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Lester Electronics Financing Alternative Benchmarking

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Concept Application of Concept in the Scenario Reference to Concept in Reading

Metrics of wealth maximization

The metrics of wealth maximization are: the balance sheet, the income statement, net working capital, financial cash flow, and the accounting statement of cash flows, (Ross, Westerfield, & Jaffe, 2005). These measures are important not only to organizational stakeholders at Lester Electronics and Shang-wa, but also to industry competitors who are currently looking at a possible merger with these two organizations.

Additionally, LEI and Shang-wa have been in business together for over 35 years and are toying with the idea of a joint venture that could strengthen both companies within the industry and remove them from a potential acquisition. A review of wealth maximization metrics would help determine the merits of such an agreement.

Financial statements help to evaluate how well a firm is doing. This is especially important when it comes to matters of mergers and acquisitions. The five key areas of financial performance that can be determine from the metrics of wealth maximization are: financial leverage (the extent to which a firm relies on debt financing), short-term solvency (the ability of the firm to meet its immediate obligations), profitability (the extent to which a firm is profitable), activity (the ability of the firm to control its investment in assets), and value (the value of the firm), (Ross, et al., 2005).

Operating exposure

A joint venture with Shang-wa will open up new opportunities for LEI. However, LEI has never marketed domestically made products outside of the United States before (University of Phoenix, 2007). In analyzing which decision to make, Lester must consider the operating exposure that is imminent if a merger with Shang-wa were to take place.

While managing operating exposure, LEI and Shang-wa should realize the impact of financial, economic, and global environments on the future of both organizations.

"Formally, operating exposure can be defined as the extent to which the firm's operating cash flows would be affected by random changes in exchange rates," (Eun & Resnick, 2004, p. 289).

Bond concepts

If Lester and Shang-wa agree that their best option is to form a joint partnership, then the new company may need additional financing. One way to obtain needed cash flows is to sell bonds. The company can issue pure discount bonds to investors. These bonds will give the company the financing needed to fund the new venture and no cash-out will be required until the bonds reach maturity. This option will give the new company time to build cash flow before repayment of the debt is required.

"A bond is a certificate showing that a borrower owes a specified sum," (Ross, et al., 2005, p. 106). In order to make good on this debt, LEI/Shanga-wa would agree to make a principle payment with interested on some designated date.

The issuer of a bond is obligated to repay its holder principal and interest at some future date. "Pure discount bonds are often called zero-coupon bonds to emphasize the fact that the holder receives no cash payment until maturity," (Ross, et al., 2005, p. 107).

The corporate firm

John Lin of Shang-wa prefers a merger with LEI as opposed to being absorbed through a merger with one its competitors. Unfortunately, on the imminent eve of his departure, Lin has failed to groom a ready successor

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