Wealth Maximization Concepts WorksheetConceptApplication of Concept in the ScenarioReference to Concept in ReadingSet of contracts viewpointBernard Lester has been faced with the decision to either merge with Shang-wa or allow Avral to acquire LEI. John Lin has been faced with the decision whether or not to allow TEC to acquire Shang-wa. The problem with TEC acquiring Shang-wa is that LEI's revenue will diminish by 45% over the next 5 years. On the other hand, if LEI merges with Shang-wa then this will help LEI maximize shareholder wealth. "This viewpoint suggests the corporate firm will attempt to maximize the shareholders' wealth by taking actions that increase the current value per share of existing stock of the firm" (Ross, Westerfield, & Jaffe, 2005, p. 47).
Managing operating exposureAfter looking at all the companies' financial documents and supplementary documents, it was discovered that each company has some part with international activities.
The problem with this is that each company has to be familiar with exchange rates to ensure proper cash flow. "The objective of managing operating exposure is to stabilize cash flows in the face of fluctuating exchange rates" (Eun & Resnick, 2004, p. 43).
Net present valueWith TEC offering to acquire Shang-wa and Avral offering to acquire LEI, they both need to consider one thing: the value in the future. TEC and Avral need to look at either one-period or multi-period to determine if the acquisition is worth the value of money they are going to pay in the future. "This relationship is called the time-value-of-money-concept. It is important in such areas as capital budgeting, lease versus buy decisions, accounts receivable analysis, financing arrangements, mergers, and pension funding" (Ross, Westerfield, & Jaffe, 2005, p. 2).
Accounting statements and cash flowJohn Lin, CEO of Shang-wa, has received an offer for...