Submitted by: Submitted by schotzy
Views: 995
Words: 1274
Pages: 6
Category: Business and Industry
Date Submitted: 05/02/2011 01:59 PM
Guillermo Furniture Store Analysis
Guillermo Navallez operates a furniture manufacturing business in Sonora, Mexico. The business has been performing well until recently. New retailers moved into the area causing the cost of labor to rise and a new overseas competitor with high-tech equipment entered the market with the ability to manufacture quality furniture more cheaply. As a result many of Guillermo’s competitors have merged together, forming larger corporations capable of competing in the new market created by these changes. Guillermo has three options to choose from; he can switch from manufacturing furniture to distribution, purchase high-tech equipment, which will allow him to manufacture furniture more quickly without losing quality, or he can add an additional product to the furniture he manufactures to increase its value. This paper will review Guillermo’s options in detail. Analyzing the sensitivity of each option, determining the weighted average cost of capital (WACC) and the use of multiple valuation techniques in risk reduction, and calculating the net present value of future cash flows (NPV) for each of the alternatives will help Guillermo make a well informed decision.
Weighted Average Cost of Capital
The cost of capital is defined as “the return required by a group of investors to take on the risk of the project” (Emery, Finnerty, & Stowe, 2007, p. 197). The weighted average cost of capital is the “weighted average cost of the components of any financing package that will allow the project to be undertaken” (Emery, Finnerty, & Stowe, 2007, p. 197). Whether the finance package is composed of stock, equity, or debt does not matter. What matters is that the investors agree to share the risk and in exchange they expect a fair return. Guillermo should calculate the weighted average cost of capital (WACC) for his store to determine the required rate of return for each option. Knowing this, Guillermo can decide how much...