Scenario Financing Solution: Lester Electronics Inc.
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Scenario Financing Solution: Lester Electronics Inc.
Publicly traded corporations are continually faced with important decisions which will affect the financial health of the firm and because these firms depend on financial investments from shareholders; all decisions should revolve around maximizing the shareholders wealth. The wealth of shareholders can be maximized through many financial tools which include: the analysis of financial statements, capital structures, accounting, and financial stability. Financial statements, capital structures, and company accounting can also be used to gain insight on a company’s future performance. These tools aid in maximizing the shareholders wealth because they provide investors with an oversight of the firm’s progress which can aid in investment decisions. These tools also provide financial managers with the metrics needed in order to track and measure goal progression.
Financial Managers oversee the preparation of financial reports and investment activities. They are responsible for choosing the capital structure that maximizing the firm’s value. “Financial Managers hold an important and elevated role in corporate governance” (Tanzanian Royalty, 2006). Managers must ensure that the firm’s stockholders and interests are protected, balanced, and preserved.
Organizations are structured according to their decision to rely on debt. However, the immediate concern is the maximization of shareholder wealth. Ross, Westerfield, & Jaffe, 2005 stated; If the goal of the management of the firm is to make the firm as valuable as possible, then the firm should pick the debt-equity ratio that makes the firms total value as big as possible. By increasing the value of the firm, shareholders wealth is also maximized in the process. Organizations focus on maximizing shareholders wealth in the decisions relating to the financial structure of the company because it has been reported that, “Changes in capital structure benefit the stockholders if and only if the value of the firm increases. Conversely, these changes hurt the stockholders if and only if the value of the firm decreases. This result holds true for capital-structure changes of many different types. Therefore, managers choose the capital structure that they believe will have the highest firm value, because this capital structure will be most beneficial to the firm’s stockholders” (Ross, Westerfield, Jaffe, 2005). On the other hand, Companies may find themselves facing financial stress if debt obligations such as interest and principle payments are not met, therefore; limiting the aid provided by debt in financial structure. Failure to oblige with the payment of these debts could force a company to file for bankruptcy. Bankruptcy is not desirable for corporations because “Bankruptcy hampers conduct with customers and suppliers. Sales are frequently lost because of both fear of impaired service and loss of trust” (Ross, Westerfield, & Jaffe 2005).
Providing up-to-date information to investors and external authorities will aid companies in minimizing lawsuits, fees and penalties associated with altering reports to make the company more appealing. Hiring experienced and reliable financial managers will also help companies to comply with regulatory forces such as Sarbanes-Oxley which can increase the trust of investors. Investors are looking for companies who can maximize their wealth in the most ethical and effective way and a company who focuses on shareholder maximization and who complies with regulatory forces will continue to gain new investors and please the current ones.
In this paper, Lester Electronic Inc. will use the 9 step problem-solving method in order to identify the situation, discuss stakeholder perspectives and ethical dilemmas as well as evaluate the alternatives to determine the optimal solution to the problem facing their current success. Afterwards, the chosen alternative will then undergo risk assessment and mitigation in order to find the most effective solution, an implementation plan will be set-up and the results will then be evaluated.
Describe the Situation
Issue and Opportunity Identification
Lester Electronics (LEI) is a publicly traded company that earns annual revenue of approximately $500 million. The need for expansion and growth opportunities in the electronics industry has resulted in an increase of hostile takeovers and the merger of small and large companies. Declines in the stock market have also contributed to the heighten threat of mergers and acquisitions (M&A) within the electronics industry. In response to hostile takeover attempts LEI has decided