Problem Solution: Lester Electronics

Problem Solution: Lester Electronics

Corporate growth usually occurs internally when a firm expands its existing departments through normal capital budgeting activities. However, the most dramatic examples of growth sometimes results from mergers. Many reasons have been offered by financial managers to account for frequent merger activity. The primary motivation behind a merger is that it provides an opportunity to bring together and increase the value of the combined enterprise. Mergers also serve to increase market share, gain competitive advantage, and improve shareholder value.

Lester Electronics, Inc. has finally reached its decision: to merge with its long time supplier Shang-wa Electronics. What remains is to prepare a plan for that merger that addresses firm value and financing sources. Shareholders will want to know how this merger will impact them in the short term and how the combined company will look financially in the longer term. Company leadership will want thoughts on the combined capital structure post merger. The CFO will need to determine if the funds exist and how necessary funds can be raised. LEI will want to know how much it can afford and what the capital structure will look like. This paper will attempt to address these questions by reviewing the concepts of the weighted average cost of capital, operating leverage, financial mix, ratio analysis, dividend policy, and financial risks.

Situation Analysis

Issue and Opportunity Identification

Poor management is a prime cause of business failure, but another important consideration is lack of capital. If LEI does not have enough capital, it might find things very difficult. As well as having sufficient capital, the CFO will need to plan how that financing is going to be used and managed. The CFO will not want to make errors by obtaining the wrong type of financing or by overestimating or underestimating the amount of financing that will be needed. Ways of raising financing are self funding from existing cash flows, debt funding borrowed from others, and equity funding raised by