astral Records North America as a Chief Executive Officer (CEO).
The profitability ratios of the company indicated the overall decline in the profitability of the company from the year 1990 to the 1993. The profit operating
ratio of the Astral Records North America was 23.4% in 1990 while 17.1% in the year 1993. In addition, the Average Tax Ratio of the company has also
showed decline from the period 1990-1993. The Return on Sales of the Astral Records North America was 7.9% in 1990 that showed decline in the year
1993 that is 5.5%. The Return on Equity (ROE) also indicated a decrease during the period 1990-1993 that is in 1990 the Return on Equity (ROE) was 18.3%
whereas, in the year 1993 this ratio showed a decrease to 14.5%. The Return on Asset (ROA) in 1990 was 4.4% that declined to 3.3% in the year 1993.
However, Sarah Conner has to take effective measures in order to increase the profitability of the company as the current profitability of the company is
showing a downward trend.

The debt to equity ratio of the Astral Records North America has indicated the increment from the year 1990 to 1993 as in 1990 the debt to equity ratio was
1.95 in 1990 while in the year 1993 this ratio increased to 2.36 which showed that the company had been aggressive in financing its business growth with
the debt. However, debt to assets ratio of Astral Records North America also increased from the time period 1990-1993. In the year 1990, the debt to asset
ratio was 0.47 whereas, in 1993 it increased to 0.54 indicating that the company has financed majority of its assets by using debt that made Astral Records
North America greatly leveraged. The EBIT/Interest ratio during the period 1990-1993 almost showed constant results that indicated the company has
improved exposure to the interest to pay out its interest expense. The overall Asset Unitization Ratio of the Astral Records North America has utilized its
asset in an effective and efficient manner in order to produce the sales and revenue for the business.
The Liquidity Ratios of the company from the year 1990-1993 indicated that the firm did not have much resource to pay off its resources. The current ratio
of the company in the year 1990 was 1.01 whereas; in the year 1993 it was 1.21. The current ratio of Astral Records, North America from the time period
1990-1993 showed that the company does not have adequate resources to pay off its debts.........................

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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

Strengths & Weaknesses of the Astral Records North America

Strengths

Astral Records North America is considered as a high quality manufacturer of compact disks in the industry. This reputation in the industry helps the
company to develop itself into one of the successful brand in the market. Moreover, the company has efficiently utilized its assets as well; another strength
of the company is a joint venture that provides it the advantage over other companies in the industry.

Weaknesses

The main weakness of the company is the managerial problems that they are currently facing. The profitability of the company is also declining as well as
currently the company is also facing liquidity and leverage problems, this is due to the inability of the inventory to convert into cash, and the the entrance
of small manufacturer in the industry that created the competition for Astral Records North America in terms of price.

Question 2

Astral Records North America Projected income statement (1994-1995)

The projected Income statement of Astral Records North America for the year 1994 and 1995 has been examined in order to analyze the expected future
performance of the company as it will be helpful in order to make future decisions. The expected sales of the company during the year 1994 are $ 45,761
thousand, whereas; on the other side the expected sales of the company for the year 1995 is $52,625 thousand.
ASTRAL RECORDS Historical and Projected Income Statements (in dollar thousand)

Year 1990 1991 1992 1993 1994 1995

(Actual) (Actual) (Actual) (Actual) Forecast Forecast

Sales 26,202 28,822 34,010 39,792 45,761 52,625

Operating Expenses:

Production Costs and Expenses 11,950 13,380 17,847 22,335 27,456 31,575

Admin. and Selling Expenses 5,734 5,967 7,020 7,970 9,152 10,525

Depreciation 2,376 2,367 2,667 2,667 2,667 2,667

Total Operating Expenses 20,060 21,714 27,534 32,972 39,275 44,767

Operating Margin 6,142 7,109 6,476 6,820 6,485 7,858

Interest Expense (2,427) (2,535) (3,265) (3,222) (900) (900)

Earnings Before Taxes 3,715 4,574 3,212 3,598 5,585 6,958

Income Taxes (1,647) (1,845) (1,269) (1,403) (2,234) (2,783)

Dividends on :

Net Earnings 2,068 2,729 1,943 2,195 3,351 4,175

 Dividends to All Common Shares 1,000 1,000 1,000 1,000 1,000 1,000

Retentions of Earnings 1,068 1,729 943 1,195 2,351 3,175

Moreover, the expected sales of the company during the years 1994 and 1995 were assumed to be 15% increase in the sales growth as compared to the
previous year showing that the profitability and growth of the company will improve from the year 1993 in the future.

Astral Records North America Projected Balance statement (1994-1995)

Years 1990 1991 1992 1993 1994 1995

(Actual) (Actual) (Actual) (Actual) (Forecasted) (Forecasted)

Assets

Cash 1,764 2,040 2,905 1,540 1,771 2,037

Accounts Receivable 8,113 9,125 10,311 13,316 $15,045 $17,301

Inventories 15,861 17,147 25,643 34,717 42,424 50,310

Total Current Assets 25,738 28,312 38,859 49,573 59,239 69,648

Gross Property Plant & Equipt. 23,667 26,667 26,667 26,667 26,667 26,667

Accumulated Depreciation (2,505) (4,872) (7,538) (10,205) (12,872) (15,539)

 Net Property Plant & Equipt. 21,162 21,795 19,129 16,462 13,795 11,129

Total Assets 46,900 50,107 57,988 66,035 73,035 80,776

Liabilities and Stockholders' Equity:

Short Term Borrowings (Bank) 12,060 13,042 19,680 25,802 33,027 42,274

Accounts Payable 4,511 4,607 4,705 5,328 5,648 5,987

Other Current Liabilities 9,014 9,414 9,616 9,723 7,660 4,146

Total Current Liabilities 25,585 27,063 34,001 40,853 46,335 52,406

Long Term Debt 10,000 10,000 10,000 10,000 10,000 10,000

Shareholders' Equity 11,315 13,044 13,987 15,182 16,700 18,370

Total Liabs. & Stkhldrs' Eq. 46,900 50,107 57,988 66,035 73,035 80,776

The above table shows the expected balance sheet of the Astral Records North America that indicated the improvement in the expected performance of
the company in the coming years that is in the year 1994 and 1995. In addition to this, the projected external financial requirement for the year 1994 is
$7,225,000 ($33,027,000-$25,805,000) and for the year 1995 it will be $9,247,000 ($42,274,000-$33,027,000).

Furthermore, the projected debt to equity ratio of the company for the years 1994 and 1995 will be 3.37 and 3.40 (total liabilities/equity) respectively.
From the analysis of the company’s recent debt to equity ratio as well as from the expected debt to equity ratio it is concluded that Astral Records North
America will not be able to repay its loan in the future within a reasonable period, but only it will be possible for the company to repay its loan if the key
assumptions that are used in order to prepare the projected financial statements are improved...........................
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ASTRAL RECORDS LTD., NORTH AMERICA: SOME FINANCIAL CONCERNS Case Solution

Historical Performance of the Firm

Astral Records Limited was founded in North America. The company is the joint venture between the ARL and an American Venture Capital Firm, Bendini,
Lambert and Locke. The company is operating in a compact disk industry and it is known as a high quality producer of compact disks. By looking the at the
financials statements of the company, the past performance and financial health of the company could be identified.

It is clear from the ratio analysis over the last four year that the financial health of the company is decreasing with each passing year. Although continuous
growth in sales have been shown and total sales have increased by more than 50% in last four year, but along with the increase in sales, cost of goods sold
have also increased significantly, which results in an increase in net earnings just by 6%.

Moreover, while looking at the balance sheet, the company is unable to manage its working capital and the inventory level of the company has increased by
more than 100%, which could be due to the increase in demand however, such high level of inventory depicts that the company is capitalizing its assets,
which could create a problem of liquidity. In addition to this, the company is highly engaged in debt and the gearing ratio of the company is increasing
continuously, which means that the company is dependent over debt in order to expand, which could result in loss of investors’confidence.

It is expected that the company’s profitability has not increased as per expectation due to greater increase in expenses as compared to sales revenue.
Moreover, increase in debt ratio also increased interest payments. Increase in interest payments also reduces the profitability of the company. Increase in
inventory and increase in interest bearing debts also reduce the ability of the company to meet its current debt obligations. Current ratio and quick ratio of
the company are also low as compared to its competitors, which indicate it could create distress among the present shareholders of the company. Beside
all these factors, the company’s profitability is positive which means there is a significant potential of growth and all these critical issues could be due to the
poor management or could be due to global economic crisis.

Forecasting and related Assumptions

In order to identify the financing requirement for the next two years, the free cashflows for the next five years are identified on the basis of common
assumption of forecasting.
It is expected that sales will grow by 15% each year, and on this basis sales revenue for the next five years is identified.In order to determine the cost of
goods sold and other expenses, the average growth of last four years is calculated. It is expected that cost of goods sold will be 50% of sales and selling and
admin expenses will be 21% of sales. By incorporating these values, PBIT is identified.

For the identification of free cash flows, depreciation is added back to the PBIT and capital expenditure is deducted. By applying 41% tax rate, after tax free
cash flows are calculated. It is expected that 41% tax rate is identified by using last four years average growth rate. In order to identify the future benefits,
terminal value over last years after tax free cash flow is also identified by using 4% future growth rate...................

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WACC:

The WACC for Astral is 9.5% (Appendix 1).The WACC is derived from the individual weightings and individual returns of debt and equity. The cost of
equity is derived through capital asset pricing model (CAPM) that is widely used and acceptable method to calculate the cost of capital. Under the CAPM
model the risk free return is 6.2% (30 years US treasury bonds), and the market average return is 11% and the beta equity is 1.72 (Appendix 1). The beta
equity is derived from beta asset; the beta asset is the industry related risk that is systematic risk. The systematic risk is unavoidable risk; the company
cannot ignore this risk as it has to bear the risk at any cost. The beta asset is 1.003; this is derived from the beta asset of the companies in the industry that
are provided in the exhibit 5. The beta equity consists of systematic risk and the company’s own gearing risks that is debt financing. The cost of equity for
the company is 14.4% (Appendix 1).

The company finances 54% of the debts and only 46% equity financing, the company is highly gearing, therefore the cost of debt is 9%, the cost of
debt is 9% of the debt instruments having B rating. It shows that the company is not very attractive due to high gearing ratio. However, the cost of debt is
5.45% less than the cost of equity, but the higher debt increases the cost of equity and cost of debt also comes with the tax saving of 40% on the interest
expense. The net of tax cost of debt is 5.4%, i.e. 11% lower than that cost of equity, due to the high gearing the weighted average cost of capital is 9.5%
(Appendix 1).

Cash flow forecast for five years:

The five year cash flow forecast is based upon the common assumptions of free cash flows; the free cash flows are the amount remaining in debt and
equity holders. To get the free cash flows, the company’s profit before interest and tax (PBIT) must be derived. It is estimated that the company’s revenues
will grow by 15% in the next two years and then 5% for the period of 3 next years. The revenues have increased from $457 million to $609 million during
the 5 years of the period. The cost of goods sold is considered to be 60% of the revenues and selling, general and administration expense is 30% of the
revenues. The profit before interest and tax is $4.6 million in 1994 and it is 6.1 million in 1998. The free cash flows are derived through adjusting
depreciation, capital expenditure and tax expense. The depreciation is not the cash expense, therefore it must be added back to the profits and capital
expenditure is the real cash expense to maintain the current production capacity and future consequences to expand the business and production capacity.
The free cash flows for the year 1994 are $7.061 million and it is 9.4 million for the year 1998 (Appendix 2).

Enterprise value and value of the firm:

The enterprise value through free cash flows is $163.3 million. The value is derived through the estimation that the required return of the company is
9.5%, i.e. WACC and the growth of 5% in revenues will last for the period of perpetuity. It is also derived that the growth in free cash flows is also 5% from
the year 1996 to 1998. The terminal value is derived at the year-end 1998 considers the growth rate of 5% is constant for perpetuity period and the
discount rate is 9.5%. It is considered that the discount rate remains same for the period of perpetuity. The value of shareholder’s equity is $114.2 million.
The value is derived from deducting the total liabilities (current and non-current) from the total value of the firm (Appendix 2).

Sensitivity analysis:

The key risk factor in the company’s valuation is the first risk is that the growth of 5% is assumed for the period of perpetuity that does not seem to
be a valid assumption. The second assumption is that the WACC remains constant over the perpetuity that is also not a valid assumption because any of the
variables used to change the value. The risks are acceptable because these assumptions are valid to derive the value and it is assumed that the changes in
WACC are also incorporated in the future years and the value is also risk adjusted for such changes........................

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