What is Going on in This Business and How Healthy is it Financially?

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Should they agree to the CEO’s suggestion?

 

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Assignment:

Include graph and assumption in your analysis.

Star Trading is a manufacturing Company that is specialized in automobile parts e.g. Air Suspension, Coil Conversion kits, Strut Mounts, Motor mounts etc. The Company has a state of the art plant in Dubai and has invested USD$ 100mn to create this plant facility.

Despite the quality produced, the Company is unable to get the “preferred supplier “status with an international automobile manufacturer (OEM manufacturer). The Company has been bleeding andthe capital/net worth is now completely eroded. The CEO of the Company makes the following suggestions to the Company Board.

 

a. They are unable to get the preferred supplier status and as such utilize the capacity of the plant appropriately.

 

b. The above is therefore leading to unfavorable ratios given to him by his CFO.

 

c. The suggestion of the CEO, after analyzing the business model is that, though they have a quality product, the problem is two-pronged as follows:

i. The prices are still not competitive compared to existing suppliers to the OEM manufacturer

ii. The status of preferred supplier takes minimum 3- 5 years

 

d. The CEO’s suggestion is that we should “BUY “ a plant based out of OEM manufacturer base, which will then help to get the “ pre-approved status “ and then probably use that base to manufacture the same here in Dubai and supply.

 

The decision to be made by the Board is:

01. Should they agree to the CEO’s suggestion?

Task: As a Finance professional with a prudent mind, what would you provide to the Board so that they can make a decision regarding the CEO’s suggestion?
 
 

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