Wealth Maximazation Concepts
Wealth Maximization Concepts Worksheet
Concept Application of Concept in the Scenario Reference to Concept in Reading
Economic exposure
With Lester Electronics, Inc. considering the acquisition of or merger to Shang-wa Electronics, management must consider the economic risks associated with changes in exchange rates between the United States and Korea. In preparing a recommendation for the board, Anne must consider the direction of the economy in Korea to determine currency risks, which are measured through sensitivities. Eun and Resnick describe economic exposure as “the extent to which the value of the firm would be affected by unanticipated changes in exchange rates” (2004, pg. 245).
Horizontal and vertical acquisitions
Transnational Electronics Corporation (TEC) has proposed an acquisition of Shang-wa (University of Phoenix, 2008). This would be considered a horizontal acquisition because the two firms are competitors. Lester Electronics, Inc. is considering the proposal of an acquisition of Shang-wa Electronics to dispel TEC’s offer (University of Phoenix, 2008). This acquisition would be considered vertical because the firms are at different levels of the production process. Ross, Westerfield, and Jaffe (2004) classify acquisitions into three types: horizontal, vertical, and conglomerate. A horizontal acquisition involves two firm in the same industry, and a vertical acquisition involves two firms at different levels of the production process (Ross, Westerfield, & Jaffe, 2004).
Merger
Lester Electronics, Inc. is also considering a merger with Shang-wa (University of Phoenix, 2008). If the board determines this is the route that will best suit the company financially, Lester Electronics, Inc. will acquire Shang-wa, and the former organization will cease to exist. A merger “refers to the absorption of one firm by another” (Ross, Westerfied, & Jaffe, 2004, pg. 797)....
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