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Gap Analysis: Lester Electronics

3603 words - 14 pages

The purpose of a business is to maximize profits for the investors. A business should make long-term investments today to determine the value of the business tomorrow. Any long-term investments made to acquire assets such as property, plant, and equipment, will require knowing the cost of obtaining funds to secure the assets. To pay for the cost of capital, a business can use debt, retained earnings, common stock, preferred stock, or a mixture of sources of funds. Additionally, a business can increase the market value of its business by earning more than the cost of capital.Lester Electronics, Inc. (LEI) is a $500 million dollar in annual sales U.S. Company and master distributor of consumer and industrial electronics going to U.S. and European suppliers. The company is merging with one of its key manufacturers, Shang-wa Electronics (SE), a Korean manufacturer of capacitors. As a requirement for this merger, LEI should develop a capital structure to fulfill its obligations to increase shareholder and firm value. LEI must find an optimal capital structure of debt and equity sources that will minimize the cost of capital and maximize shareholder value. How LEI chooses to finance its growth will affect the capital structure.This paper will provide a gap analysis and identify the issues and opportunities, stakeholder perspectives, and end-state goals involved in assessing the financial needs of the merger needed for wealth maximization. Additionally, the paper will identify medium-term financing alternatives, and analyze the long-term financing instruments in the LEI/SE merger.Situation AnalysisIssue and Opportunity IdentificationThe primary goal of LEI is to create value for its shareholders. The CFO’s most important role is to create value from the company's capital budgeting. Bernard Lester, CEO of LEI has an exclusive supply agreement with John Lin, Shang-wa’s CEO. The exclusive supply agreement contract with Bernard Lester allows LEI “the exclusive right to sell Shang-wa capacitors in the United States for 65 years, as long as Lester maintained a minimum annual purchase of $1 million wholesale” (Scenario 2008). Additionally, Shang-wa is Lester’s primary supplier of capacitors for the U.S. market, which results in LEI generating up to 45% of its sales from this agreement. LEI has decided to merge with Shang-wa and has approval from its Board members who agreed this move is in the best interest of its shareholders, and a strategic move to avoid a possible takeover Shang-wa by one of its competitors, Transnational Electronics Corporation (TEC). One of the driving reasons for this merger is a defensive move as Shang-wa products make up 45% of LEI’s sales. Additionally, Avral Electronics has expressed interest in acquiring LEI. LEI must act fast to complete the merger and acquire Shang-wa or risk losing Shang-wa to TEC and the possibility of declining market share and revenues. John Linn is planning to retire eventually...

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