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Wealth Maximization Concepts Worksheet
Concept Application of Concept in the Scenario Reference to Concept in Reading
Identify relevant cash flows including initial investment that are incremental to the firm.
Lester Electronics, Inc. has finally reached its decision: to merge with its long time supplier Shang-Wa Electronics. Through recent mergers and acquisitions, the company has developed enough resources to expand globally. Many reasons have been offered by financial managers to account for frequent merger activity. Merger provides an opportunity to bring together and increased the value of the combined enterprise. Mergers serve to increase market share, gain competitive advantage and improve shareholder value. Corporate growth usually occurs internally when a firm expands its existing departments through normal capital budgeting activities. All stakeholders have the right to expect benefits from this merger (Lester Electronics Scenario, UOP). “Capital budgeting must be placed on an incremental basis that sunk costs must be ignored, while both opportunity costs and side effects must be considered.” (Ross, 2004, Ch 7).
Use Net Present Value (NPV) method, Internal Rate of Return (IRR) method for capital budgeting decisions.
Anne Lorale, CFO, Lester Electronics must use financial planning models to determine the best course of action for this merger. CFO must decide on financial policies:, Net Present Value, the payback rule, the accounting-rate-of-return rule, the internal rate of return (IRR), and the new entity’s profitability for its acquisition of Shang-Wa Electronics. She must determine fo ...