Case - SoCal Semiconductor, Inc. - B

Introduction

SoCal Semiconductor (SCS) was founded in Irvine, California, in 1985 by a team of engineers led by Joe Reed.  Reed took early retirement that year from his position as an engineering professor at a major Southern California university.  During his years at the university, Reed was actively involved in semiconductor research, and he was a consultant to several firms in the industry.

SCS started with a $500,000 investment from its founders and a $4.5 million design contract from a leading cellular telephone company.  SCS soon parlayed its scientific skills and Reed's familiarity with the industry into a thriving business, and in 1989 the company built a state-of-the-art manufacturing plant at a cost of $100 million.  The necessary capital was obtained from venture capitalists and commercial banks.  SCS has since produced and marketed a broad range of computer chips for commercial use in the semiconductor market, primarily to makers of cellular telephones and laptop computers.  Continued innovation in its memory and logic products, along with a rapid expansion of the markets for these products, has resulted in high profitability and very rapid growth.  By 1990, SCS's growing capital needs could no longer be met by internal funds, venture capital and its ability to borrow, so the company went public.  Currently, SCS shares trade in the over-the-counter market, and they have been selling at about $22 per share.

The Assignment - Mary Porter's assignment includes the following:

1. Critique SCS's current procedures for estimating the costs of debt and equity,

2. Use the data, along with methods she learned in her MBA program, to estimate the cost of each of SCS's sources of funds (long-term debt, internally generated equity and externally generated equity), and the firm's weighted average cost of capital (WACC),

3. Examine the impact of changing the capital structure on the WACC.  (She decides to use only the cost of debt and cost of internally generated equity to estimate the capital structure with varying amounts of debt.)

Porter's report will be presented to Kennedy. If he likes the report - that is if he thinks it is logical, technically correct, and well-presented - he will send copies to President Reed and other members of the SCS executive committee. Mary knows that this would give her career a big boost.

Attachment:- Assignment Files.rar