Financing Alternative Benchmarking
Lester Electronics, Inc. (LEI) has decided to merge with Shang-Wa Electronics. Some of the reasons include gaining market share and keeping the exclusive supply agreement that LEI has had with Shang-Wa for almost 30 years. Now LEI must decide how they will finance the merger. An analysis by Team A of 10 other companies; Starbucks, IBM, Nortel, Kodak, H.J. Heinz, PepsiCo., Oracle, Google, Motorola and Wal-mart will allow LEI to determine the different financials options that are available and what will specifically work best for them in the situation.
Determine the weighted average cost of capital
According to University of Phoenix Scenario (2007), Lester Electronic was offered a chance to expand and secure the company�s continuity by acquiring another company, Shang-Wa Electronics, and creating a merge with this company and opening a joint facility in Asia. This move requires a financial planning and a modification in the company�s capital structure in order to provide the necessary fund required for this expansion. Thus, the weighted average cost of capital (WACC) can help Lester Company to decide which source of capital to choose, stocks, bonds, debts since each is weighted in the calculation according to its prominence in the company�s capital structure. Based on these calculations, Lester Company chose to use long-term debts to finance it project.
According to Investor words (2007), the weighted average cost of capital (WACC) is used in finance to measure a firm's cost of capital. Its formula is:
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V = E + D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
Tc = corporate tax rate
This has been used by many firms in the past as a discount rate for financed projects, as the cost of financing (capital) is regarded by some as a logical discount...