Problem Solution: Lester Electronics

Running head: PROBLEM SOLUTION: LESTER ELECTRONICS

Problem Solution: Lester Electronics

University of Phoenix

Problem Solution: Lester Electronics

Lester Electronics Inc. (LEI) is currently ranked third among capacitor manufacturers. LEI is a master distributor of electronics parts to the consumer and industrial small and medium sized original equipment manufacturers, repair facilities and small local distributors throughout the Americas and Europe. (University of Phoenix, 2007) Servicing these clients has allowed LEI to see revenues of approximately $500 million a year.

LEI is faced with the decision to align with Shang-wa Electronics to establish a new capacitor manufacturing facility in a neighboring Asian country, acquire Shang-wa outright, or sell the firm to Avral Electronics, Inc., (University of Phoenix, 2007). "The issue translates into an opportunity to increase revenues through sources of synergy Ð'- revenue enhancement, cost reduction, lower taxes, and lower cost of capital," (Ross, Westerfield, & Jaffe, 2005). Clearly, the firm must study the options carefully and make a decision timely in order to maximize wealth for its shareholders

Situation Analysis

Issue and Opportunity Identification

Lester Electronics does not want to be faced with any losses. Lester is focused on maximizing shareholder wealth anyway possible. The key for Lester Electronics is to develop a joint venture with Shang-wa Electronics quickly. Bernard Lester and John Lin have established a strong friendship over the years. Lester Electronics should consider a limited partnership with Shang-wa CEO John Lin once he retires.

According to Ross, Westerfield, and Jaffe, 2005, "Permit the liability of some of the partners to be limited to the amount of cash each has contributed to the partnership. Limited partnerships usually require that (1) at least one partner be a general partner and (2) the limited partners do not participate in managing the business," (p.12). This will still give John Lin an opportunity to contribute to the financial portion of the business; however, this will keep John Lin from managing the business. Bernard Lester and his management team can handle this.

According to Eun and Resnick, 2004, "Portfolio management is a strong balance, of optimal investment mix between risk versus return, maintenance versus growth, and short-term versus long-term new product projects." Lester Electronics will need to ensure that they can fulfill any obligations set by Shang-wa Electronics if they decide on a joint venture. If prices have to be cut, can Lester afford to pay its bills and not go into financial distress?

According to Ross, Westerfield, and Jaffe, 2005, "Measure the ability of the firm to meet recurring financial obligations (that is, to pay its bills). To the extent a firm has sufficient cash flow, it will be able to avoid defaulting on its financial obligations and, thus, avoid experiencing financial distress," (p.16). LEI will gain intelligence by ensuring that they can maintain revenue when taking on new clients. This will help ensure their short-term solvency.

Lester Electronics must understand the importance of the NPV (net present value) of this process. This joint venture has to show that a long-term benefit of profit and present value in joining. According to Ross, Westerfield, and Jaffe, 2005, "It is important in such areas as capital budgeting, lease versus buy decisions, accounts receivable analysis, financing arrangements, mergers, and pension funding," (p.60). If it requires additional capital to fund the joint venture this will need to be made up in another area. LEI will gain intelligence by using their funds carefully.

Lester Electronics will need to determine their profit margin. LEI needs to determine if they can still provide the products they are known for at the same cost. This may almost upset some of the customers and they may consider purchasing products from the competitor. According to Ross, Westerfield, and Jaffe, 2005, "In general, profit margins reflect the firm's ability to produce a product or service at a low cost or a high price." Profit margins are not direct measures of profitability because they are based on total operating revenue, not on the investment made in assets by the firm or the equity investors," (p.20). If it requires additional capital to fund the joint venture this will need to be made up in another area. LEI will gain intelligence by using their funds carefully.

The capital-asset-pricing model (or CAPM for short) implies that the expected return on a security is linearly related to its beta. If the average return on the market has been higher than the average risk-free rate over long periods of time, RM - RF is presumably positive. Thus, the CAPM implies that the expected return on a security is positively related to its beta. This means LEI will need to take a look at the economic exposure this joint venture will have.

Lester Electronics will need to determine if they do a joint venture with Shang-wa Electronics if the company's located internationally or domestic. This will determine if the joint venture will decrease/increase in the exchange rate. According to Eun and Resnick, 2004, the economic exposure is "Defined as the extent to which the value of the firm would be affected by unanticipated changes in exchange rates. Any anticipated changes in exchange rates would have been already discounted and reflected in the firm's value," (p.284). Lester Electronics can gain intelligence by reviewing current rates based on location to ensure that the joint venture is worth the time and profit.

Stakeholder Perspectives/Ethical Dilemmas

LEI has not taken into consideration all the stakeholders interests, rights, and values. Several stakeholders with conflicting interests, rights, and ethical dilemmas that may conflict with one another.

The customers are one of the primary stakeholders. LEI and Shang-wa have established a loyal customer base over the years. Bernard Lester and John Lin must take into consideration their customers needs. The customers are interested in knowing if the cost of products will increase. They will also be interested in the new products that will be offered either after the joint venture or takeover. The customers are the lifelines to the business. If LEI does not take the customers into consideration this could cause a decrease in their sales and overall customer service experience. If this is not done there