Lester Electronics Financing Alternative Benchmark Essay

6139 words - 25 pages

Lester Electronics, Inc PAGE 1
Lester Electronics Financing Alternative BenchmarkLester ElectronicsFinancing Alternative BenchmarkMBA 540 - Maximizing Shareholder WealthLester Electronics Financing Alternative BenchmarkIntroductionIt has become a popular trend in corporate America to start, merge and/or acquire companies. This trend has become so popular due to the different models of business formations to choose from and the many choices companies or individuals have to finance the activities of the company. Businesses can choose to finance activities of the company by issuing debt and equity. This determines the capital structure of the company, which is very important once the business begins to run. Cash flow is also another important aspect of the business because it aids business managers in making decisions for the company. These are some of the important concepts related to the Lester Electronics scenario. Lester Electronics would like to acquire a Shang-Wa Electronics (Shang-Wa) because it would be beneficial to the company and the business they are currently doing with Shang-Wa brings in a good amount of revenue but Lester Electronics must evaluate its current situation and decide what is best for its company. As in most situations, there are issues and opportunities that Lester Electronics will have to review in order to determine if the acquisition would be a good choice for the company. The shareholder's interest and the company's goals are also priority when making major decisions that may affect the company financially. A goal of every company is to maximize shareholder's wealth as well as the company's revenues.Determine the Weighted Average Cost of CapitalThe weighted-average cost of capital (WACC) is a formula that helps a company to find out how much the company is spending on interest on all its financing activities such as stockholder's equity both common and preferred, as well as bonds. Each financing activity whether from debt or equity has a cost. The WACC formula helps a company as well as creditors and investors to see how much the finance activities are costing the company. A company wants to see a low WACC; generally, a company can withstand a debt to equity mix up to about 50% without having a real problem. In fact, a company may even lower their WACC by employing more debt. However, there comes a point when the debt will raise all costs causing the WACC will begin to rise called a 'U' affect (Block & Hirt, 2004). This increase in WACC is what a company wants to avoid as it will affect not only costs increasing but also the investors will become quite upset. One thing to keep in mind however is that different industries will have different WACC that is considered normal within that industry. This depends upon the level of debt acceptable for that industry. For example, airline companies have very high rates of debt even above 80% whereas software companies are generally around 30% (Block & Hirt, 2004)....

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