a. An explanation of your calculations of the component costs of debt and equity

b. An explanation of your calculations of the weights of debt/equity

c. Given the weighted average cost of capital (WACC) that you calculate, what is your recommendation about the machine purchase? Based on a crossover rate of 8.7%, should the purchase be made now or in three years? Explain.

UVA-F-1361 Exhibit 1 STAR RIVER ELECTRONICS LTD. Historical Income Statements for Fiscal Year Ended June 30 (SGD 000) 1998 1999 2000 2001 71,924 80,115 92,613 106,042 Sales Operating expenses: Production costs and expenses Admin. and selling expenses Depreciation Total operating expenses 33,703 16,733 8,076 58,512 38,393 17,787 2,028 65,208 46,492 21,301 10,392 78,185 53,445 24,177 11,360 88,983 Operating profit Interest expense Earnings before taxes Income taxes Net earnings 13,412 5,464 7,949 2,221 5,728 14,908 6,010 8,897 2,322 6,576 14,429 7.938 6,491 1,601 4,889 17,059 7,818 9,241 2,093 7,148 Dividends to all common shares Retentions of earnings 2,000 3,728 2,000 4,576 2,000 2,889 2,000 5,148 'The expected corporate tax rate was 24.5%. UVA-F-1361 Exhibit 2 STAR RIVER ELECTRONICS LTD. Historical Balance Sheets for Fiscal Year Ended June 30 (SGD 000) 1998 1999 2000 2001 Assets: Cash Accounts receivable Inventories Total current assets 4,816 22,148 23,301 50,265 5,670 25,364 27,662 58,697 6,090 28,078 53,828 87,996 5,795 35,486 63,778 105,059 Gross property, plant & equipment Accumulated depreciation Net property, plant & equipment Total assets 64,611 (4,559) 60,052 110,317 80,153 (13,587) 66,566 125,262 97,899 (23,979) 73,920 161,916 115,153 (35,339) 79,814 184,873 Liabilities and Stockholders' Equity: Short-term borrowings (bank)' Accounts payable Other accrued liabilities Total current liabilities Long-term debe Shareholders' equity Total liabilities and stockholders' equity 29,002 12,315 24,608 65,926 37,160 12,806 26,330 76,296 73,089 11,890 25,081 110,060 84,981 13,370 21,318 119,669 10,000 34,391 110,317 10,000 38,967 125,263 10,000 41,856 161,916 18,200 47,004 184,873 Exhibit 3 STAR RIVER ELECTRONICS LTD. Ratio Analyses of Historical Financial Statements 1998 1999 2000 2001 Profitability Operating margin (%) Tax rate (%) Return on sales (%) Return on equity (%) Return on assets (%) 18.6% 27.9% 8.0% 16.7% 5.2% 18.6% 26.1% 8.2% 16.9% 5.2% 15.6% 24.7% 5.3% 11.7% 3.0% 16.1% 22.6% 6.7% 15.2% 3.9% Leverage Debt/equity ratio Debt/total capital (%) EBIT/interest (x) 1.13 0.53 2.45 1.21 0.55 2.48 1.99 0.67 1.82 2.20 0.69 2.18 Asset Utilization Sales/assets Sales growth rate (%) Assets growth rate (%) Days in receivables Payables to COGS Inventories to COGS 65.2% 15.0% 8.0% 112.4 36.5% 69.1% 64.0% 11.4% 13.5% 115.6 33.4% 72.1% 57.2% 15.6% 29.3% 110.7 25.6% 115.8% 57.4% 14.5% 14.2% 122.1 25.0% 119.3% Liquidity 0.77 Current ratio Quick ratio 0.76 0.41 0.80 0.31 0.88 0.34 0.41