Realtek TV: Ultra-High Definition Smart Television Manufacturing In Malaysia, Essay.

Pick a business idea of your choice (New Business) which you intend to start and do the

following:

1. Evaluate the local markets in light of stock markets, interest rates, currencies and commodities. Explain how these elements would affect your proposed business.
2. Financial Management
3. Choose a form of business. Describe why?
4. Project cash flows for the next five years (derive from assumptions about revenues and expenses) – use excel spreadsheet to perform this task
5. Discuss sources of financing for the project
6. Risk Analysis Evaluate the risk of this venture and compare with public companies in the same industry. Use CAPM to discover the required return on equity.
7. Cost of Capital

Determine the cost of capital and explain its effects on rates of return. You should use this for discounting cash flows in the valuation step.

a) Value these cash flows based on corporate finance principles. Use multiple methods (including multiple growth models).

b) Give final accept/reject recommendation and explain reasons

Market Conditions in Malaysia

The market of Malaysia is well diversified with a large variety of products in electronic field which is a result of globalization. In addition to this, the technological level in the world is moving forward with the introduction of High Definition Television with crystal clear images. As per the opinion of the World Bank, the economy of Malaysia is an open market and the economy is well diversified resistant to external shocks (Themalaysianreserve.com 2017). The economy has strong macroeconomic management and has a stable inflationary situation.

The plan of the management of the business is to establish a business which will be providing high tech television product which would be incorporating all the features of a smart TV. The market situation is appropriate and the introduction of three dimension and high definition quality has brought about vast changes in the television as a product. The technological changes have captured the imagination of people in Malaysia and therefore the demand for such HD Television is quite high in the market (Digitaltrends.com 2018). The product which is being developed by the business is ultra-high definition TV and the product would be called Real Tech Smart Tv. The management anticipates that with the new product which is being developed with added features as larger screen, UHD quality, LED display, User Interface, Video Streaming Services and some other features. The management is positive that the product would be able to capture the interest of the consumers and also generate structure. Therefore, in an overall estimate, it can be said that market for television is on the rise as demand for High Definition TV is more.

Figure 1: Number of televisions owned in Malaysia from 2011 to 2018

(Source: Statista.com 2018)

The above table shows the number of televisions, which is owned by the people from 2011 to 2018. The above table shows in increase in sales and market suitability of Malaysia.

The undertaken report is related to the introduction of a new business in the Malaysian electronic goods industry. The name of the new company will be Realtek TV and the main business operation of the company will be the manufacturing of ultra-high definition smart television (TV). The business form of Realtek TV will be Corporation under which the firm will be considered as a separate legal entity from its owners. The ownership of Realtek TV will be represented by shares of stock of the company. One major reason for the selection of this form of business is the ease in raising required capital through the allocation of shares of the firm (Mueller 2013). The other major reasons for selecting this form of business are limited liability of the owners, ease in raise capital, ease in transferring ownership, continuous lifetime of the firms and certain tax-deductible expenses (Allen 2017).

Realtek TV's Business Plan

Figure 2: Profit and Loss Statement

The profit and loss statement are shown in the above table for a period of five years and the main source of revenue for the business is from the sale of the product. The sale is shown to be on the rise as it is assumed that the sale will increase by 5.5% year by year. The gross profit of the business is also shown to be on the rise as the overall operational cost is slightly low. The net profit of the business is also shown to be on the rise and the year 5 estimate is shown to be MYR 10,693,996. The net profit is also shown to be high and is also on the rise which suggest that the business is estimated to be profitable in nature.

Figure 3: Cash Flow Statement

The above table shows the cash flow statement of the business and the same is prepared in order to ensure that the business has positive liquidity in order to meet the current obligations of the business.  The main cash inflow is from the sales of goods and receipt of payment from customers. The financing activities of the cash flow shows the method which will be used by the business to acquire funds and the same is done by issue of bonds and shares and by taking a loan from bank.

The management of the business to initiate a project for developing and selling Real Tech Tv which is anticipated to have an estimated life of 5 years. In order to effectively analyze the true worth of the project, the following assumptions are considered by the management of the business:

Figure 2: Image Showing Assumptions which are considered for Analysis

The above table shows that the capital structure of the business is made on assumption basis and the same is shown to be made up of 65% equity capital and 35% debt capital. This is done to take advantage of the leverage effect of debt capital as well as reduces the overall risks of the business. In order to estimate the cost of equity, the value of Beta, risk free rate of return and market rate of return are based on the estimates which are available for television companies operating in Malaysia. The cost of equity is computed and shown to be 11.50 and the same is computed considering Beta, risk free rate of return and market rate of return of other television companies operating in Malaysia. The level of inflation and the amount of depreciation which is to be charged by the business is also considered on assumption basis considering the economy of Malaysia.

SWOT Analysis

The total capital requirement of the new business will be MYR 4,81,42,875. Both equity shares and non-current debts will be used for raise the required capital. More specifically, 65 per cent capital will be raised through equity shares and rest 35 per cent will be raised through non-current debts; they are MYR 3,12,92,869 from equity and MYR 1,68,50,006 from non-current liabilities (Lee, Sameen and Cowling 2015). The company will issue equity shares in Malaysian equity market for raining the capital. Under the non-current debts, the company will issue both 5 Year Bond and 5 Years Loan for raining the rest of the capital. More specifically, the company will issue 45 per cent of bonds and 55 percent of loans from bank. Thus, the company will raise MYR 75,82,503 from issuing bonds and MYR 92,67,503 from taking loan from bank on the basis of 5 years (Lee, Sameen and Cowling 2015).

The above table indicates the overall risk analysis of the project, which is calculated by utilising the beta conditions of public company in the same industry. This has mainly helped in detecting the level of cost of equity, which will calculate the CAPM value of the newly proposed project. The overall beta of Panasonic Manufacturing Malaysia Berhad is mainly used for calculating the overall cost of equity under the CAPM measure. In addition, the overall risk-free rate of 4.16% is used, which is the current market rate of 10-year government bonds issued in Malaysia. Furthermore, the market risk premium is mainly calculated from the market index. Therefore, the formula of CAPM will eventually help in detecting the level of minimum returns that needs to be provided by the company to their shareholders. The risk attributes of the project are higher, as beta of the stock is high, which is mainly at the levels of 1.06. Frank and Shen (2016) mentioned that CAPM calculation directly indicates the level of risk and return attributes of a stock.

The calculations conducted in the above table directly indicates the level of Weighted Average Cost of Capital of the proposed project. This calculation would eventually help in detecting the level of weighted average cost of capital of the new business, which monitors the minimum required level of income that needs to be generated from the proposed project. The WACC calculation directly indicates that minimum of 9.17% returns needs to be provided by the new business for adequately generating the required level of income from investment. Hence, from the evaluation it is detected that the cost of capital is mainly used for discounting the cash inflows of the project. Thus, the discounting rate would help in detecting the current values of future cash inflows and determine viability of the proposed project. Li and Trutnevyte (2017) mentioned that cost of capital indicates the minimum level of required return that needs to be generated from a particular project

Financial Statements

The calculation conducted in the above table directly helps in detecting the overall financial viability of the project. Moreover, the calculation directly indicates that the overall net present value of the business is mainly at the levels of MYR 20,543,131, which is relevantly positive. This positive value of the NPV indicates an optimistic approach of the proposed business, which can increase value of the firm in long run. Moreover, the Internal rate of return is mainly calculated at the levels of 10.15%, which is higher than the cost of capital. The higher value of IRR indicates that the project will generate higher return from investment and increase profitability condition of the proposed business (Shortall et al. 2016).

Moreover, the payback period is calculated at the level of 4.42 years, while the profitability index is at in 1.43. Both the values directly represent the optimistic condition of the proposed business, which can eventually help in generating high income over the period of time. The payback period is within the 5-year tenure of the business, which indicates that the initial investment will be accumulated before the anticipated completion of the proposed project. Moreover, the profitability index is mainly at 1.43, which is higher than 1 and depicts a positive attribute for the proposed project.

Conclusion:

The overall valuation of the assessment directly indicates that the proposed business of High Definition Television with crystal clear image is relevant viable and can be conducted in Malaysia. The investment appraisal techniques used in the evaluation process of the proposed business indicates a positive flag, which depicts that the business will provide higher returns in the long run. Hence, opening the manufacturing company of High Definition Television with crystal clear image would be beneficial for the organisation.

Reference

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