Business

Furniture Store is a large furniture manufacturer store that is locates in Sonora, Mexico. Labor was considerably inexpensive and the location had ample supply of timber for furniture the company produced. In the early 1990s, business for the company started to decline caused by outside influences. The decline began when a new foreign competitor entered the market. The new competitor used technologically advanced methods that produced customized furniture at a lower price. Another disadvantage for Guillermo was that one of the largest retailers was only a few miles from the company and had a major impact on the communities in Sonora. “With inexpensive housing, mild weather, beautiful scenery, un-congested roads, a new International Airport, and plenty of development, an influx of people and jobs raised the cost of labor substantially. Guillermo watched his profit margins shrink as prices fell and costs rose” (University of Phoenix, 2010).

The weighted average cost of capital (WACC) will be an important calculation in determining the direction that Guillermo needs to take in the future . This measurement averages the cost of financing sources to help determine the return required for the firm. This calculation is then used by the company to help determine whether or not a project is feasible or worthwhile. Guillermo currently has assets of cash, inventory, accounts receivable, and pre-paid insurance that total approximately $400 million, and carries approximately $300 million in debt. Therefore, Guillermo needs to raise money to finance the hi-tech expansion project; they must be able to show potential investors that the returns on current assets are good. Potential investors and creditors alike will need to believe secure in that Guillermo can handle and pay back the investment needed to secure the equipment. If they determine there is too much risk, Guillermo may not be able to expand as planned and would then have to pursue other less attractive...