Worldwide paper company case study answer

The case is based on an actual investment decision made by a major paper-products company in the 1990s. The numbers and the company name have been disguised at the request of the company. The dates have been revised for pedagogical reasons. The case provides a glimpse into the paper business but is primarily designed to present a straightforward problem in assessing cash flows, cost of capital, and net present value of a capital-investment decision.

The case touches on the following capital-investment topics:

· Estimation of relevant cash flows (both cost savings and increased revenues)

· Influence of taxes vis-à-vis cost savings and revenues

· Change in net working capital as a cash flow

· Component costs of capital as determined by current market conditions

· Weighted-average cost of capital (WACC) as the discount rate for the average investment

Case Report Instructions

This is a “Use a set of provided questions to prepare a formal case report” assignment. For this case study, you must write a professional report as per the guidelines in “Learning with Cases and Writing Case Reports.” You should create an action-oriented advisory report that presents concisely your analysis and recommendations. The questions below should help you analyze the case and identify the specific issue(s) raised. These are not questions that you should directly answer in your report; instead these questions are designed to help you frame your report with specific focus on the last question: “What is the net present value (NPV) and internal rate of return (IRR) for the investment?”

1. What yearly cash flows are relevant for this investment decision? Itemize the cash flows for each of the six years of the investment. Do not forget the effect of taxes and the initial investment amount.

2. What discount rate should Worldwide Paper Company (WPC) use to analyze those cash flows? Be sure to justify your recommended rate and the assumptions that you used to estimate it.

3. What is the net present value (NPV) and internal rate of return (IRR) for the investment?

NOTE: You can access a student spreadsheet file that you might find helpful for this case on the textbook website found at the following link:

http://highered.mheducation.com/sites/1259277194/student_view0/index.html

This directory contains Excel spreadsheet files with the primary exhibits for this case. Some of the Excel tables exercisable models which will allow you to test ideas with minimum setup time.

Case 25 Report Instructions

CASE 25: Star River Electronics Ltd.

Case Introduction/Overview

In July 2015, a new CEO joins this small manufacturer of CD-ROMs and DVDs to discover that the firm is in the midst of a financial crisis that was induced by rapid growth. The CEO asks an analyst for help with five tasks:

· Review the historical performance of the firm.

· Forecast financing requirements for the next two years.

· Exercise the forecasting model to identify key driver assumptions.

· Estimate Star River’s weighted-average cost of capital.

· Analyze a proposed investment in a packaging machine.

The analyst must offer insights and recommendations based on the work.

Case Report Instructions

This is a “Directly answer a set of questions” case report. For this case study, answer each of the following questions (as per the guidelines in “Learning with Cases and Writing Case Reports”).

1. What are the issues in this case? In what order should Andy Chin and Adeline Koh address them?

2. Assess the current financial health and recent financial performance of the company. What strengths and/or weaknesses would you highlight to Adeline Koh?

3. Forecast the firm’s financial statements for 2016 and 2017. What will be the external financing requirements of the firm in those years? Can the firm repay its loan within a reasonable period?