• Perform sensitivity analysis and other risk analysis you consider appropriate on key variables and assumptions. Identify the effect on firm value of deviations in key factors from those presented. Do you feel that these risks are acceptable?

• What should Sarah do next? Consider both operating and financial issues ? which should be her highest priorities? How might she address the three most pressing issues identified? Be sure to discuss strategic as well as financial factors.

Lin 1 sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m Astral Records LTD., North America Th Ray (Yu-Jui) Lin Financial Accounting F2 Professor Sun https://www.coursehero.com/file/10737485/Astral-Financial-Assessment/ Lin 2 Summary Astral Records LTD. recently experienced several issues in terms of the financial nature of the firm as well as changes in the industry. The CEO needs to make adequate adjustments and managerial decisions that enable the firm to compete in the competitive environment. Therefore, we will go over five aspects including (1) firm's historical performance, (2) projected performance, (3) key ratio analysis, (4) CD manufacturing industry analysis, and (5) investment decision on packaging machine. (I) Firm's Historical Financial Performance sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m Exhibit 1: 1 Sales Operating Expenses: 2 Production Costs and Expenses 3 Admin. and Selling Expenses 3 Depreciation 4 Total Operating Expenses 5 Operating Margin 6 Interest Expense 7 Earnings Before Taxes 8 Income Taxes 9 Net Earnings 1990 (Actual) 26,202 1992 (Actual) 34,010 1993 (Actual) 39,792 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 1,000 1,068 1,000 1,729 1,000 943 1,000 1,195 Dividends on : 15 Dividends to All Common Shs 16 Retentions of Earnings Exhibit 2: 1991 (Actual) 28,822 Th 1 Sales Operating Expenses: 2 Production Costs and Expenses 3 Admin. and Selling Expenses 3 Depreciation 4 Total Operating Expenses 5 Operating Margin 6 Interest Expense 7 Earnings Before Taxes 8 Income Taxes 9 Net Earnings Dividends on : 15 Dividends to All Common Shs 16 Retentions of Earnings https://www.coursehero.com/file/10737485/Astral-Financial-Assessment/ 1990 100% 1991 100% 1992 100% 1993 100% 46% 22% 9% -77% 23% -9% 14% -6% 8% 46% 21% 8% -75% 25% -9% 16% -6% 9% 52% 21% 8% -81% 19% -10% 9% -4% 6% 56% 20% 7% -83% 17% -8% 9% -4% 6% 4% 4% 3% 6% 3% 3% 3% 3% Lin 3 sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m Astral Records LTD. experienced a steady growth of sales, however, its net income has not grown accordingly (see Exhibit 1). By looking at the common-sized income statement in Exhibit 2, we realized that a significant portion of revenue (46%) is taken by production costs and expenses, or cost of goods sold. The large proportion of cost of goods sold diminished earnings and caused stagnant earning. Also there is a 6% jump in cost of goods sold from 1991 to 1992. This is the result of producing high-quality Compact Disks. Increase in cost of raw material may be one reason. On one hand, an oversized cost of goods sold remains an unanswered concern, other expenses are stable throughout the four-year period. To improve net income, we need to find a way to either cost down or improve profit margin. This will be a dependent variable based on the firm's strategic position and its competitive advantage against other major players in the same industry. (II) Future Performance Forecast Exhibit 3: 1 Sales Operating Expenses: 2 Production Costs and Expenses 3 Admin. and Selling Expenses 3 Depreciation 4 Total Operating Expenses 5 Operating Margin 6 Interest Expense 7 Earnings Before Taxes 8 Income Taxes 9 Net Earnings Dividends on : 15 Dividends to All Common Shs 16 Retentions of Earnings Exhibit 4: 1990 (Actual) 26,202 1991 (Actual) 28,822 1992 (Actual) 34,010 1993 (Actual) 39,792 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 1,000 1,068 1,000 1,729 1,000 943 1,000 1,195 1994 (forecast) 45,761 23,796 9,610 3,661 (37,066) 8,695 (4,118) 4,576 (2,288) 2,288 1,000 1,288 1995 (forecast) 52,625 27,365 11,051 avg= 21% 4,210 avg= 8% (42,626) 9,999 (4,736) avg= 9% 5,262 (2,631) avg= 5% 2,631 1,000 1,631 Th Assumption: 1 sales will grow 15% a year for the next two years 2 COGS remains 52% of sales 3 all other expenses are avergae of past 4 years To give a reliable future financial forecast of the firm, we need to made assumption based on recent data (see Exhibit 3). We assume all other expenses will be the average of the past four years (See Exhibit 4). For example, if SG&A from 1990 to 1993 are 22%, 21%, 21%, and 20%, then we get 21% for 1994 and 1995. We also want to make our assumptions conservative. We do so by creating an upper bound of costs, which we assume a 15% growth of revenue each year 1994 and 1995. We are also interested if we could reduce cost of goods sold to 52% of 1991 level. That yields $23,796 and $27,365 https://www.coursehero.com/file/10737485/Astral-Financial-Assessment/ Lin 4 for 1994 and 1995 respectively. Therefore, cost control will be a very important factor to attract external funding, in both cases of capital injection and debt financing. With the conservative assumptions, we could extrapolate the future performance by looking at historical data. (III) Key Ratio Analysis Exhibit 5: 1990 (Actual) Exhibit 6: Exhibit 7: 18.3% 4.4% 20.9% 5.4% 1990 55.9% 4.0% 6.0% 54.0% 1991 57.5% 10.0% 6.8% 53.3% 1992 (Actual) 1993 (Actual) 13.9% 3.4% 14.5% 3.3% sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m Profitability 1 Return on Equity 2 Return on Assets 1991 (Actual) Asset Utilization Sales/Assets Sales Growth Rate Assets Growth Rate Asset Turnover 1992 58.7% 18.0% 15.7% 54.8% 1993 60.3% 17.0% 13.9% 120.5% Th We can use several ratios to measure profitability, but here we will focus on return on assets and return on equity (Exhibit 5). Both ratios show declining returns, which signals a threat to the firm's ability in generating profit over existing resources. We don't have leverage ratios from competitors, so we will conduct a trend analysis of Astral's leverage in the past four years (Exhibit 6). Noticed the growing proportion of debt against equity, we can conclude an on-growing trend of debt. However, we cannot conclude that Astral is in a bad financial health. It has to be compared with industry average. On the other hand, three ratios that measure asset utilization improved: sales to asset, sales growth to asset growth, and asset turnover (Exhibit 7). Sales growth to assets growth increase from .667 to 1.22 over past four years. This implies not only a better use of resources in generating sales but also an anticipated future growth. (IV) CD Manufacturing Industry Analysis https://www.coursehero.com/file/10737485/Astral-Financial-Assessment/ Lin 5 The CD manufacturing industry has low barrier of entry, allowing small startup companies to compete on low price. In addition, highest-quality CD is no longer a differentiator as technology becomes fairly mature. The high-quality advantages diminished over the past four years in competing new emergent firms that sell low costs CDs. Therefore, Astral needs to reposition itself to either increase customer's willingness to pay or to figure out a cost-efficient model that reduces costs. The company will need to answer the question, whether the value provided to customers exceed the price they pay. (V) Investment Decision on Packaging Machine Exhibit 8: sh is ar stu ed d vi y re aC s ou ou rc rs e eH w er as o. co m Cost-Benefit Chart: Cost Benefit - 1M investment - speed, reliability, flexibility - Depreciation expense on tax deduction - capacity to support growth - lower maintenance and labor costs Th To review the proposed investments in the packaging machine, we will consider its costs against the benefits it brings (see Exhibit 8). The new machine will cost one million of investment, which we could finance from debt as the company has a manageable debt to asset of 54%. The benefits from the new machine include a faster production rate, a more reliable and flexible operation, and the capacity that support future growth needs. The old machine incurs $45,000 per year for maintenance and labor costs while the new machine requires only $32,000 growing by 5% annually. The depreciation expense is also another important factor that could save $40,000 ($100,000 annual depreciation expense * 40% effective tax rate). https://www.coursehero.com/file/10737485/Astral-Financial-Assessment/ Powered by TCPDF (www.tcpdf.org) Input Range Sales Growth 1994-1995 Sales Growth after 1995 Cost of Goods Sold SG&A Capital Expenditures / Sales Depreciation as a % Gross PPE Dividend Payout Interest Rate (LTD & STD) Tax Rate Cash as % Sales Days Inventories Days Sales Outstanding Days Payables Other Current Liabilities / Sales 15% 5% 60% 30% 5% 10% 25% 9% 40% 4% 275 120 44 20% Output range Net profit Free Cash Flow Add Interest Total Free Cash Flow 1990 2,068 1991 2,729 2,260 2,535 4,795 1992 1,943 (2,308) 3,265 957 1993 2,195 (3,928) 3,222 (706) 1994 (612) 9,554 2,700 12,254 Income Statement Sales Operating Expenses: Production Costs and Expenses Admin. and Selling Expenses Depreciation Total Operating Expenses Operating Margin Interest Expense Earnings Before Taxes Income Taxes Net Earnings + Depreciation Working capital Fixed assets Free Cash flow Dividends on : Dividends to All Common Shs Retentions of Earnings 1990 (Actual) 26,202 1991 (Actual) 28,822 1992 (Actual) 34,010 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 2,376 1,000 1,068 1993 (Actual) 39,792 1994 (Forecast) 45,761 1995 (Forecast) 52,625 1996 (Forecast) 55,256 1997 (Forecast) 58,019 1998 (Forecast) 60,920 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 27,456 13,728 2,896 (44,080) 1,681 (2,700) (1,020) 408 (612) 31,575 15,787 3,159 (50,521) 2,104 (3,094) (990) 396 (594) 33,154 16,577 3,435 (53,165) 2,091 (3,245) (1,154) 462 (692) 34,811 17,406 3,725 (55,942) 2,077 (3,398) (1,321) 528 (793) 36,552 18,276 4,030 (58,857) 2,062 (3,554) (1,491) 597 (895) 2,367 2,202 633 2,260.23 2,667 9,584 (2,667) (2,307.50) 2,667 11,456 (2,667) (3,927.80) 2,896 (6,663) (607) 9,553.74 3,159 5,406 (527) (2,314.54) 3,435 2,072 (672) 1,342.20 3,725 2,176 (824) 1,580.40 4,030 2,285 (984) 1,833.52 1,000 1,729 1,000 943 1,000 1,195 (611.94) (594.21) (692.38) (792.61) (894.83) Balance Sheet 1990 (Actual) 1991 (Actual) 1992 (Actual) 1993 (Actual) 1994 (Forecast) 1995 (Forecast) 1996 (Forecast) 1997 (Forecast) 1998 (Forecast) Assets Cash Accounts Receivable Inventories Total Current Assets Gross Property Plant & Equipt. Accumulated Depreciation Net Property Plant & Equipt. Total Assets 1,764 8,113 15,861 25,738 23,667 (2,505) 21,162 46,900 2,040 9,125 17,147 28,312 26,667 (4,872) 21,795 50,107 2,905 10,311 25,643 38,859 26,667 (7,538) 19,129 57,988 1,540 13,316 34,717 49,573 26,667 (10,205) 16,462 66,035 1,830 16,474 23,595 41,900 28,955 (13,101) 15,854.43 57,754 2,105 18,945 27,135 48,185 31,586 (16,259) 15,327 63,512 2,210 19,892 28,491 50,594 34,349 (19,694) 14,655 65,249 2,321 20,887 29,916 53,124 37,250 (23,419) 13,831 66,954 2,437 21,931 31,412 55,780 40,296 (27,449) 12,847 68,627 Liabilities and Stockholders' Equity: Short Term Borrowings (Bank) Accounts Payable Other Current Liabilities Total Current Liabilities Long Term Debt Shareholders' Equity Total Liabs. & Stkhldrs' Eq. 12,060 4,511 9,014 25,585 10,000 11,315 46,900 13,042 4,607 9,414 27,063 10,000 13,044 50,107 19,680 4,705 9,616 34,001 10,000 13,987 57,988 25,802 5,328 9,723 40,853 10,000 15,182 66,035 20,005 4027 9,152 33,184 10,000 14,570 57,754 24,380 4631 10,525 39,536 10,000 13,976 63,512 26,052 4863 11,051 41,966 10,000 13,283 65,249 27,754 5106 11,604 44,464 10,000 12,491 66,954 29,486 5361 12,184 47,031 10,000 11,596 68,627 Assumption loan is Taken at the end of the yr so int is paid next yr 1995 (594) (2,315) 3,094 780 1996 (692) 1,342 3,245 4,587 1997 (793) 1,580 3,398 4,978 1998 (895) 1,834 3,554 5,387 Input Range Sales Growth 1994-1995 Sales Growth after 1995 Cost of Goods Sold SG&A Capital Expenditures / Sales Depreciation as a % Gross PPE Dividend Payout Interest Rate (LTD & STD) Tax Rate Cash as % Sales Days Inventories Days Sales Outstanding Days Payables Other Current Liabilities / Sales WACC Growth Rate 15% 5% 60% 30% 5% 10% 25% 9% 40% 4% 275 120 44 20% 8.90% 7.00% Base Output range Net profit Free Cash Flow Add Interest Total Free Cash Flow Contribution to present value Terminal value Present value 1990 2,068 1991 2,729 2,260 2,535 4,795 1992 1,943 (2,308) 3,265 957 1993 2,195 (3,928) 3,222 (706) 1 1994 (925) 13,464 3,222 16,686 15,322 Income Statement Sales Operating Expenses: Production Costs and Expenses Admin. and Selling Expenses Depreciation Total Operating Expenses Operating Margin Interest Expense Earnings Before Taxes Income Taxes Net Earnings + Depreciation Working capital Fixed assets Free Cash flow Dividends on : Dividends to All Common Shs Retentions of Earnings 1990 (Actual) 26,202 1991 (Actual) 28,822 1992 (Actual) 34,010 1993 (Actual) 39,792 1994 (Forecast) 45,761 1995 (Forecast) 52,625 1996 (Forecast) 55,256 1997 (Forecast) 58,019 1998 (Forecast) 60,920 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 27,456 13,728 2,896 (44,080) 1,681 (3,222) (1,542) 617 (925) 31,575 15,787 3,159 (50,521) 2,104 (2,349) (245) 98 (147) 33,154 16,577 3,435 (53,165) 2,091 (2,571) (480) 192 (288) 34,811 17,406 3,725 (55,942) 2,077 (2,659) (582) 233 (349) 36,552 18,276 4,030 (58,857) 2,062 (2,746) (683) 273 (410) 2,376 2,367 2,202 633 2,260.23 2,667 9,584 (2,667) (2,307.50) 2,667 11,456 (2,667) (3,927.80) 2,896 (10,886) (607) 13,463.62 3,159 3,948 (527) (409.03) 3,435 1,788 (672) 2,030.56 3,725 1,878 (824) 2,321.80 4,030 1,972 (984) 2,631.45 1,000 1,068 1,000 1,729 1,000 943 1,000 1,195 (925) ### (147) (288) ### (349) (410) Balance Sheet 1990 (Actual) 1991 (Actual) 1992 (Actual) 1993 (Actual) 1994 (Forecast) 1995 (Forecast) 1996 (Forecast) 1997 (Forecast) 1998 (Forecast) Assets Cash Accounts Receivable Inventories Total Current Assets Gross Property Plant & Equipt. Accumulated Depreciation Net Property Plant & Equipt. Total Assets 1,764 8,113 15,861 25,738 23,667 (2,505) 21,162 46,900 2,040 9,125 17,147 28,312 26,667 (4,872) 21,795 50,107 2,905 10,311 25,643 38,859 26,667 (7,538) 19,129 57,988 1,540 13,316 34,717 49,573 26,667 (10,205) 16,462 66,035 1,830 14,443 20,686 36,960 28,955 (13,101) 15,854 52,814 2,105 16,609 23,789 42,504 31,586 (16,259) 15,327 57,831 2,210 17,440 24,979 44,629 34,349 (19,694) 14,655 59,284 2,321 18,312 26,228 46,860 37,250 (23,419) 13,831 60,691 2,437 19,227 27,539 49,203 40,296 (27,449) 12,847 62,050 Liabilities and Stockholders' Equity: Short Term Borrowings (Bank) Accounts Payable Other Current Liabilities Total Current Liabilities Long Term Debt Shareholders' Equity Total Liabs. & Stkhldrs' Eq. 12,060 4,511 9,014 25,585 10,000 11,315 46,900 13,042 4,607 9,414 27,063 10,000 13,044 50,107 19,680 4,705 9,616 34,001 10,000 13,987 57,988 25,802 5,328 9,723 40,853 10,000 15,182 66,035 16,095 3310 9,152 28,557 10,000 14,257 52,814 18,565 4631 10,525 33,721 10,000 14,110 57,831 19,548 4863 11,051 35,462 10,000 13,822 59,284 20,509 5106 11,604 37,219 10,000 13,472 60,691 21,443 5361 12,184 38,988 10,000 13,062 62,050 0 0 0 0 0 Assumption loan is Taken at the end of the yr so int is paid next yr 2 1995 (147) (409) 2,349 1,940 1,635 3 1996 (288) 2,031 2,571 4,601 3,563 4 1997 (349) 2,322 2,659 4,981 3,542 5 1998 (410) 2,631 2,746 5,377 3,511 197,721 225,295 Input Range Sales Growth 1994-1995 Sales Growth after 1995 Cost of Goods Sold SG&A Capital Expenditures / Sales Depreciation as a % Gross PPE Dividend Payout Interest Rate (LTD & STD) Tax Rate Cash as % Sales Days Inventories Days Sales Outstanding Days Payables Other Current Liabilities / Sales WACC Growth Rate 15% 5% 60% 30% 5% 10% 25% 9% 40% 4% 275 120 44 20% 8.90% 7.00% Base Output range 1990 Net profit 2,068 Free Cash Flow Add Interest Total Free Cash Flow Contribution to present value Terminal value Present value Add value of non operating assest Enterprise value Less value of debt (long term) Value of common equity Divide by no of shares Vaue per share 1991 2,729 2,260 2,535 4,795 1992 1,943 (2,308) 3,265 957 1993 2,195 (3,928) 3,222 (706) 1 1994 (612) 9,554 2,700 12,254 11253 Income Statement Sales Operating Expenses: Production Costs and Expenses Admin. and Selling Expenses Depreciation Total Operating Expenses Operating Margin Interest Expense Earnings Before Taxes Income Taxes Net Earnings + Depreciation Working capital Fixed assets Free Cash flow Dividends on : Dividends to All Common Shs Retentions of Earnings 1990 (Actual) 26,202 1991 (Actual) 28,822 1992 (Actual) 34,010 1993 (Actual) 39,792 1994 (Forecast) 45,761 1995 (Forecast) 52,625 1996 (Forecast) 55,256 1997 (Forecast) 58,019 1998 (Forecast) 60,920 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 27,456 13,728 2,896 (44,080) 1,681 (2,700) (1,020) 408 (612) 31,575 15,787 3,159 (50,521) 2,104 (3,094) (990) 396 (594) 33,154 16,577 3,435 (53,165) 2,091 (3,245) (1,154) 462 (692) 34,811 17,406 3,725 (55,942) 2,077 (3,398) (1,321) 528 (793) 36,552 18,276 4,030 (58,857) 2,062 (3,554) (1,491) 597 (895) 2,376 2,367 2,202 633 2,260.23 2,667 9,584 (2,667) (2,307.50) 2,667 11,456 (2,667) (3,927.80) 2,896 (6,663) (607) 9,553.74 3,159 5,406 (527) (2,314.54) 3,435 2,072 (672) 1,342.20 3,725 2,176 (824) 1,580.40 4,030 2,285 (984) 1,833.52 1,000 1,068 1,000 1,729 1,000 943 1,000 1,195 (611.94) (594.21) (692.38) (792.61) (894.83) Balance Sheet 1990 (Actual) 1991 (Actual) 1992 (Actual) 1993 (Actual) 1994 (Forecast) 1995 (Forecast) 1996 (Forecast) 1997 (Forecast) 1998 (Forecast) Assets Cash Accounts Receivable Inventories Total Current Assets Gross Property Plant & Equipt. Accumulated Depreciation Net Property Plant & Equipt. Total Assets 1,764 8,113 15,861 25,738 23,667 (2,505) 21,162 46,900 2,040 9,125 17,147 28,312 26,667 (4,872) 21,795 50,107 2,905 10,311 25,643 38,859 26,667 (7,538) 19,129 57,988 1,540 13,316 34,717 49,573 26,667 (10,205) 16,462 66,035 1,830 16,474 23,595 41,900 28,955 (13,101) 15,854.43 57,754 2,105 18,945 27,135 48,185 31,586 (16,259) 15,327 63,512 2,210 19,892 28,491 50,594 34,349 (19,694) 14,655 65,249 2,321 20,887 29,916 53,124 37,250 (23,419) 13,831 66,954 2,437 21,931 31,412 55,780 40,296 (27,449) 12,847 68,627 Liabilities and Stockholders' Equity: Short Term Borrowings (Bank) Accounts Payable Other Current Liabilities Total Current Liabilities Long Term Debt Shareholders' Equity Total Liabs. & Stkhldrs' Eq. 12,060 4,511 9,014 25,585 10,000 11,315 46,900 13,042 4,607 9,414 27,063 10,000 13,044 50,107 19,680 4,705 9,616 34,001 10,000 13,987 57,988 25,802 5,328 9,723 40,853 10,000 15,182 66,035 20,005 4027 9,152 33,184 10,000 14,570 57,754 24,380 4631 10,525 39,536 10,000 13,976 63,512 26,052 4863 11,051 41,966 10,000 13,283 65,249 27,754 5106 11,604 44,464 10,000 12,491 66,954 29,486 5361 12,184 47,031 10,000 11,596 68,627 Assumption loan is Taken at the end of the yr so int is paid next yr 2 1995 (594) (2,315) 3,094 780 657 3 1996 (692) 1,342 3,245 4,587 3552 4 1997 (793) 1,580 3,398 4,978 3540 5 1998 (895) 1,834 3,554 5,387 3517 198,089 220,608 2,437 223,045 10,000 Assumption 213,045 1,000 213 Input Range Sales Growth 1994-1995 Sales Growth after 1995 Cost of Goods Sold SG&A Capital Expenditures / Sales Depreciation as a % Gross PPE Dividend Payout Interest Rate (LTD & STD) Tax Rate Cash as % Sales Days Inventories Days Sales Outstanding Days Payables Other Current Liabilities / Sales WACC Growth Rate 15% 5% 60% 30% 5% 10% 25% 9% 40% 4% 275 120 44 20% 8.90% 7.00% Base Output range 1990 Net profit 2,068 Free Cash Flow Add Interest Total Free Cash Flow Contribution to present value Terminal value Present value Add value of non operating assest Enterprise value Less value of debt (long term) Value of common equity Divide by no of shares Vaue per share 1991 2,729 2,260 2,535 4,795 1992 1,943 (2,308) 3,265 957 1993 2,195 (3,928) 3,222 (706) 1 1994 (612) 9,554 2,700 12,254 8773 + Depreciation Working capital Fixed assets Free Cash flow Dividends on : Dividends to All Common Shs Retentions of Earnings 1990 (Actual) 26,202 1991 (Actual) 28,822 1992 (Actual) 34,010 1993 (Actual) 39,792 1994 (Forecast) 45,761 1995 (Forecast) 52,625 1996 (Forecast) 55,256 1997 (Forecast) 58,019 1998 (Forecast) 60,920 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 27,456 13,728 2,896 (44,080) 1,681 (2,700) (1,020) 408 (612) 31,575 15,787 3,159 (50,521) 2,104 (3,094) (990) 396 (594) 33,154 16,577 3,435 (53,165) 2,091 (3,245) (1,154) 462 (692) 34,811 17,406 3,725 (55,942) 2,077 (3,398) (1,321) 528 (793) 36,552 18,276 4,030 (58,857) 2,062 (3,554) (1,491) 597 (895) 2,376 2,367 2,202 633 2,260.23 2,667 9,584 (2,667) (2,307.50) 2,667 11,456 (2,667) (3,927.80) 2,896 (6,663) (607) 9,553.74 3,159 5,406 (527) (2,314.54) 3,435 2,072 (672) 1,342.20 3,725 2,176 (824) 1,580.40 4,030 2,285 (984) 1,833.52 1,000 1,068 1,000 1,729 1,000 943 1,000 1,195 (611.94) (594.21) (692.38) (792.61) (894.83) Balance Sheet 1990 (Actual) 1991 (Actual) 1992 (Actual) 1993 (Actual) 1994 (Forecast) 1995 (Forecast) 1996 (Forecast) 1997 (Forecast) 1998 (Forecast) Assets Cash Accounts Receivable Inventories Total Current Assets Gross Property Plant & Equipt. Accumulated Depreciation Net Property Plant & Equipt. Total Assets 1,764 8,113 15,861 25,738 23,667 (2,505) 21,162 46,900 2,040 9,125 17,147 28,312 26,667 (4,872) 21,795 50,107 2,905 10,311 25,643 38,859 26,667 (7,538) 19,129 57,988 1,540 13,316 34,717 49,573 26,667 (10,205) 16,462 66,035 1,830 16,474 23,595 41,900 28,955 (13,101) 15,854.43 57,754 2,105 18,945 27,135 48,185 31,586 (16,259) 15,327 63,512 2,210 19,892 28,491 50,594 34,349 (19,694) 14,655 65,249 2,321 20,887 29,916 53,124 37,250 (23,419) 13,831 66,954 2,437 21,931 31,412 55,780 40,296 (27,449) 12,847 68,627 Liabilities and Stockholders' Equity: Short Term Borrowings (Bank) Accounts Payable Other Current Liabilities Total Current Liabilities Long Term Debt Shareholders' Equity Total Liabs. & Stkhldrs' Eq. 12,060 4,511 9,014 25,585 10,000 11,315 46,900 13,042 4,607 9,414 27,063 10,000 13,044 50,107 19,680 4,705 9,616 34,001 10,000 13,987 57,988 25,802 5,328 9,723 40,853 10,000 15,182 66,035 20,005 4027 9,152 33,184 10,000 14,570 57,754 24,380 4631 10,525 39,536 10,000 13,976 63,512 26,052 4863 11,051 41,966 10,000 13,283 65,249 27,754 5106 11,604 44,464 10,000 12,491 66,954 29,486 5361 12,184 47,031 10,000 11,596 68,627 Assumption loan is Taken at the end of the yr so int is paid next yr 3 1996 (692) 1,342 3,245 4,587 1039 4 1997 (793) 1,580 3,398 4,978 1124 $ Income Statement Sales Operating Expenses: Production Costs and Expenses Admin. and Selling Expenses Depreciation Total Operating Expenses Operating Margin Interest Expense Earnings Before Taxes Income Taxes Net Earnings 2 1995 (594) (2,315) 3,094 780 -1952 5 1998 (895) 1,834 3,554 5,387 1197 67418 77600 2,437 80,036.42 10000 Assumption 70,036.42 1000 70.04 Name Harris-Beshel Donaldson Inc. % of Sales from CD Production 95% 90% Raw beta Harris-Beshel Donaldson Inc. Price/Earnings Ratio 8 12 Mkt Debt/Equity 1.3 1.2 0.30 0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.04 0.59 0.95 Book D/E 1.3 1.2 tax rate 0.64 0.41 0.95 0.81 0.77 0.73 0.70 0.67 0.64 0.62 0.60 0.59 Unlevered Beta Levered beta Harris Donaldson Astral Value Line Beta Book Value per Share 0.7 12.75 1.4 5.25 Unleverd beta market value 0.40 0.94 105 0.40 0.96 180 0.40 0.40 ### 0.40 0.40 0.40 0.40 0.40 0.40 0.40 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 0.95 Mkt value of debmkt value of equity Book Value mkt/book value Debt/ 67 105 12.75 1.10 73.5 180 5.25 3.43 36 34.4 15.18 2.26 Weight of debt Weight of equity Unlevered B Risk Free Risk premium 51% 49% 0.59 6% 5.50% Cost of equity Cost of Debt Tax Rate WACC 11.24% 5.40% 8.3% Number of Market Shares Price Outstanding per Share (millions) 14 7.5 18 10 9% 40% Equitmkt debt/ mkt equity 0.64 0.64 0.41 0.41 1.04 1.04 Last Annual Dividend Value Line 5-Year Earnings Growth Forecast $1.00 6% $0.75 8% Input Range Sales Growth 1994-1995 Sales Growth after 1995 Cost of Goods Sold SG&A Capital Expenditures / Sales Depreciation as a % Gross PPE Dividend Payout Interest Rate (LTD & STD) Tax Rate Cash as % Sales Days Inventories Days Sales Outstanding Days Payables Other Current Liabilities / Sales WACC Growth Rate 15% 5% 60% 30% 5% 10% 25% 9% 40% 4% 275 120 44 20% 8.90% 7.00% Base Output range 1990 Net profit 2,068 Free Cash Flow Add Interest Total Free Cash Flow Contribution to present value Terminal value Present value Add value of non operating assest Enterprise value Less value of debt (long term) Value of common equity Divide by no of shares Vaue per share 1991 2,729 2,260 2,535 4,795 1992 1,943 (2,308) 3,265 957 1993 2,195 (3,928) 3,222 (706) 1 1994 (612) 9,554 2,700 12,254 8773 2 1995 (594) (2,315) 3,094 780 -1952 3 1996 (692) 1,342 3,245 4,587 1039 4 1997 (793) 1,580 3,398 4,978 1124 Income Statement Sales Operating Expenses: Production Costs and Expenses Admin. and Selling Expenses Depreciation Total Operating Expenses Operating Margin Interest Expense Earnings Before Taxes Income Taxes Net Earnings + Depreciation Working capital Fixed assets Free Cash flow Dividends on : Dividends to All Common Shs Retentions of Earnings 1990 (Actual) 26,202 1991 (Actual) 28,822 1992 (Actual) 34,010 1993 (Actual) 39,792 1994 (Forecast) 45,761 1995 (Forecast) 52,625 1996 (Forecast) 55,256 1997 (Forecast) 58,019 1998 (Forecast) 60,920 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 27,456 13,728 2,896 (44,080) 1,681 (2,700) (1,020) 408 (612) 31,575 15,787 3,159 (50,521) 2,104 (3,094) (990) 396 (594) 33,154 16,577 3,435 (53,165) 2,091 (3,245) (1,154) 462 (692) 34,811 17,406 3,725 (55,942) 2,077 (3,398) (1,321) 528 (793) 36,552 18,276 4,030 (58,857) 2,062 (3,554) (1,491) 597 (895) 2,376 2,367 2,202 633 2,260.23 2,667 9,584 (2,667) (2,307.50) 2,667 11,456 (2,667) (3,927.80) 2,896 (6,663) (607) 9,553.74 3,159 5,406 (527) (2,314.54) 3,435 2,072 (672) 1,342.20 3,725 2,176 (824) 1,580.40 4,030 2,285 (984) 1,833.52 1,000 1,068 1,000 1,729 1,000 943 1,000 1,195 (611.94) (594.21) (692.38) (792.61) (894.83) Balance Sheet 1990 (Actual) 1991 (Actual) 1992 (Actual) 1993 (Actual) 1994 (Forecast) 1995 (Forecast) 1996 (Forecast) 1997 (Forecast) 1998 (Forecast) Assets Cash Accounts Receivable Inventories Total Current Assets Gross Property Plant & Equipt. Accumulated Depreciation Net Property Plant & Equipt. Total Assets 1,764 8,113 15,861 25,738 23,667 (2,505) 21,162 46,900 2,040 9,125 17,147 28,312 26,667 (4,872) 21,795 50,107 2,905 10,311 25,643 38,859 26,667 (7,538) 19,129 57,988 1,540 13,316 34,717 49,573 26,667 (10,205) 16,462 66,035 1,830 16,474 23,595 41,900 28,955 (13,101) 15,854.43 57,754 2,105 18,945 27,135 48,185 31,586 (16,259) 15,327 63,512 2,210 19,892 28,491 50,594 34,349 (19,694) 14,655 65,249 2,321 20,887 29,916 53,124 37,250 (23,419) 13,831 66,954 2,437 21,931 31,412 55,780 40,296 (27,449) 12,847 68,627 Liabilities and Stockholders' Equity: Short Term Borrowings (Bank) Accounts Payable Other Current Liabilities Total Current Liabilities Long Term Debt Shareholders' Equity Total Liabs. & Stkhldrs' Eq. 12,060 4,511 9,014 25,585 10,000 11,315 46,900 13,042 4,607 9,414 27,063 10,000 13,044 50,107 19,680 4,705 9,616 34,001 10,000 13,987 57,988 25,802 5,328 9,723 40,853 10,000 15,182 66,035 20,005 4027 9,152 33,184 10,000 14,570 57,754 24,380 4631 10,525 39,536 10,000 13,976 63,512 26,052 4863 11,051 41,966 10,000 13,283 65,249 27,754 5106 11,604 44,464 10,000 12,491 66,954 29,486 5361 12,184 47,031 10,000 11,596 68,627 Assumption loan is Taken at the end of the yr so int is paid next yr Share Sales growth $ 70.04 -25% 351.98 -20.0% 335.04 -15.0% 307.60 -10.0% 268.51 -5.0% 216.65 0.0% 150.87 5.0% 70.04 10.0% (26.99) 15.0% (141.33) 20.0% (274.15) 25.0% (426.56) 5 1998 (895) 1,834 3,554 5,387 1197 67418 77600 2,437 80,036.42 10000 Assumption 70,036.42 1000 70.04 Input Range Sales Growth 1994-1995 Sales Growth after 1995 Cost of Goods Sold SG&A Capital Expenditures / Sales Depreciation as a % Gross PPE Dividend Payout Interest Rate (LTD & STD) Tax Rate Cash as % Sales Days Inventories Days Sales Outstanding Days Payables Other Current Liabilities / Sales WACC Growth Rate GM Income Statement Sales Operating Expenses: Production Costs and Expenses Admin. and Selling Expenses Depreciation Total Operating Expenses Operating Margin Interest Expense Earnings Before Taxes Net Earnings + Depreciation Working capital Fixed assets Free Cash flow Dividends on : Dividends to All Common Shs Retentions of Earnings 15% 5% 60% 30% 5% 10% 25% 9% 40% 4% 275 120 44 20% 8.90% 7.00% 40% Base Output range 1990 Net profit 2,068 Free Cash Flow Add Interest Total Free Cash Flow Contribution to present value Terminal value Present value Add value of non operating assest Enterprise value Less value of debt (long term) Value of common equity Divide by no of shares Vaue per share 1991 2,729 2,260 2,535 4,795 1992 1,943 (2,308) 3,265 957 1993 2,195 (3,928) 3,222 (706) 1 1994 (612) 9,554 2,700 12,254 8773 2 1995 (594) (2,315) 3,094 780 -1952 3 1996 (692) 1,342 3,245 4,587 1039 4 1997 (793) 1,580 3,398 4,978 1124 5 1998 (895) 1,834 3,554 5,387 1197 67418 77600 2,437 80,036.42 10000 Assumption 70,036.42 1000 70.04 500.00 1990 (Actual) 26,202 1991 (Actual) 28,822 1992 (Actual) 34,010 1993 (Actual) 39,792 1994 (Forecast) 45,761 1995 (Forecast) 52,625 1996 (Forecast) 55,256 1997 (Forecast) 58,019 1998 (Forecast) 60,920 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 27,456 13,728 2,896 (44,080) 1,681 (2,700) (1,020) 408 (612) 31,575 15,787 3,159 (50,521) 2,104 (3,094) (990) 396 (594) 33,154 16,577 3,435 (53,165) 2,091 (3,245) (1,154) 462 (692) 34,811 17,406 3,725 (55,942) 2,077 (3,398) (1,321) 528 (793) 36,552 18,276 4,030 (58,857) 2,062 (3,554) (1,491) 597 (895) 2,376 2,367 2,202 633 2,260.23 2,667 9,584 (2,667) (2,307.50) 2,667 11,456 (2,667) (3,927.80) 2,896 (6,663) (607) 9,553.74 3,159 5,406 (527) (2,314.54) 3,435 2,072 (672) 1,342.20 3,725 2,176 (824) 1,580.40 4,030 2,285 (984) 1,833.52 1,000 1,068 1,000 1,729 1,000 943 1,000 1,195 (611.94) (594.21) (692.38) (792.61) (894.83) Balance Sheet 1990 (Actual) 1991 (Actual) 1992 (Actual) 1993 (Actual) 1994 (Forecast) 1995 (Forecast) 1996 (Forecast) 1997 (Forecast) %Variation from WACC -20.0% 7.00% -10.0% 7.90% 0.0% 8.90% 10.0% 9.90% 20% 10.90% %Variation from GM -20.0% -10.0% 0.0% 10.0% 20% 70.04 35.14 15.81 (4.19) (24.88) (46.26) 70.04 #DIV/0! 151.84 70.04 44.65 32.28 40% 50% 60% 70% 80% 70.04 386.92 228.48 70.04 (88.41) (246.85) %Variation from capital exp/ s -20.0% 2% -10.0% 3% 0.0% 5% 10.0% 7% 20% 9% 70.04 99.04 89.37 70.04 50.70 31.36 1998 (Forecast) Assets Cash Accounts Receivable Inventories Total Current Assets Gross Property Plant & Equipt. Accumulated Depreciation Net Property Plant & Equipt. Total Assets 1,764 8,113 15,861 25,738 23,667 (2,505) 21,162 46,900 2,040 9,125 17,147 28,312 26,667 (4,872) 21,795 50,107 2,905 10,311 25,643 38,859 26,667 (7,538) 19,129 57,988 1,540 13,316 34,717 49,573 26,667 (10,205) 16,462 66,035 1,830 16,474 23,595 41,900 28,955 (13,101) 15,854.43 57,754 2,105 18,945 27,135 48,185 31,586 (16,259) 15,327 63,512 2,210 19,892 28,491 50,594 34,349 (19,694) 14,655 65,249 2,321 20,887 29,916 53,124 37,250 (23,419) 13,831 66,954 2,437 21,931 31,412 55,780 40,296 (27,449) 12,847 68,627 Liabilities and Stockholders' Equity: Short Term Borrowings (Bank) Accounts Payable Other Current Liabilities Total Current Liabilities Long Term Debt Shareholders' Equity Total Liabs. & Stkhldrs' Eq. 12,060 4,511 9,014 25,585 10,000 11,315 46,900 13,042 4,607 9,414 27,063 10,000 13,044 50,107 19,680 4,705 9,616 34,001 10,000 13,987 57,988 25,802 5,328 9,723 40,853 10,000 15,182 66,035 20,005 4027 9,152 33,184 10,000 14,570 57,754 24,380 4631 10,525 39,536 10,000 13,976 63,512 26,052 4863 11,051 41,966 10,000 13,283 65,249 27,754 5106 11,604 44,464 10,000 12,491 66,954 29,486 5361 12,184 47,031 10,000 11,596 68,627 Assumption loan is Taken at the end of the yr so int is paid next yr %Variation from Growth -20.0% 6.90% -10.0% 7.90% 0.0% 8.90% 10.0% 9.90% 20% 10.90% 400.00 300.00 200.00 100.00 -20.0% (100.00) -10.0% (200.00) (300.00) Growth WAC rowth Chart Title -10.0% 0.0% WACC GM 10.0% capital exp/ sales 20.0% Exhibit 1 ASTRAL RECORDS Historical and Projected Income Statements Fiscal Year Ended August 23 Sales Operating Expenses: Production Costs and Expenses Admin. and Selling Expenses Depreciation Total Operating Expenses Operating Margin Interest Expense Earnings Before Taxes Income Taxes Net Earnings Dividends on : Dividends to All Common Shs Retentions of Earnings 1990 (Actual) 26,202 1991 (Actual) 28,822 1992 (Actual) 34,010 1993 (Actual) 39,792 11,950 5,734 2,376 (20,060) 6,142 (2,427) 3,715 (1,647) 2,068 13,380 5,967 2,367 (21,714) 7,109 (2,535) 4,574 (1,845) 2,729 17,847 7,020 2,667 (27,534) 6,476 (3,265) 3,212 (1,269) 1,943 22,335 7,970 2,667 (32,972) 6,820 (3,222) 3,598 (1,403) 2,195 1,000 1,068 1,000 1,729 1,000 943 1,000 1,195 Exhibit 2 ASTRAL RECORDS Historical Balance Sheets (fiscal year ended August 23; all figures in $ thousands) 1990 (Actual) 1991 (Actual) 1992 (Actual) 1993 (Actual) Assets Cash Accounts Receivable Inventories Total Current Assets Gross Property Plant & Equipt. Accumulated Depreciation Net Property Plant & Equipt. Total Assets 1,764 8,113 15,861 25,738 23,667 (2,505) 21,162 46,900 2,040 9,125 17,147 28,312 26,667 (4,872) 21,795 50,107 2,905 10,311 25,643 38,859 26,667 (7,538) 19,129 57,988 1,540 13,316 34,717 49,573 26,667 (10,205) 16,462 66,035 Liabilities and Stockholders' Equity: Short Term Borrowings (Bank) Accounts Payable Other Current Liabilities Total Current Liabilities Long Term Debt Shareholders' Equity Total Liabs. & Stkhldrs' Eq. 12,060 4,511 9,014 25,585 10,000 11,315 46,900 13,042 4,607 9,414 27,063 10,000 13,044 50,107 19,680 4,705 9,616 34,001 10,000 13,987 57,988 25,802 5,328 9,723 40,853 10,000 15,182 66,035 Exhibit 3 ASTRAL RECORDS Ratio Analyses of Historical Financial Statements (fiscal year ended August 23) 1990 (Actual) Profitability Operating Profit Margin Average Tax Rate Return on Sales Return on Equity Return on Assets Leverage Debt/Equity Ratio Debt/Total Assets EBIT/Interest (x) Asset Utilization Sales/Assets Sales Growth Rate Assets Growth Rate Days in Receivables Payables to COGS Inventories to COGS Liquidity Current Ratio Quick Ratio 1991 (Actual) 1992 (Actual) 1993 (Actual) 23.4% 44.3% 7.9% 18.3% 4.4% 24.7% 40.3% 9.5% 20.9% 5.4% 19.0% 39.5% 5.7% 13.9% 3.4% 17.1% 39.0% 5.5% 14.5% 3.3% 1.95 0.47 2.53 1.77 0.46 2.80 2.12 0.51 1.98 2.36 0.54 2.12 55.9% 4.0% 6.0% 113.0 37.7% 132.7% 57.5% 10.0% 6.8% 115.6 34.4% 128.2% 58.7% 18.0% 15.7% 110.7 26.4% 143.7% 60.3% 17.0% 13.9% 122.1 23.9% 155.4% 1.01 0.39 1.05 0.41 1.14 0.39 1.21 0.36 Exhibit 5 ASTRAL RECORDS Data on Comparable Companies and Capital Market Conditions Name Dickenson Inc. Harris-Beshel Donaldson Inc. IBBEX Corp. ZEPORT % of Sales from CD Price/Earnings Production Ratio 20% 9 95% 8 90% 12 40% 16 60% 10 Value Line Beta 1.5 1.3 1.2 1.45 1.6 Book D/E 0.45 0.700 1.400 0.1 1.3 Book Value per Share 5.5 12.75 5.25 16.8 25 Number of Market Shares Price Outstanding Last Annual per Share (millions) Dividend 10 5 $0.95 14 7.5 $1.00 18 10 $0.75 20 15 $0.00 40 10 $2.20 Value Line 5-Year Earnings Growth Forecast 4% 6% 8% 10% 7% Bond Rating A AA AA Baa B Forecasting Assumptions Sales Growth 1994-1995 Sales Growth after 1995 Cost of Goods Sold SG&A Capital Expenditures / Sales Depreciation as a % Gross PPE Dividend Payout Interest Rate (LTD & STD) Tax Rate Cash as % Sales Days Inventories Days Sales Outstanding Days Payables Other Current Liabilities / Sales 15% 5% 60% 30% 5% 10% 25% 9% 40% 4% 275 120 44 20%