Running Head: Risk Analysis on Investment Decision
Risk Analysis on Investment Decision
University of Phoenix
MBA 540 – Maximizing Shareholder Wealth
Risk Analysis on Investment Decision
Silicon Arts Inc. (SAI), worth $180 million, is a four-year-old company operating in North America, Europe and South East Asia (UOP, 2005). SAI manufactures digital imaging Integrated Circuits (ICs) used in DVD players, computers, digital cameras, and scientific and medical instrumentation. Recently an investment decision has been made by SAI’s Financial Analyst. SAI wants to increase market share and keep up with technology, which can be done by either expanding their existing Digital Imaging market share or by entering the wireless market. The decision has been made that entering the wireless market will be more beneficial than the Digital Imaging market. However, a number of risks, internal and external are inherent in joining this industry. The purpose of this paper is to apply valuation techniques to both the internal and external investment strategies and analyze the risks associated with these investment decisions. After analyzing the risk, possible mitigation techniques to deter these risks will be discussed.
Apply Valuation Techniques to External Investment Strategies
“Valuation methods are not only necessary for accounting purposes but they also serve as roadmaps for the angel investors, venture capitalists and corporate acquirers in order to know the true value of a company’s assets” (Secondventure, 2008, ¶ 1). An effective external investment strategy for increasing revenue is the merger with or acquisition of another company within the industry. According to Ross, Westerfield, and Jaffe (2005), four sources of synergy exist in an acquisition: revenue enhancement, tax gains, cost reduction, and the lower cost of capital. With revenue enhancement, a combined firm could possibly generate greater revenues than two individual, separate firms. “Increased...