Astral Records ltd. North America: Some Financial Concerns Harvard Case Solution & Analysis

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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