Personal Perspective Paper

Lester Electronics will borrow 40million cash to purchase Shang-wa electronics for a cash price of $100 million. This will be accomplished through a cash flow loan for one year at a rate of 6% interest and preferred stock. First, Lester will increase net income by 40% through launching a new marketing campaign that highlights a new products and services obtained from the merger. This strategic plan will add $60 million to retained earnings, with the already $61 million in retained earnings, will give a cash balance of $121 million after one year. Lester will then issue $60 million in preferred stock in efforts to acquire Shang-wa for $100 million. This plan is an enhancement because the borrowed funds are at an interest rate of only 6% and preferred stock of 60 million both through low risk debt and preferred stock. The interest that the company must pay on debt is 6% %, compared with the average long-term debt loans of 7.75%. In addition, Lester Electronics only needs to finance 40 million to seal the deal as opposed to the 100 million by offering 60 million of preferred stock. Normally, short-term debt loans are not a good option for long-term assets but due to both companies having predictable and historically sustainable cash flows based on a solid brand, franchise, technology, and customer base, this option was chosen in order to maximize leverage and match the loan structure with the cash flows and enterprise value of Lester Electronics. As with any option, there are risks associated with this option. Therefore low risk is the key; it will work out best if 40% of the cash is obtained from a short-term loan and 60% through preferred stock. This option is the preferred approach because Lester Electronics will be able to reap the benefits of Shang-Wa immediately, while paying for more than half of the benefits over a longer period of time by means of preferred stock. As a direct result of the preferred stock option, this particular transaction will