Guillermo Furniture Store Analysis

Guillermo Furniture Store Analysis

Russell L. Yancey Sr.

University of Phoenix

Corporate Finance

FIN / 571

Rene Niese

July 04, 2011

Guillermo Furniture Store Analysis

In his efforts to determine his response to changes in both his community and his industry, Guillermo has engaged in researching those factors which are impacting the existence and growth of his furniture Store. He has an idea as to how to proceed but additional analysis relative to which capital budgeting decision is made concerning how the business moves forward. Capital budgeting is the process of choosing the firm’s long-term capital investments strategy. This strategy will often include investments in such things as land, plant, and equipment (Emery, Finnerty, & Stowe, 2007).

Because Guillermo has enjoyed a period of being the only manufacturer of custom furniture and having access to affordable labor, these new challenges are moving Guillermo and his management team to reassess how they will do business and which model they will move forward with. The options available are to continue with his current production and sales model, to adopt a more hi-tech model using state of the art equipment to produce their mid-grade line, or move from being a manufacturer to more of a distributor of the mid-grade line. To determine which option will best serve the company, Guillermo will need to determine the optimal weighted average cost of capital for each option and discuss the use of multiple techniques in reducing the risks associated with each. Also calculation of the net present value (NPV) of future cash flows for each of the alternative will guide Guillermo to select the appropriate choice.

Weighted Average Cost of Capital

Guillermo’s business environment has forced him to develop an analysis that looks at the different business model alternatives available and determine the optimal weighted average cost of capital for each option available. The weighted average cost of...