Guillermo Furniture Store
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Guillermo Furniture Store Recommendation Paper
University of Phoenix
Corporate Finance FIN 571
Introduction
Guillermo Navallez, and his business Guillermo's Furniture Store located in Sonora, Mexico, have fallen victim to several changes in the market in which he does business. These changes include expensive technological advances made by his competitors and a changing labor market which have forced Guillermo to carefully evaluate and analyze his business from different financial perspectives. This business assessment will analyze Guillermo's alternatives based upon working average cost of capital (WACC), valuation techniques designed to reduce risk, net present value and a capital structure. This analysis will provide him the financial information needed to justify an informed decision with regard to the future of him and his business.
Alternative One – Capital Investment
Based on the new technologies that some of his competitors are bringing to the industry of furniture making, option one could be to invest significant capital into the business to bring the operation up to state of the art. This would include plant upgrades and purchase and installation of computer controlled laser lathes. This option would require a large cash outlay or assumption of long term debt since these upgrades would be extremely costly. The capital investment, however, could be offset by a reduction in labor and a decrease in production costs resulting from 24 hour running capability. In an effort to gain clarity, the business must perform an analysis to determine what risks exist under this option and whether or not the business is willing to assume that risk. In obtaining the WACC, we will assume that new facility upgrades and one new laser lathe will cost a total of $1.0 million and the new debt will carry an interest rate of 7%. Using the following formula the weighted average cost of capital can be calculated:
Cost of Equity (Re) = Dividends per...
University of Phoenix
Corporate Finance FIN 571
Introduction
Guillermo Navallez, and his business Guillermo's Furniture Store located in Sonora, Mexico, have fallen victim to several changes in the market in which he does business. These changes include expensive technological advances made by his competitors and a changing labor market which have forced Guillermo to carefully evaluate and analyze his business from different financial perspectives. This business assessment will analyze Guillermo's alternatives based upon working average cost of capital (WACC), valuation techniques designed to reduce risk, net present value and a capital structure. This analysis will provide him the financial information needed to justify an informed decision with regard to the future of him and his business.
Alternative One – Capital Investment
Based on the new technologies that some of his competitors are bringing to the industry of furniture making, option one could be to invest significant capital into the business to bring the operation up to state of the art. This would include plant upgrades and purchase and installation of computer controlled laser lathes. This option would require a large cash outlay or assumption of long term debt since these upgrades would be extremely costly. The capital investment, however, could be offset by a reduction in labor and a decrease in production costs resulting from 24 hour running capability. In an effort to gain clarity, the business must perform an analysis to determine what risks exist under this option and whether or not the business is willing to assume that risk. In obtaining the WACC, we will assume that new facility upgrades and one new laser lathe will cost a total of $1.0 million and the new debt will carry an interest rate of 7%. Using the following formula the weighted average cost of capital can be calculated:
Cost of Equity (Re) = Dividends per...