Guillermo Furniture Store Analysis
FIN 571
Guillermo Furniture Store Analysis
This paper will focus on the analysis of different alternatives available to Guillermo, including a sensitivity analysis. The optimal weighted average cost (WACC) and the use of multiple valuation techniques in reducing risks will be discussed along with the calculation of the net present value of future cash flows for each of the alternatives.
Problem Statement
Guillermo's Furniture store is encountering tough international opposition from international rivals, which has placed them in the position of rethinking how to keep a company structure, which would permit them to carry on and remain competitive in an international market. The owner, Guillermo has taken into consideration a considerable number of options and this paper will examine those options.
Weighted Average Cost of Capital
Below is the equation Guillermo will follow for their WACC implementation.
WACC = (1-L) r? L (1-T) r?
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| | | | Cost | % Total | | | |
| Capital Structure | (Rate) | Capital | | WACC | |
| Bank Loans | 965,866 | | 7.5% | 80.4% | | 6.03% | |
| Equity | 235,805 | | 16.0% | 19.6% | | 3.14% | |
| | | | | | | 9.17% | |
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| Capital Asset Pricing Model | | | | | | | |
| Rf | 4.0% | | | | | | |
| Rm | 12.0% | | | | | | |
| beta | 1.5 | | | | | | |
| CAPM formula: | | | | | | | |
| Ke = Rf + b(Rm - Rf) | | | | | | | |
| Ke = .04+ 1.5(.12 - .04) | | | | | | | |
| Ke = .04+ 1.5(.08) | | | | | | | |
| Ke = .04+ .12 | | | | | | | |
| Ke = | 16.0% | | | | | | |
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| | 16.0% | | | | | | |
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Restructuring Guillermo's
An alternative that Guillermo...