Introduction A firm which moves at automation mechanical and electronic, TONGLI, are about to lease it's advanced system

to Wanditex Knitting Factory. Wanditex is a high-end garment manufacturer. Suger offered Wanditex four alternative in order to compete with their competitors, Shima Seiki and Marui. To evaluate the current financial condition of Wanditex ofcourse is a must for Wanditex's CFO. Wanditex experienced the effect of Indonesia economic recovery in 2008. Since Wanditex is a highly leveraged and marginally profitable company, it gives a rather complicated effects to Wanditex financial condition. The company's COO, Mr. Rudy Ng, is willing to get an automation system to cut cost and accelerate the production. This consideration was mede after seeing a large backlog orders from the customers. He plans to increase the company sales to an estimated 40% in 2011. But, the risk of obsolescence and the ability to upgrade equipment weighed heavily in Wanditex's decision As the new CEO, Mr. Wang Liang Kee is more concerned on the bottom line and the balance sheet than about making capital expenditure that had long paybacks. There are 3 investments opportunities at the moment. One of them is having automation system which the COO is proposing. As the CFO, an observation and evaluation about any projected investment is needed to increase the shareholder's wealth to support the CEO decision.

Analysis Firms Conditions Highly Leveraged Firms WANDITEX is a highly leveraged firm. It is represented by high use of debt in financing the firms assets. The debt finances the asset 5.6559 times than equity. So, almost 90% of the assets are finaced from debt. It also indicates that the company is very risky. With that bearing-risk, WANDITEX cannot maintain the RoE to attract the investor, since ROE is declining from 2009 to 2010. The decreasing of RoE can affect the shareholders wealth because they cannot get more than before. Actually, they can maintain the debt lower than 2009. But, the decreasing of financing funds affected the operating condition of the firm because the declining of Net Profit Margin. Marginally Profit While operating, WANDITEX still cannot maintain the Net Profit Margin as a capital to finance the growth of the firms.
Growth Rate Internal Growth Rate Sustainable Growth Rate 1,003% 7,079%

The indication from that calculation gives a direction that the firm can only grow 1,003% with their internal financing (financed from Net Profit). The firms can achieve 7,079% growth when financed from net profit and also keep the debt-equity equal to 2010 debt-equity ratio : 5,6559. To achieve 40% growth from sales, the company needs extra finance without maintaining the debtequity ratio. If the company sells more stocks, the increasing in equity may not be significant since the debt-equity is too high. While it should cost a lot (issueing common stock), actually, the cost of equity is smaller than the cost of debt.
WACC Cost of Debt Cost of Common Stock Debt Weight Common Stock Weight WACC 7,31% 7% 0,850 0,150 7,21%

WANDITEX cannot maintain the net profit margin, it is only 1-2%. It is can still be burst up with decreasing the cost, and doing any tax savings. Tax savings is a must, since it is too high, 49% from income before tax deducted for the tax. High payment for interest should be maintained to control the risk. Investment Analysis

WANDITEX now is facing three options of investment : Hotel Acquistion Automation Existing Plant Marketable Securities Based on the calculation of Discounted Free Cash Flow, all of three investment gives positive NPV. But, only one who gives a big amount of NPV from the expected free cash flow : Automation. Meanwhile, only 2 of the investment who give the accepted IRR : Hotel Acquisition and Automation. There are many consideration while choosing the right investment. Current condition of the company is the most considerable things. The next one is the mission of the company, the prerequisite from the board of the directors. While choosing the investment for Automation Existing Plant, WANDITEX should also consider another option : leasing. There are 3 companies who offer leasing proposal. These are the sensitivy analysis between each offerings.
Scenario Effective Tax Rate Pretax Cost of Debt After-Tax Cost of Debt NPV of Loan IRR of Loan Leasing Option #01 NPV of Leasing Option #01 IRR of Lease Lease Advantages Leasing Option #02 NPV of Leasing Option #02 IRR of Lease Lease Advantages Leasing Option #03 NPV of Leasing Option #03 IRR of Lease Lease Advantages Leasing Option #04 NPV of Leasing Option #04 IRR of Lease Lease Advantages SHIMA SEIKI NPV of Loan NPV of Leasing IRR of Lease Lease Advantages MARUI

A 34,00% 9,50% 6,27% $ 469.273 6,27% 155.040 454.717 5,32% 14.556 160.003 469.273 6,27% (0) 162.350 476.156 6,72% (6.884) 164.760 483.225 7,19% (13.952) $

B 34,00% 13,00% 8,58% 484.546 8,58% 155.040 436.915 5,32% 47.631 160.003 450.901 6,27% 33.645 162.350 457.515 6,72% 27.031 164.760 464.306 7,19% 20.240

$ $ $ $ $ $ $ $ $ $ $ $

$ $ $ $ $ $ $ $ $ $ $ $

$ $ $

484.376 498.593 7,13% (14.217)

$ $ $

501.993 479.073 7,13% 22.920

NPV of Loan NPV of Leasing IRR of Lease Lease Advantages

$ $ $

435.634 478.063 8,77% 42.428

$ $ $

456.279 459.346 8,77% (3.068)

The tax that is quoted here is 34% while in the real condition, the tax is 49%. So, leasing is good option for tax savings. The most valuable offerings was made by TONGLI for leasing option #02. It gives the lowest NPV of leasing which will create a great Lease Advantages. And also, the leasing option #02 offered by TONGLI gives the lowest IRR, which mean low return to the lessor, high gain for lessee (WANDITEX). Leasing also gives alternative to the firms who has an adequate cash for buying the equipments or investments. While choosing leasing there is no extra financing needed if the effect from leasing (growth of sales) can cover the leasing payment. Operational Lease will be suit for WANDITEX since it will cover the tax savings to maintain the bottom line as requested by the CEO and also will not be recorded on the balance sheet. So, the investor will be more interesting while checking our potrait.

Proforma for the WANDITEX in 2011 Analysis 1 If leasing 50 machines can achieved the 40% growth sales, then it will cost about 50*$ 102.326 : $5.116.300 for lease expense in 2011. It is about Rp 45.535,07 million for lease expense. The net bottom line will be negative, since the lease payment are made from rupiah for dollar payment.
Sales Other Income Gross Income Cost of Goods Sold Selling, General, Administrative Research & Development Interest Leasing Expense Total Expenses Income before Tax Taxes (49%) Net Income Rp Rp Rp Rp Rp Rp Rp Rp Rp Rp Rp Rp 80.685,78 998,50 81.684,28 59.510,64 6.107,36 1.928,22 8.406,20 45.535,07 121.487,89 (39.803,21) 0 (39.803,21)

Conclusion & Recommendation Conclusion WANDITEX is a highly leveraged and marginally profitable. It is indicated with the Debt-Equity Ratio for 2010 : 5,6559. The profit margin only reach about 1,75% which means it is still not enough capital to grow. While keep maintaining the debt equity ratio for balancing the gain from internal funding, the company can only grow to 7,079%. High payment for interest should be maintained to control the risk. Tax Savings can be covered by leasing, loan, and depreciation. At this time, leasing is one of best aggrements to save the tax savings, since the tax for WANDITEX is too high. Recommendation Declining the leverage to decrease the risk is one of future best alternatives. Maintaining the leverage but boost up the sales also an effective way to get more RoE To achieve the 40% growth of Sales, WANDITEX can do the extra financing activities. Issueing a common stock can be good choices, since it has relative low cost to the debt.