Wealth Maximization Concept Worksheet

Wealth Maximization Concepts Worksheet

Concept Application of Concept in the Scenario Reference to Concept in Reading

Profitability

Shang-Wa Electronics received an offer for purchase from TEC. This company is a key manufacturer for Lester Electronics. If Shang-Wa accepts the proposal, Lester Electronics will be affected significantly. Lester Electronic anticipate that the acquisition will cause Lester Electronic to lose up to 45% of their expected revenue over the next few years. Analyzing the profitability of Shang-Wa can be useful to TEC in making the appropriate decision.

“One of the most difficult attributes of a firm to conceptualize and measure is profitability. In a general sense, accounting profits are the difference between revenues and costs” (Jaffe, Ross, Westerfield, 2005, p. 37).

Dividend Growth Model

In order to make the best decision in acquisition, Lester Electronic can utilize the dividend-growth model to see the potential growth of both companies. This will provide the company with model that will enable the company and the shareholders an opportunity to see how the acquisition will profit them. Acquiring Shang-wa Electronics will result in increased net income, along with increased dividends and retained earnings

“It is worthwhile to compare the dividend-growth model with the NPVGO model when growth occurs through continual investing”

“A steady growth in dividends results from a continual investment in growth opportunities, not just investment in a single opportunity” (Jaffe, Ross, Westerfield, 2005, p. 123).

Growth Opportunities

Lester Electronic is currently in a position where they can make a big investment by acquiring Shang-Wa. This will provide growth opportunities for the companies. This tactic will prevent the company from losing up to 45% of its revenue for the next five years and provide the opportunity to expand its operations to domestic markets.

“Many firms have growth opportunities to invest in profitable projects. Because these projects can represent a significant fraction of a firm’s value, it would be foolish to forgo them to pay out all earnings as dividends” (Jaffe, Ross, Westerfield, 2005, p. 119).

Corporate Government and Corporate Firm

Lester Electronics, Inc. started out as a small family business owned by Bernard Sr. The business was first sold due to encroaching overseas manufacturers and repurchased by Bernard Jr. and again became