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Lester Electronics Financing Problem
"Corporations are very adept at creating hybrid securities that look like equity but are called debt. Obviously, the distinction between debt and equity is important for tax purposes. When corporations try to create a debt security that is really equity, they are trying to obtain the tax benefits of debt while eliminating its bankruptcy costs" (Ross, Westerfield & Laffe, 2004). Since CEO and board of Lester Electronics have decided to acquire Shang-Wa of South Korea, there are many challenges and opportunities facing Lester Electronics. It is critical for Lester Electronics to identify and overcome all challenges and capitalize on all opportunities related to the Shang-Wa acquisition to ensure future success of the combine company.
The next step for Lester Electronics is to identify and select the best financing solution for the acquisition. Lester Electronics' executives should choose the capital structure that will yield the highest firm value and most beneficial to firm's shareholders. In the capital market, the cost of debt financing is much lower than cost of equity. However, should Lester Electronics finance the acquisition solely with debt to reduce cost or should the company consider a combination of debt and equity finance? It is not an easy decision to determine the best debt and equity financing mix, optimal debt and equity ratio, and most appropriate balance between risk, leverage and control. Capital structure decisions affect firm's earning per share (EPS), financial risks and long-term financial health of acquiring firm. The proper use of debt financing can increase Lester Electronics' leverage ...