ASTRAL RECORDS LTD.

, NORTH AMERICA: SOME FINANCIAL CONCERNS Case Solution

Calculation of WACC

In order to identify total value of the enterprise, there is a need to identify appropriate discount rate.
The WACC for Astral is calculated with the help of capital asset pricing model. With the help of
capital asset pricing model, cost of equity is identified and by using this cost of equity, the cost of
capital of the company is calculated.
There are certain assumptions that have been taken while calculating cost of equity through capital
asset pricing model. It is expected that Beta of comparable industries is used in this formula. By
taking the average beta of comparable industries and then incorporating the capital structure of the
company, equity beta is identified.
Risk free debt and risk premium for the company are identified by taking certain assumptions like by
using 30 years treasury rate risk free debt is identified and by using Libor and three months treasury
rate market risk premium is calculated. By using equity beta, risk free rate and market risk premium,
the cost of equity is identified which is 20.3%.

ASTRAL RECORDS LTD., NORTH AMERICA- SOME FINANCIAL CONCERNS case solution

By using the interest expense of last four years the cost of debt is assumed , then putting the values
of cost of debt, value of debt , cost of equity and value of equity into the formula of WACC, the cost
of capital is calculated which is 11.6%. The value of debt and of equity is identified with the help of
ratios and using the average growth rate over the value of debt, the current value of debt is
identified.

Enterprise value and value of the firm

By using the discount rate that is calculated with the help of capital asset, the pricing model value of
equity is identified. By discounting the free cash flows at a discount rate of 11.6%, thenet present
value of the company is identified.
It is expected that the company is generating positive net present value of worth $343390. In order
to identify the equity part in this net present value, the net interest bearing debt is deducted from
this value. It is expected that net interest bearing debt of the company is 50853 dollars. By deducting
this value through the net present value, the value of equity for the company is identified which is
292537 dollars.
Therefore, there is a significant potential of growth in the company with respect to future earnings
and it is expected that future cash flows are greater than the total debt of the company, which shows
that in next five years the company could resolve the current facing problems through better and
efficient management.
Sensitivity analysis

It is expected that the valuation of the company is performed by taking certain assumptions, such as
it is assumed that company’s sales will grow by 15% in projected years and it is also expected that
the company’s earnings will grow by 4% after these five forecasted years for the foreseeable future.
Therefore, there is a risk that the growth of 15% is assumed for the projected years and growth of 4%
in perpetuity do not seem to be reasonable assumptions as the past performance of the company
was not well.
In addition to this, it is also expected that WACC will also remain same over the life of the company,
which is also not a realistic assumption as WACC changes over the period which means that if WACC
increases over the time, then it could reduce the value of the company.

Analysis of Proposed Investment

Although the current equipment of the company is enough in order to meet the current demands of
the company,it is expected that in near future demands of the compact disks will increase
significantly and after three years the company would have to buy new and advanced machinery.
Moreover, the current machinery is incurring high maintenance cost and labor cost and as a result it
slows the production processes………………

This is just a sample partial work. Please place the order on the website to get your own originally
done case solution

The group gives us impressive numbers which we thought is from evaluating the financial situation
but from the case exhibits. They didn’t mention the situation of the company (CEO been killed) they
only talking about the numbers, in this point of view the group focus on numbers too much on this
question. And in our opinion it will be better if they put some graph to show the trend. The trend can
show us the financial health. The confuse part is they didn’t go to the point of the question directly.
They didn’t give us the certain answer in the first part of question one.

The good part is from the report; we can see the group was really focus on this question compare
rest of the questions, besides the answer of first question is much better comparing the
presentation. It will be good if they are not only showing the numbers but also available to explain
the numbers. From the report we can see clearly about the EBITDA ratio however we cannot find
anything from the presentation. Here is the copy from the report: “In operating management we
used gross profit and EBITDA ratios (Table 2. ,). We use EBITDA ratio to better evaluate Astral
financial condition- companies have different distribution and pricing policies which lead to different
cost structure. ” The ratios showed really clear in the report, and they think it is the most important
ratio to see the financial health however they did not show anything during the presentation. 2.
Please forecast the financial statements of the firm for 1994 and 1995. What will be the external
financing requirements of the firm in those years? Can the firm repay its loan within a reasonable
period?

The purpose of this question was to detect the skills of preparing financial forecast. However, during
the presentation the group did not show us how to forecast but only numbers again. Audience may
lose interest to follow. And it is also to catch the point during the presentation. Besides the group’s
answer to this question, in the presentation and report, assume too much as they just mentioned;
“Sales growth: 15%, Dividends, Fixed-assets, Interest expense , Production cost & expense and
Admin & selling expense” In our point of view here is no need to assume too many unchanged
numbers.

And more assumption means more incorrect of the result. For example here is no need to assume
stable interest expensive. During the presentation, when people asking why using the numbers they
said just because of assumption. The growth rate they were using is 15% and they give no reason,
however the 15% is from the expected growth rate not only from the assumption. Considering all the
previous calculation is from assumptions and we must agree but if they do it more careful and using
less assumption it will be much better compare the thing they have now. 3.

What are the key driver assumptions of the firm’s future financial performance? * What are the
managerial implications of those key drivers? * That is, what aspects of the firm’s activities should
Conner especially focus on? Question 3 is not clear during the presentation however they showed
everything in their report. 4. What is Astral’s weighted average cost of capital (WACC)? * What
methods did you use to estimate the WACC? * What key assumptions especially influenced the
WACC? Question 4 looks correct, but they didn’t show us numbers and we feel like the result is from
the heaven.

After checking the report we found out they use the wrong data. What they wrote in their report:
‘‘WACC was calculated using the following inputs; Using information from the comparables, Haris-
Bershel and Donaldson, Inc E = Equity = average outstanding shares of the two comparables used
multiplied by their average book value per share D = Debt= long-term debt E(re )= cost of equity =
Gordon growth model= average comparable dividend, 10% growth, average comparable share price
D(re) = cost of debt= libor + 1%” They have to tell us the number they were using whatever during
the presentation or in the report.

The most confusing part is cost of equity. There are 2 ways to calculate the cost of equity: And they
were choosing the first way. They were using the different dividend and we even cannot find out the
number they use. And they feel the number incorrect so they even divided by 2 to make the number
similar as what we usually use during the lecture. In our case we got all the numbers to evaluate the
cost of equity and the different ways should show the similar numbers of cost of equity. So our
calculation of the cost of equity=risk-free return (6%)+beta(1. 45)*(average stock return(0. 8)-risk
free return)=8. 9% And the WACC=5. 1. This part of the present is the worst and people cannot
understand the point during the presentation. The report is not enough explanations. As you can see
the group’s method would be not only confusing themself but provided them with the wrong
answer. 5. What are the free cash flows of the packaging machine investment? Should Conner
approve the investment? The Group did not answer to this question at all. It was not clear where
there it actually is better to buy a machine later or not. They did not compare the two situations, just
put not clear assumption.

Therefore here is a proposition of alternative approach that in our opinion makes it clearer. * The
discount rate used for calculation is the WACC from previous question. If you look at the totals and
the differences between them it becomes quite clear that buying the machine now will result cost
only 718,401 in terms of all cost for 10 years projection. At the same time the present value of all
sawing to be made is higher by 280,028 if the machine is to be bought now. Evidently looking at this
numbers will make you conclude that it is in fact worth to but the new equipment now.
However it is important to look at general condition of the company. Keeping that in mind we must
say that even thou the calculation would suggest to buy it now the company would have to finance it
with a loan. It already has a lack of cash so making it even worst by investing another million is not a
best idea. Especially that they can buy it any time in the future I would first deal with their shortage
of cash and excess of account receivables and inventories. Then it will be a time to think about new
investment in the equipment.

Astral Records Ltd North America Some Financial Concerns Case Study Solution & Analysis

In most courses studied at Harvard Business schools, students are provided with a case study. Major
HBR cases concerns on a whole industry, a whole organization or some part of organization;
profitable or non-profitable organizations. Student’s role is to analyze the case and diagnose the
situation, identify the problem and then give appropriate recommendations and steps to be taken.

To make a detailed case analysis, student should follow these steps:

STEP 1: Reading Up Harvard Case Study Method Guide:

Case study method guide is provided to students which determine the aspects of problem needed to
be considered while analyzing a case study. It is very important to have a thorough reading and
understanding of guidelines provided. However, poor guide reading will lead to misunderstanding of
case and failure of analyses. It is recommended to read guidelines before and after reading the case
to understand what is asked and how the questions are to be answered. Therefore, in-depth
understanding f case guidelines is very important.

Harvard Case Study Solutions

STEP 2: Reading The Astral Records Ltd North America Some Financial Concerns Harvard Case
Study:

To have a complete understanding of the case, one should focus on case reading. It is said that case
should be read two times. Initially, fast reading without taking notes and underlines should be done.
Initial reading is to get a rough idea of what information is provided for the analyses. Then, a very
careful reading should be done at second time reading of the case. This time, highlighting the
important point and mark the necessary information provided in the case. In addition, the
quantitative data in case, and its relations with other quantitative or qualitative variables should be
given more importance. Also, manipulating different data and combining with other information
available will give a new insight. However, all of the information provided is not reliable and relevant.

When having a fast reading, following points should be noted:

 Nature of organization

 Nature if industry in which organization operates.

 External environment that is effecting organization

 Problems being faced by management

 Identification of communication strategies.

 Any relevant strategy that can be added.

 Control and out-of-control situations.

When reading the case for second time, following points should be considered:

 Decisions needed to be made and the responsible Person to make decision.

 Objectives of the organization and key players in this case.

 The compatibility of objectives. if not, their reconciliations and necessary redefinition.

 Sources and constraints of organization from meeting its objectives.

After reading the case and guidelines thoroughly, reader should go forward and start the analyses of
the case.

STEP 3: Doing The Case Analysis Of Astral Records Ltd North America Some Financial Concerns:

To make an appropriate case analyses, firstly, reader should mark the important problems that are
happening in the organization. There may be multiple problems that can be faced by any
organization. Secondly, after identifying problems in the company, identify the most concerned and
important problem that needed to be focused.

Firstly, the introduction is written. After having a clear idea of what is defined in the case, we deliver
it to the reader. It is better to start the introduction from any historical or social context. The
challenging diagnosis for Astral Records Ltd North America Some Financial Concerns and the
management of information is needed to be provided. However, introduction should not be longer
than 6-7 lines in a paragraph. As the most important objective is to convey the most important
message for to the reader.

After introduction, problem statement is defined. In the problem statement, the company’s most
important problem and constraints to solve these problems should be define clearly. However, the
problem should be concisely define in no more than a paragraph. After defining the problems and
constraints, analysis of the case study is begin.

STEP 4: SWOT Analysis of the Astral Records Ltd North America Some Financial Concerns HBR Case
Solution:
SWOT analysis helps the business to identify its strengths and weaknesses, as well as understanding
of opportunity that can be availed and the threat that the company is facing. SWOT for Astral
Records Ltd North America Some Financial Concerns is a powerful tool of analysis as it provide a
thought to uncover and exploit the opportunities that can be used to increase and enhance
company’s operations. In addition, it also identifies the weaknesses of the organization that will help
to be eliminated and manage the threats that would catch the attention of the management.

This strategy helps the company to make any strategy that would differentiate the company from
competitors, so that the organization can compete successfully in the industry. The strengths and
weaknesses are obtained from internal organization. Whereas, the opportunities and threats are
generally related from external environment of organization. Moreover, it is also called Internal-
External Analysis.

STRENGTHS:

In the strengths, management should identify the following points exists in the organization:

 Advantages of the organization

 Activities of the company better than competitors.

 Unique resources and low cost resources company have.

 Activities and resources market sees as the company’s strength.

 Unique selling proposition of the company.

WEAKNESSES:

 Improvement that could be done.

 Activities that can be avoided for Astral Records Ltd North America Some Financial Concerns.

 Activities that can be determined as your weakness in the market.

 Factors that can reduce the sales.

 Competitor’s activities that can be seen as your weakness.

OPPORTUNITIES:

 Good opportunities that can be spotted.

 Interesting trends of industry.

 Opportunities for Astral Records Ltd North America Some Financial Concerns can be obtained
from things such as:

 Change in technology and market strategies

 Government policy changes that is related to the company’s field

 Changes in social patterns and lifestyles.

 Local events.

THREATS:
Following points can be identified as a threat to company:

 Company’s facing obstacles.

 Activities of competitors.

 Product and services quality standards

 Threat from changing technologies

 Financial/cash flow problems

 Weakness that threaten the business.

Following points should be considered when applying SWOT to the analysis:

 Precise and verifiable phrases should be sued.

 Prioritize the points under each head, so that management can identify which step has to be
taken first.

 Apply the analyses at proposed level. Clear yourself first that on what basis you have to apply
SWOT matrix.

 Make sure that points identified should carry itself with strategy formulation process.

 Use particular terms (like USP, Core Competencies Analyses etc.) to get a comprehensive
picture of analyses.

STEP 5: PESTEL/ PEST Analysis of Astral Records Ltd North America Some Financial Concerns Case
Solution:

Pest analyses is a widely used tool to analyze the Political, Economic, Socio-cultural, Technological,
Environmental and legal situations which can provide great and new opportunities to the company
as well as these factors can also threat the company, to be dangerous in future.

Pest analysis is very important and informative. It is used for the purpose of identifying business
opportunities and advance threat warning. Moreover, it also helps to the extent to which change is
useful for the company and also guide the direction for the change. In addition, it also helps to avoid
activities and actions that will be harmful for the company in future, including projects and
strategies.

To analyze the business objective and its opportunities and threats, following steps should be
followed:

 Brainstorm and assumption the changes that should be made to organization. Answer the
necessary questions that are related to specific needs of organization

 Analyze the opportunities that would be happen due to the change.

 Analyze the threats and issues that would be caused due to change.

 Perform cost benefit analyses and take the appropriate action.

Pest analysis

PEST FACTORS:

POLITICAL:

 Next political elections and changes that will happen in the country due to these elections

 Strong and powerful political person, his point of view on business policies and their effect
on the organization.

 Strength of property rights and law rules. And its ratio with corruption and organized crimes.
Changes in these situation and its effects.

 Change in Legislation and taxation effects on the company

 Trend of regulations and deregulations. Effects of change in business regulations

 Timescale of legislative change.

 Other political factors likely to change for Astral Records Ltd North America Some Financial
Concerns.

ECONOMICAL:

 Position and current economy trend i.e. growing, stagnant or declining.

 Exchange rates fluctuations and its relation with company.

 Change in Level of customer’s disposable income and its effect.

 Fluctuation in unemployment rate and its effect on hiring of skilled employees

 Access to credit and loans. And its effects on company

  Effect of globalization on economic environment

 Considerations on other economic factors

SOCIO-CULTURAL:

 Change in population growth rate and age factors, and its impacts on organization.

 Effect on organization due to Change in attitudes and generational shifts.

 Standards of health, education and social mobility levels. Its changes and effects on
company.

 Employment patterns, job market trend and attitude towards work according to different age
groups.

case study solutions

 Social attitudes and social trends, change in socio culture an dits effects.

 Religious believers and life styles and its effects on organization

 Other socio culture factors and its impacts.

TECHNOLOGICAL:

 Any new technology that company is using

 Any new technology in market that could affect the work, organization or industry

 Access of competitors to the new technologies and its impact on their product
development/better services.
  Research areas of government and education institutes in which the company can make any
efforts

 Changes in infra-structure and its effects on work flow

 Existing technology that can facilitate the company

 Other technological factors and their impacts on company and industry

These headings and analyses would help the company to consider these factors and make a “big
picture” of company’s characteristics. This will help the manager to take the decision and drawing
conclusion about the forces that would create a big impact on company and its resources.

STEP 6: Porter’s Five Forces/ Strategic Analysis Of The Astral Records Ltd North America Some
Financial Concerns Case Study:

To analyze the structure of a company and its corporate strategy, Porter’s five forces model is used. In
this model, five forces have been identified which play an important part in shaping the market and
industry. These forces are used to measure competition intensity and profitability of an industry and
market.

porter’s five forces model

These forces refers to micro environment and the company ability to serve its customers and make a
profit. These five forces includes three forces from horizontal competition and two forces from
vertical competition. The five forces are discussed below:

 THREAT OF NEW ENTRANTS:

 as the industry have high profits, many new entrants will try to enter into the market.
However, the new entrants will eventually cause decrease in overall industry profits.
Therefore, it is necessary to block the new entrants in the industry. following factors is
describing the level of threat to new entrants:

 Barriers to entry that includes copy rights and patents.

 High capital requirement

 Government restricted policies

 Switching cost

 Access to suppliers and distributions

 Customer loyalty to established brands.

 THREAT OF SUBSTITUTES:

 this describes the threat to company. If the goods and services are not up to the standard,
consumers can use substitutes and alternatives that do not need any extra effort and do not
make a major difference. For example, using Aquafina in substitution of tap water, Pepsi in
alternative of Coca Cola. The potential factors that made customer shift to substitutes are as
follows:

 Price performance of substitute

 Switching costs of buyer

 Products substitute available in the market

 Reduction of quality

 Close substitution are available

 DEGREE OF INDUSTRY RIVALRY:

 the lesser money and resources are required to enter into any industry, the higher there will
be new competitors and be an effective competitor. It will also weaken the company’s
position. Following are the potential factors that will influence the company’s competition:

 Competitive advantage

 Continuous innovation

 Sustainable position in competitive advantage

 Level of advertising

 Competitive strategy

 BARGAINING POWER OF BUYERS:

  it deals with the ability of customers to take down the prices. It mainly consists the
importance of a customer and the level of cost if a customer will switch from one product to
another. The buyer power is high if there are too many alternatives available. And the buyer
power is low if there are lesser options of alternatives and switching. Following factors will
influence the buying power of customers:

 Bargaining leverage

 Switching cost of a buyer

 Buyer price sensitivity

 Competitive advantage of company’s product

 BARGAINING POWER OF SUPPLIERS:

 this refers to the supplier’s ability of increasing and decreasing prices. If there are few
alternatives o supplier available, this will threat the company and it would have to purchase
its raw material in supplier’s terms. However, if there are many suppliers alternative,
suppliers have low bargaining power and company do not have to face high switching cost.
The potential factors that effects bargaining power of suppliers are the following:

 Input differentiation

 Impact of cost on differentiation

 Strength of distribution centers

 Input substitute’s availability.

STEP 7: VRIO Analysis of Astral Records Ltd North America Some Financial Concerns:

Vrio analysis for Astral Records Ltd North America Some Financial Concerns case study identified the
four main attributes which helps the organization to gain a competitive advantages. The author of
this theory suggests that firm must be valuable, rare, imperfectly imitable and perfectly non
sustainable. Therefore there must be some resources and capabilities in an organization that can
facilitate the competitive advantage to company. The four components of VRIO analysis are
described below:
VALUABLE: the company must have some resources or strategies that can exploit opportunities and
defend the company from major threats. If the company holds some value then answer is yes.
Resources are also valuable if they provide customer satisfaction and increase customer value. This
value may create by increasing differentiation in existing product or decrease its price. Is these
conditions are not met, company may lead to competitive disadvantage. Therefore, it is necessary to
continually review the Astral Records Ltd North America Some Financial Concerns company’s
activities and resources values.
RARE: the resources of the Astral Records Ltd North America Some Financial Concerns company that
are not used by any other company are known as rare. Rare and valuable resources grant much
competitive advantages to the firm. However, when more than one few companies uses the same
resources and provide competitive parity are also known as rare resources. Even, the competitive
parity is not desired position, but the company should not lose its valuable resources, even they are
common.
COSTLY TO IMITATE: the resources are costly to imitate, if other organizations cannot imitate it.
However, imitation is done in two ways. One is duplicating that is direct imitation and the other one
is substituting that is indirect imitation.
Any firm who has valuable and rare resources, and these resources are costly to imitate, have
achieved their competitive advantage. However, resources should also be perfectly non sustainable.
The reasons that resource imitation is costly are historical conditions, casual ambiguity and social
complexity.
ORGANIZED TO CAPTURE VALUE: resources, itself, cannot provide advantages to organization until it
is organized and exploit to do so. A firm (like Astral Records Ltd North America Some Financial
Concerns) must organize its management systems, processes, policies and strategies to fully utilize
the resource’s potential to be valuable, rare and costly to imitate.

STEP 8: Generating Alternatives For Astral Records Ltd North America Some Financial Concerns
Case Solution:

After completing the analyses of the company, its opportunities and threats, it is important to
generate a solution of the problem and the alternatives a company can apply in order to solve its
problems. To generate the alternative of problem, following things must to be kept in mind:

 Realistic solution should be identified that can be operated in the company, with all its
constraints and opportunities.

 as the problem and its solution cannot occur at the same time, it should be described as
mutually exclusive

 it is not possible for a company to not to take any action, therefore, the alternative of doing
nothing is not viable.

 Student should provide more than one decent solution. Providing two undesirable
alternatives to make the other one attractive is not acceptable.

Once the alternatives have been generated, student should evaluate the options and select the
appropriate and viable solution for the company.

STEP 9: Selection Of Alternatives For Astral Records Ltd North America Some Financial Concerns
Case Solution:

It is very important to select the alternatives and then evaluate the best one as the company have
limited choices and constraints. Therefore to select the best alternative, there are many factors that
is needed to be kept in mind. The criteria’s on which business decisions are to be selected areas
under:

 Improve profitability

 Increase sales, market shares, return on investments

 Customer satisfaction

 Brand image

 Corporate mission, vision and strategy

 Resources and capabilities

Alternatives should be measures that which alternative will perform better than other one and the
valid reasons. In addition, alternatives should be related to the problem statements and issues
described in the case study.
STEP 10: Evaluation Of Alternatives For Astral Records Ltd North America Some Financial Concerns
Case Solution:

If the selected alternative is fulfilling the above criteria, the decision should be taken
straightforwardly. Best alternative should be selected must be the best when evaluating it on the
decision criteria. Another method used to evaluate the alternatives are the list of pros and cons of
each alternative and one who has more pros than cons and can be workable under organizational
constraints.

STEP 11: Recommendations For Astral Records Ltd North America Some Financial Concerns Case
Study (Solution):

There should be only one recommendation to enhance the company’s operations and its growth or
solving its problems. The decision that is being taken should be justified and viable for solving the
problems.

Buy This Case Solution

Buy Now
Turnitin Report Will Also Be Sent

Search
Search for:

Categories

 Harvard Case Studies

 HBR Cases

CaseQuiz.com

 Instructions Feel free to send us an inquiry, we reply back real fast.

 Name

 Email *

 Phone *

 Country Country

 Requirements

 File Upload

 File Upload

 File Upload
Verification

vfb-3
 Please enter any two digits * Example: 12

Submit


/ astral-records-ltd

Categories

 Harvard Case Studies

 HBR Cases

Search
Search for:

Copyright © 2017 CaseQuiz.com Sitemap Refund Policy Privacy Policy Terms of Use

Share This


