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Lester Electronics Financing Alternative Benchmarking Mba 540 Week 5

5727 words - 23 pages

Financing Alternative Benchmarking PAGE \* MERGEFORMAT 1
Financing Alternative BenchmarkingCathy BillingsleaLisa Chomko-MurphyJenna Moye'Nitin SoniDesirae WislerUniversity of PhoenixFinancing Alternative BenchmarkingMerging Lester Electronics, Inc. (LEI) and Shang-wa Electronics requires financing options. Needs, such as investment financing, medium-term and long-term investment options, must be planned in accordance with the operations and needs of the stakeholders in both operations now. "These guidelines should include (1) an identification of the firm's financial goals, (2) an analysis of the differences between these goals and the current financial status of the firm, and (3) a statement of the actions needed for the firm to achieve its financial goals" (Ross, et al., 2005, p. 44). As LEI and Shang-wa management review each organization's current strategies, debt, cash flow, and stock options, a combined strategy must be created. Financing considerations should include the weighted average cost of capital, the financial mix which can optimize capital, investment risks, and dividend policies.Weighted Average Cost of Capital (Cathy Billingslea)The weighted-average cost of capital (WACC) is a formula that helps a company determine the amount spent on interest for all financial endeavors such as stockholder's equity and bonds. Each financing activity whether from debt or equity has a cost. The WACC formula helps a company, as well as creditors and investors, see how much each finance activity costs the company.When companies are trying to determine or calculate the weighted average cost of capital for the use in capital budgeting, the notion is that the firm has set a specific target capital structure. However, this optimal capital structure may change over time which can affect the risk and cost of each type of capital and the weighted average cost of capital. A change in this cost of capital can affect the capital budgeting decisions and the organization's stock price (Hoffman, 2005). Determining the exact amount in order to maximize the optimal capital structure is not an exact science, but most firms should determine the amount of debt and equity to finance their operations.Companies want to see a low WACC. Generally, a company can withstand a debt to equity mix up to about 50% without having any concern. In fact, a company may even lower their WACC by utilizing more debt; however, there comes a time when the debt will increase all costs causing the WACC to rise (Block & Hurt, 2004). This increase in WACC should be avoided because it will affect costs and investor perception negatively. A key point is that different industries will have different WACC and 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 & Hurt, 2004).Chrysler...

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