Wealth Maximization Concepts Worksheet

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

Growth Opportunities

Lester Electronics Inc. (LEI), an American distribution company, has two options for growth of the business. Bernard Lester can merge the company with Asian-based Shang-wa or Lester can sell the company to Paris-based Avril. Lester must determine whether the future cash flows of merging with Shang-wa will be more than the current payment Avril will offer him. Lester must consider the time-value-of-money to decide which offer to accept. "Consider the following example: A firms is contemplating investing $1 million in a project expected to pay out $200,000 per year for nine years...Thus, we need to know the relationship between a dollar today and a (possibly uncertain) dollar in the future before deciding on the project." (Ross, 2005, p. 60).

Operating Exposure

Forcing a merger with Shang-wa will open up new opportunities for (LEI). However, LEI has never marketed domestic made products outside of the United States.

In analyzing which decision to make, Lester must consider the operating exposure that is probable if a merger with Shang-wa was to take place. "Formally, operating exposure can be defined as the extent to which the firm's operating cash flows would be affected by random changes in exchange rates." (Fun & Resnick, 2004, p. 289).

Dividend-Growth Model

Once Lester makes a decision, he must convince the shareholders that the decision will profit them. To do this, Lester can use the dividend-growth model to show the shareholders the potential return of both companies. Lester must consider the potential future opportunities each venture will provide when considering these returns. "A steady growth in dividends results from a continual investment in growth opportunities, not just investment in a single opportunity." (Ross, 2005, p. 123).

Bonds

If