Wealth Maximization Concepts Worksheet

Wealth Maximization Concepts Worksheet

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

Net Working Capital

The e-mail to John Lin from Bernard Lester disclosed Lester Electronics losing Shang-Wa as a manufacture; Lester electronics can possible lose 43 percent of its revenue within the next five years.

A win- all situations for Lester’s Electronics and Shang-Wa is to evaluate the difference between each firm’s current assets and their current liabilities.

Net working capital give firm the ability to pay its debts. When the firm has positive net working capital the firm is in a better position to pay its short term liabilities. Negative net working capital places the firm in a position whereas obligations to pay short term liabilities is limited and can cause major disruption to the firm such as bankruptcy (Forbes Media, 2008).

Capital Budgeting

Bernard Lester e-mail to CFO Anne Lorale reveals the joint venture capital budget received form John Li that includes the term sheet for Tec/Shang-Wa and Avral/Lester proposed acquit ions.

The win-win solution would be for Anne to evaluate and select the best opposition for the long-term investment that align Lester Electronics goal for maximizing owner’s wealth.

Capital Budgeting help firms decided whether or not to pursuit another firm as a good long-term investment. One way to analysis another firm’s budget is to use view their net present value, internal rate of return, discounted cash flow, and all payback periods (Forbes, 2008).

Partnership

In 1978, Lester Electronics, Inc. and Shang-wa Electronics enter a contract allowing Lester electronics exclusive rights to sell Shang-wa capacitors in United States for 65 years. The agreement stipulates Shang-wa cannot sell its manufactured capacitors to any other market in the US. The past 35 years each company has profit very well. Additionally, the agreement is to be renewed annually.

Currently, John Li want Bernard Lester to consider partnering a new venture to manufacture capacitors in the Asian market that can increase each company growth opportunities and revenue. This venture will give John the opportunity to retire and gain new management talent for his company.

The partnership will create a win-win solution for Shang-wa and Lester Electronics. The partnership will be viewed as limited for John Li. John Li can retire and enjoy the profits from the new venture. Bernard Lester oversees the operations and increase revenue.

“Partnership is defined as two or more persons merging together (Ross, 2005 Ch 1 p12).” There are two types of partnership: general and limited. General partnership is when all partners agree to equally share the work, cash, profits or losses. Limited partnerships limit the amount of contribution that is required. However, one partner should be the general partner, while other partner(s) does not involve him or herself with managing the business (Ross, 2005 Ch 1 p 12).

Evaluate the Metrics of Maximized Wealth

Throughout the scenario, many proposals have emerged between four companies: Lester Electronics, Shang-wa, Transnational Electronic Corporation, and Avral Electronics, S.A.

For instance, Transnational (TEC) wants to acquire Shang-wa. Losing Shang-wa will decrease Lester’s Electronics revenues. Avral has approach Lester Electronics with buyout options.

Avral and TEC are in good financial standing to takeover both companies. Avral revenue is estimated around $900 million dollars. Whereas TEC has maneuver enough resources from recent mergers and acquisition to maximize its wealth.

In order to maximize wealth from the interested companies and produce win-win solutions, Avral and TEC should evaluate each firm’s financial activities. One way to observe the financial activities are to analyze each company balance sheet and income statements.