Sterling Household Products Company Harvard Case Solution & Analysis

Sterling Household Products Company Case Solution


It is expected that Sterling Company is operating in household industry and has a wide range of household products in its portfolio. From the past results it is clear that the company is performing well and the financial health of the company is good, which is becoming stronger with the passage of each year.Nonetheless, the company is facing the problem of slow growth in recent years, which could be due to the global economic crisis or financial crisis.
Although the company is generating more profit as compared to the last year however,sales growth has declined which could create problem for the company in future. Therefore,the management of the company is considering in what times the proposed expansion plan would increase the value of the company or have negative impact on the performance of the company by increasing pressure on the management which could affect their performance and of the company as well. It has a well diversified portfolio in the consumer goods, however now it is looking forward for other than consumer products to sustain positive growth. The decline in growth has made the company to take a decision to switch towards other markets that has high growth rates.
In addition to this,Sterling Household Products is considering entering into new markets and it is expected that there is an opportunity available in the market in the form of Montaigne Medical Instruments which will increase its product range by adding sanitize, germicidal and antiseptic products in its portfolio. Moreover, it will also help the company by increasing its exposure with respect to medical industry however, it also involves a heavy investment of $265 million, which is a critical point for the management of the sterling company that whether the proposed benefits form the Montagne company could justify its cost or not.

Financial Analysis

In order to identify that the proposed expansion plan is worthwhile for the company ornot, there are certain factors that should be considered. Apparently it seems that there is a significant potential of growth with respect to the proposed expansion plan however, in order to identify the real value of the proposed acquisition plan a detailed financial analysis is performed, which is given below:

Business Risk Evaluation with respect to Cost of Equity & WACC

In order to analyze the associated risk with the proposed investment plan, there is a need to identify the appropriate cost of capital for the proposed acquisition plan. There are certain risks associated with the cost of capital which could determine associated risk with the expansion plan.
First of all, in order to calculate the cost of capital for the proposed investment, there is a need to identify cost of equity. For the calculation of cost of equity, equity beta coefficient should be calculated which represent the risk of the associated with the proposed investment plan.
In order to identify equity beta, comparable industry’s data is used. With the help of comparable industry’s data, the beta asset is identified and by using this asset beta of any comparable industry and adjusting risk of the proposed acquisition, equity beta is identified which is 0.990 which shows that proposed acquisition plan is not much risky as it looks.

In order to identify the cost of equity of the project capital asset pricing model is used and there are certain assumptions that have been taken apart from equity beta such as risk free rate and market risk premium. By assuming the treasury bills rate, the risk free rate is identified which is 3.1% and it is expected that the market risk premium is 5% within this industry.Sterling Household Products Company Case Solution

By taking all these assumptions along with the equity beta, cost of equity of the proposed investment plan is identified which is 8.05%. By using this cost of equity and 5.10% as the cost of debt and value of equity and value of debt in to the formula of weighted average, the cost of capital for the proposed expansion plan is identified which is 6.63%.It is expected that target capital structure is 30% debt and 70% equity, this same capital structure is used in order to identify the cost of capital for the investment plan...............

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