Guillermo Furniture Store Analysis
Guillermo’s Furniture Store is in the midst of organizational change which is forcing them to rethink their business practices to stay competitive within the growing market. Several new competitors have moved into the market that Guillermo’s Furniture Store once found to be his niche market. According to Emery, Finnerty & Stowe (2007), “to make good business decisions, human behavior needs to be understood. It is often assumed that people act in an economically rational way, which means that people act in their own personal interest (pg.20)”. Guillermo has researched his competitors in an effort to examine ways in which his business can remain viable. Guillermo has come up with several ideas to remain a notable force in the furniture market. One alternative is possible reorganization of the company. Guillermo has considered becoming a distributor for the foreign company seeking to get into the market. Guillermo also will need to consider if changing his production methods (which will have large upfront costs) will be beneficial over all. This would be a huge departure for the company because what makes the company unique was the fact that all of the furniture pieces were hand made.
This paper will examine the three different alternatives available to Guillermo Furniture. For each suggested alternative, the optimal Weighted Average Cost of Capital (WACC) will be assessed along with a discussion of the use of multiple valuation techniques to reduce risk to the company. Finally, a sensitivity analysis will also be included as a part of the paper.
Weighted Average Cost of Capital
Weighted Average Cost of Capital (WACC) is a calculation of a “firm’s capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation” (Investopedia, n.d.). Guillermo is seeking to increase finances for operational...