Sterling Household Products Company Case Study Analysis

Introduction

Sterling Households Products Company – one of the leading and valuable manufacturer and marketer of consumer products, which has been selling recognized and trusted brand names through grocery stores, mass merchandise & other retailer outlets. With the passage of time; the company grew and expanded the scope and scale of its business operations. In 2012, the well regarded laundry products, disinfecting & sanitizing products, toilet preparation and cleaning products, cosmetics and soaps; combined to generate $323 million of net income and $3.3 billion of sales. Adding much to the strong financial performance, the company produced a 12% rate of return on assets in the most recent years. Even though, the company invested internally whenever attractive and lucrative opportunities surfaced, yet most of its continued growth and success came from the series of acquisition of successful and renowned brands.

Problem statement / the dilemma

Since its establishment;Sterling Household Products has been producing and marketing consumer products,including: cosmetics, laundry soap to cleaning, sanitizing &disinfecting products. Despite of the record of having continuous growth and success;it has been analyzed through the evaluation of the financial measures that the growth rates for the sales, profit as well as unit volumes are low. The company is concerned regarding the acquisition ofthe germicidal, sanitation and antiseptic product unit from a Montagne Medical Instruments. The acquisition decision seems to be a natural extension of the expertise and experience of Sterling in the household cleaning supplies market. Montagne Medical Instruments and Sterling Household Products reached to the tentative agreement on price, but Sterling is concerned about whether the investment would be beneficial and feasible and would it be able to add value,given the risk involved.

Financial analysis

With core consideration over the identification that whether the proposed plan of expansion is worthwhile for the company or not; the real value of the proposed acquisition plan is calculated, with an inclusion of  the financial analysis.

Evaluation of business risk with respect to WACC& Cost of Equity

The weighted average cost of capital of the project is calculated for the proposed investment plan. In order to analyze the associated risk with the proposed plan of investment; calculation of appropriate cost of capital is required for the proposed acquisition plan.The cost of equity is calculated by using the capital asset pricing model (CAPM) in which the equity beta of all comparable firms is calculated, including:Teleological, Labyrinth, Stratus, Chiron, Pathogen and Vortex. The beta equity is calculated after calculating the asset beta of each comparable through using the below mentioned formula………………………………….

 

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