Lester Electronics Investment

Lester Electronics Investment

Lester Electronics scenario refers to many financial concepts including the evaluation of internal and external growth strategies, working capital management strategies to maximize shareholder wealth, challenges of cross-border growth strategies, assessments of organizational performance using financial statements and ratio analysis and portfolio management. These different concepts have been used in order to benchmark companies that may provide an investment alternative solution for the Lester Electronics that will ultimately optimize their portfolio for maximization of shareholder wealth.

In evaluating internal and external growth strategies, the concepts to consider include returns, holding period returns, return statistics, average stock returns and risk-free returns, and risk statistics. There are two components to returns, dividends and capital gains or losses. Dividends are profits distributed to shareholders. Capital gain occurs when stock increases in price. If the price drops there is a capital loss. Holding period returns are the total return from reinvesting the first year dividend in the stock market for an extra year and then reinvesting additional year dividends for the final year. The average return is the "best estimate of the return that an investor could have realized in a particular year over a period of time." The frequency distribution "plots the histogram of the yearly stock market return." (Ross, Westerfield, & Jaffe, 2004, pg. 244). By using the frequency distribution, the average returns can be calculated by adding up all the values and dividing by the total number. (Ross, Westerfield, & Jaffe, 2004, pg. 244). Average stock returns and risk-free returns are government issued bonds give risk-free returns as the "government can raise taxes to pay for the debt." (Ross, Westerfield, & Jaffe, 2004, pg. 246). The risk statistic measures the risk in returns "in terms of how spread out the frequency distribution is." (Ross, Westerfield, & Jaffe, 2004, pg. 247).

In analyzing the Lester Electronics, Inc. (LEI) scenario, the previously described concepts in relation to internal and external growth strategies were considered. These concepts were also considered in relation to other companies in a similar situation of merger and acquisition. These companies are Time Warner, AT&T, Domino's Pizza, Kenexa, Sirius, and XM Satellite Radio.

In relation to the concepts discussed above, LEI's cash flow statement shows that it paid dividends to shareholders in the three years reported. In 2002 LEI paid over $5 million, in 2003 it paid over $10 million, and in 2004 it paid out over $20 million in dividends to shareholders. During the same period of time Shang-wa's cash flow statement shows that it did not pay out dividends, but rather retained earnings. Likewise, Siruis does not pay dividends to its shareholders. Sirius currently has no profit and is at a loss of $1,104.87 million. Sirius does however provide information on stock investment scenarios. For example, if an individual had invested $1,000 in 1994, the current value of the stock would be $668.11 and capital loss of 33%. XM does not pay a dividend on its common stock, but does pay quarterly stock or cash dividends on its preferred stock. Time Warner has consistently paid out dividends. Prior to the merger with AOL, the average dividend amount was $0.045 and after the merger the dividend amount increased slightly to an average of $0.052. AT&T pays dividends to shareholders quarterly. Historically, AT&T paid dividends at $1.40 in the 1980's. Currently it is paying dividends at $0.355. Domino's has focused on debt reduction to improve operating performance and has been able to significantly increase cash flow. This cash flow has allowed them to help finance future securities and to payoff their current debt, using their own cash to buy back outstanding shares of stock, and pay dividends to shareholders. Kenexa does not pay cash dividends, has not done so since going public in 2005, and has no plans to do so in the foreseeable future. The company retains earnings to finance the operation and expansion of the business. In order to realize a return on their investment, shareholders need to sell their shares of stock. In retaining earnings, rather than paying out dividends, these companies are able to implement growth strategies.

Additional concepts were analyzed in describe working capital management strategies to

maximize shareholder wealth. These concepts include the operating cycle and cash cycle, tracing

cash and net working capital, defining cash in terms of other elements, as well as some aspects of

short-term financial policy. "The operating cycle is the time period from the arrival of stock until

the receipt of cash. The cash cycle begins when cash is paid for materials and ends when cash is

collected from receivables." (Ross, Westerfield, & Jaffe, 2004, pg 734). In tracing cash it is

necessary to "look at where cash comes from and how it is used." (Ross, Westerfield, & Jaffe,

2004, pg 733). Net working capital is cash plus other current assets less current liabilities. Cash

can be defined in "terms of other elements of the balance sheet" such as net working capital.

Two aspects of short-term financial policy are the size of the firm's investment in current assets

and the financing of current assets.

LEI's balance sheet shows the company's cash and other elements of cash including short-term investments, accounts receivable, inventories, and other current assets. Shang-wa has the same cash and other elements of cash categories. Sirius/XM's cash and other elements of cash include marketable securities, accounts receivable, other receivables, receivables, raw materials, finished goods, other inventory, inventory, prepaid expenses, and other current assets. Domino's lists cash and cash equivalents, short-term investments, net receivables, inventory, and other current assets. AT&T lists cash, net receivables, inventories, and other current assets. In comparison, Time Warner and Kenexa similarly define cash.

In tracing cash for LEI and the other companies, the cash flow statement shows how cash is generated and how it is used. LEI generated cash by increasing its accounts payable, sale of property, plant and