Lester Electronics

Problem Solution: Lester Electronics

Eric Korte

University of Phoenix

Maximizing Shareholder Wealth 540/MBA

Pamela Scales, Instructor

August 6, 2007

Problem Solution: Lester Electronics

Lester Electronics, Inc., is a distribution company in the United States and has business relationships with Shang-wa Electronics, a Korean manufacturer. Shang-wa has a contract with Lester to sell capacitors in the United States if Lester maintained a minimum annual purchase of $1 million per year resulting is Shang-wa being Lester's primary supplier. In exchange, Shang-wa cannot sell its capacitors to anyone intending to market in America. Lester added additional components to its product line. Shang-wa's capacitors are well known in the U.S. market that is why Transnational Electronics Corporation, a large manufacturer and distributor of electronics components wants to acquire Shang-wa. On the other hand, Avral Electronics equipment and component parts manufacturer headquartered in Paris wants to acquire Lester, because they want to market their product in the U.S. market.

Financial Planning

Financial planning consists of forecasting, budgeting and controls. Forecasting consists of short term and long term forecasting to ensure that the organization is prepared for the next week and the next decade. Short term planning needs to take into account the organization industry's outlook, customer base and what spending patterns will occur in the future, and other influences on expenses and income. Long term forecasting is usually more difficult to anticipate and can end up sounding vague, but through constant adjusting the organization should be able to stay on top of the changes as they occur.

A budget: A budget is actually made up of 3 budgets. The capital budget should outline expected spending for assets (both fixed and capital) necessary to run the business. The cash flow budget should be based on your forecasted cash flow to anticipate income and spend it appropriately as it comes in. Operating budget should anticipate expenses and income. A cash flow budget and an operating budget differ in that a cash flow budget anticipates the ebb and flow of money during a period of time while an operating budget looks at the expenses due on a regular basis.

Financial controls: Controls are necessary to make sure that spending doesn't get out of hand and to minimize the potential for error and employee theft. Some basic controls include requiring 2 signatures on every check or limiting the number of people who have access to the cashbox or counting the money in the cash register multiple times per day.

Although the idea of financial planning for business sounds daunting, these three things on their own don't sound that bad, do they? One of the reasons these are avoided is because of the misconception that financial planning is all about number crunching. It's not. It's simply creative forecasting (which I know many entrepreneurs love to do) but just from a financial perspective.

In order for Bernard and John to make a solid choice they must both look at the data. This data will help them at arriving at best choice. The two organizations must look at the sales forecasting and what is economic outlook of their sectors. A good forecast should identify all valuable investment opportunities (Chesterfield, 2004). Each company should look at the appropriate financial information. This should include the balance sheet, and income statement. Also, future capital spending needs to be reviewed.

Growth

In order for these two companies to determine their growth potential they must always look at the conditions that will assist the company at growth which are as follows: the

assumption would be that the assets will grow in proportion to the sales, the next is that the net income is a constant proportion of their sales, the third is that the firm has a given dividend-payout policy and a given debt-equity ratio and the final assumption is that the firm will not change the outstanding shares of stock. There is actually only one rate that is always consistent with the other assumptions and that is a change in assets equals a change in debt plus a change in equity (Chesterfield, 2004).

Stakeholder Perspectives/Ethical Dilemmas

If Lester does not go through a union with Shang-wa they stand to lose 43% of their income over the next five years. That is if Transnational completes the hostile takeover that has been discussed. By not completing the union it could mean financial disaster.

This would incur direct expenses which would consist of legal and managerial costs tjat does not include the expense other legal fees. There is also the possible of lost clientele and business partners.

If Lester's and Shang-wa does not go through with arrangement the organizations could increase the liabilities of the companies, which in turn could cause issues for the stockholders. The above strategies would only occur if there is a probability of bankruptcy.

Leasing

A lease is an agreement between the lessee and lessors. The agreement establishes that the lessee has the right to use an asset and in return must make periodic payments to the lessor, the owner of the assets (Ross, 2004). For Lester's and Shang-wa's intense interest the use of the asset that is most important, not who owns the asset. By merging the two companies together there would not be an annual agreement signed and this would save the two companies money and time. If Lester's lose the annual agreement with Shang-wa because of a hostile turnover than again the stockholder will lose the income and the annual revenue will decrease by 43%. A sale and lease-back occurs when the company sells an asset it owns to another firm and immediately leases it back. A leverage lease is a three-sided arrangement among the lessee, the lessor, and the lenders (Mergers & Acquisitions, 2007).

Taxes, the IRS, the Leases

In this agreement the lessee can deduct lease payments for income tax purposes if the lease is qualified by the Internal Revenue Service. In this case the term of the lease must be less than 30 years. If the transaction will be thought of as a sale of the merchandise, the lease should not have a value of less than fair market value and not be bought for less than the market value. The lease should not have a schedule of