Wealth Maximization Concepts Worksheet

Topics: Corporate tax, Sole proprietorship, Corporation Pages: 6 (1542 words) Published: September 14, 2008
Wealth Maximization Concepts Worksheet
University of Phoenix
August 8, 2008
Maximizing Shareholder Wealth- MBA/540r4

Wealth Maximization Concepts Worksheet
ConceptApplication of Concept in the ScenarioReference to Concept in Reading Definitions of Wealth Maximization

Bernard Lester is CEO and founder of Lester Electronics the public Lester Electronics, Inc. which earns $500 million annually. In 1984, Bernard took his company public, and it is now traded on the NASDAQ market and rated Baa by a nationally recognized rating agency.

A corporation is owned by shareholders who share the privilege of limited liability and whose liability exposure is usually no greater than their initial investment. A corporation has a continued life and is not dependent on any one shareholder for maintaining its legal existence. A key feature of the corporation is the easy divisibility of the ownership interest by issuing shares of stock(Block & Hirt, 2005)

Discuss definitions of wealth maximization (Ross Ch. 1)
The corporate firm
The Corporation
“Of the many forms of business enterprises, the corporation is by far the most important. It is a distinct legal entity. As such, a corporation can have a name and enjoy many of the legal powers of natural persons. For example, corporations can acquire and exchange property. Corporations can enter into contracts and may sue and be sued. For jurisdictional purposes, the corporation is a citizen of its state of incorporation. (It cannot vote, however.). Starting a corporation is more complicated than starting a proprietorship or partnership.” (Ross, et al, 2004 p. 13).

Definitions of Wealth Maximization
John Lin, founder and CEO of Shang-wa Electronics at age 68, John looks forward to spending less time on business and more time with his grandchildren while they are still young. John has never groomed a successor and without one, the business cannot afford for him to slow down. With one son a doctor and the other a commercial architect, John has begun to explore other options that might afford him retirement.

The sole proprietorship represents single person ownership and offers the advantages of simplicity of decision making and low organizational and operating costs(Block & Hirt, 2005). The Sole Proprietorship “A sole proprietorship is a business owned by one person, and is the cheapest business to form. No formal charter is required, and few government regulations must be satisfied for most industries. A sole proprietorship pays no corporate income taxes. All profits of the business are taxed as individual income. The sole proprietorship has unlimited liability for business debts and obligations. No distinction is made between personal and business assets. The life of the sole proprietorship is limited by the life of the sole proprietor. Because the only money invested in the firm is the proprietor’s, the equity money that can be raised by the sole proprietor is limited to the proprietor’s personal wealth” (Ross, et al,2004 p.12). Evaluate the Metrics of Wealth Maximization

Explain Corporate Valuation Methods

Lester’s key manufacturer, Shang-wa, has received a hostile takeover bid from TEC. If John (CEO of Shang-wa) accepts it, LEI stands to lose upwards of 45 percent of expected revenues over the next five years. Fortunately, there are some options. Lester will have to run some numbers to see what the best course is. LEI is aware it will have to do something. Doing nothing will devastate them (Scenario, 2008).

TO: John Lin
FROM: Bernard Lester
LEI ran the numbers. If Lester loses Shang-wa as a manufacturer, it loses 43 percent of its revenue over the next five years. Lester asked Shang-wa for a capital budget for the joint venture manufacturing facility and Shang-wa’s recent financial statements? Bernard is ready to...
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