• Submitted By: lafwaf
  • Date Submitted: 07/26/2008 10:23 PM
  • Category: Business
  • Words: 1671
  • Page: 7
  • Views: 964


Gap Analysis: Lester Electronics
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University of Phoenix

Gap Analysis: Lester Electronics

This paper gave us great insights about the financing of the merger. Lester is going to takeover Shang-wa Electronics and they have to find the right sources of funds to finance the merger. The issues and opportunities have been identified. Financing by debt can magnify returns due to trading on equity. Similarly using equity can reduce the risk
One has to also take care of all the stakeholders and make a fine balance in order to achieve the vision of the organization. Here the concerned stakeholders are investors, new Board room members and current employees.

Situation Analysis
Issue and Opportunity Identification
Strong companies will act to buy other companies to create a more competitive, cost-efficient company. The companies will come together hoping to gain a greater market share or achieve greater efficiency. Because of these potential benefits, target companies will often agree to be purchased when they know they cannot survive alone. Here the issue is of financing the merger. A firm’s optimal capital structure is that mixture of debt and equity than minimizes its weighted average cost of capital (WACC). Since the after-tax cost of debt is lower than equity for many corporations, why not use debt only or mostly? It turns out that, while debt reduces a company’s tax liability because interest payments are deductible expenses, increasing amounts of debt raise both the cost of equity capital and the interest rate on debt because of the increasing probability of bankruptcy. In other words, higher amounts of debt raise the financial risk of a company, and this risk is reflected on the cost of all the types of capital the company uses. As such, the relationship between financial leverage and WACC is not a straight line, but more of a U-shaped...

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