Wealth Maximization Concepts Worksheet

Wealth Maximization Concepts Worksheet

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

Evaluate the metrics of wealth maximization

Lester Electronics, Inc. key manufacturer, Shang-wa has received a hostile takeover bid from TEC, if the CEO John Lin accept this offer LEI stands to lose upwards of 45% of the company’s expected revenues over 5 years. LEI’s CEO Bernard Lester had asked to his CFO Anne Lorale to run some numbers so see what the best course is. These numbers include the metrics of wealth maximization such as balance sheet, the income statement, net working capital, financial cash flow and the accounting statement methods. “The balance sheet is an accountant's snapshot of the firm's accounting value on a particular date, as though the firm stood momentarily still”.

“The accounting definition of income is revenue – expenses = income.” “Net working capital is current assets minus current liabilities.” The most important item that can be extracted from financial statements is the actual cash flow of the firm. (Ross, Westerfield, & Jaffe, 2005, pp. 1-29)

Net Present Value

In each company has to evaluate one period or multi-period case in order to evaluate the company’s performance. TEC and Avral Electronics made a good financial research of LEI and Shang-wa and are planning to buy these companies. “This relationship is called the time-value-of-money concept. It is important in such areas as capital budgeting, lease versus buy decisions, accounts receivable analysis, financing arrangements, mergers, and pension funding.”(Ross, Westerfiled, & Jaffe, pp.1-5, 2005)

Growth opportunities

In the scenario we can see different companies and the growth opportunities that these companies are facing. It is important for each CEO and his leadership team to analyze this opportunities and chose the best decision to increase the company future revenues. “Many firms have growth opportunities, that is, opportunities to invest in profitable projects.”(Ross, Westerfiled, & Jaffe, pp,48-49, 2005)

Managing operating exposure

As the economy becomes increasingly globalized, many firms such as LEI, TEC, Shang-wa and Avral Electronics are engaged in international activities such as exports, cross-border sourcing, and joint ventures