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Capital strucuture decision at Lester Electronics

Lester Electronics Gap Analysis
Using the Gap Analysis Template, prepare a 1,400-1,750-word paper in which you complete table 1, table 2, table 3, and perform a gap analysis for Lester Electronics. Be sure to incorporate appropriate citations from your readings.
NOTE: The word count does not include the tables.
Review the rubric for further assignment expectations.

Additional info from instructor:
To get you started in the right direction on this week's assignment, I wanted to post the following information for your help.

A brief outline/example of what needs to be covered follows.

The situation is that Lester has decided to pursue the merger. Do not write you paper stating that Lester is trying to decide what to do in that area. That decision has been made. You now need to decide on the financing for the merger. The choices could be any or a combination of the following:

(1) Long term debt bank financing
(2) Corporate debentures
(3) Secondary offering of common stock
(4) Offering of Preferred stock
(5) Convertible debt offering
(6) Debt offering with warrants
(7) Equity offering of convertible preferred shares
(8) Use of cash in the Retained Earnings account

An issue could be that if Lester uses all retained earnings for the merger, that would leave them with very or n excess funds in reserves. An opportunity could be that Lester could use alternative financing sources for the merger. Relating to readings: In an effort to not deplete all of capital in reserve or retained earnings, companies often use secondary offering of common stock "when no new capital is raised and all the shares on offer are being sold as a secondary offering by existing shareholders" (Brealey, p. 388.)

Stakeholder Perspectives and Ethical Dilemmas

X verses Y: Lester Electronics vs. Firms new board.
Interests, rights and values: Non-agreement on new boards direction or strategies, New board may outvote and dismiss Bernard Lester.
What is the ethical dilemma: Bernard Lester may not be in full control with a new board of directors for the new company. Bernard may inadvertently go through a hostel takeover.

A good problem statement would be: Lester can maximize shareholder wealth by selecting an appropriate finance alternative.

Example of End State Goals: Put yourself into the future and imagine what Lester Electronics will have become if the problem is solved/the opportunity is realized. Describe this end state, that is, the different things you would see happening considering the concepts and ideas from the course. Next, think about the specific metrics that will let you know that you have achieved this desired end state. These are your end-state goals. Example:
If an End State is:Provide the maximum wealth for shareholders by choosing a finance option that will yield a high return on investment.
Your End-State Goal is à Minimize your weighted average cost of capital
Your Measure is à The percentage of both debt and equity to yield a large return
Your Target is à 100% shareholder confidence in the Avral, Lester acquisition of Shangwa.
Your End-State Goal is à Appropriate debt-equity mix
Your Measure is à amount of risk and debt to yield a return on investment
Your Target is à 100% shareholder confidence in the Avral, Lester acquisition of Shangwa.
Identify several end states and then list the associated end state goals.

Additional info:
The attached zip file contains all the required info, including the books and template. Also, there are other solutions for this problem here on BrainMass.


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Gap Analysis: Lester Electronics
Your Name Goes Here
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 curve, with a minimum WACC between the extremes of debt utilization.
Apart from the risk associated with a firm's fundamental operations known as operating risk, risk can be introduced by the use of financial instruments with fixed payments, more commonly known as debt. Thus the advantage of taking debt is its lower cost, no share in profits. The limitation is that it increases financial risk. Hence the capital funding of a company is made up of two components: debt and equity. Lenders and equity holders each expect a certain return on the funds or capital they have provided. The cost of capital is the expected return to equity owners (or shareholders) and to debt holders, so WACC tells us the return that both stakeholders - equity owners and lenders - can expect. WACC, in other words, represents the investors' opportunity cost of taking on the risk of putting money into a company.
Equity Financing
Equity means sharing in the ownership. Equity can be raised either by private placement or by public. It has got strong track record; thus it can use this route to raise money. It has following features:
Claim on Income ...

Solution Summary

This discusses the capital structure decisions at Lester electronics