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Lester Electronics Incorporated (LEI), after arduous study, has resolved to acquire Shang-Wa Electronics. Through this acquisition, LEI will develop a new strategy to maximize shareholder wealth. The company will discuss the valuation of the company and how to finance the purchase.
Capital Budgeting:
The decision to purchase Shang-Wa Electronics started with the benchmarking of decisions that other corporations in a similar situation have made. Once the projects have been trimmed down to a reasonable list, we will use financial concepts of internal rate of return (IRR) and net present value (NPV) to make the dollar values comparable. Based on this analysis the purchase of Shang-Wa provided an IRR of 11.92% and NPV of $31,882.48 million. (Exhibit 1) The positive values indicated the favorability of the purchase.
Valuation:
The first step in the acquisition process is a sound valuation of the firm of interest. There are many methods for valuation, but we will limit our analysis to the most commonly used and easily understood. The three methods used will derive a valuation and form a cross-check for the value of Shang-Wa Electronics. Solid valuation will require an in-depth research to support any assumptions.
Method 1
The Discounted Cash Flow Method (DFC) approach describes a method to value a project or an entire company using the concepts of the time value of money. The DCF method determines the present value of future cash flows by discounting them using the appropriate required rate of return (RRR). (Ross-Westerfield-Jaffe, 2004) This is necessary because cash flows in different time periods cannot be directly compared si ...