Guillermo Furniture Store Analysis
Diana Thomas
Fin/571-Corporate Finance
James Ciaramella
May 25, 2013
Guillermo Furniture Store Analysis
The Guillermo Furniture Store has been struggling to stay profitable. Until late 1990’s, competitors started taking away business affecting the revenue. Guillermo Navallez will have to make changes. He has three options, one is to go through a merger or acquisition, which would reduce his production costs. Option two is to become a representative for another company and making his company a primary manufacturing for distribution only. Third option is Guillermo could invest in modern machineries to help reduce and improve production costs.
This paper will analyze the alternatives, and look at the optimal weighted average cost of capital (WACC), net present value (NPV), and review analysis and valuation techniques.
Weighted Average Cost of Capital (WACC)
Guillermo needs to choose the option that will give him the greatest competitive advantage, Guillermo needs to figure out the WACC to determine his minimum return needed on the investment. “Weighted average cost of capital (WACC) is the components of any financing package that will allow a project to be undertaken,” (D.R. Emery, 2007, p. 197). As an example, if the WACC is 5% the company should not invest because it will have a lower return of less than 5%.
Guillermo Furniture Store shows its capital: bank loans: $936,628 + $29,239 = $965,867 @ 7.5% = 80.4% of capital and 6.03%. WACC: Equity: $235,805 at 16% = 19.6% of capital and 3.14% WACC giving at total WACC: 9.17%.
Net Present Value (NPV)
Most financial decisions are based on their net present value (NPV). This is the difference between what something is worth and what it costs. NPV calculations are the total present value of a time series of cash flows. The time along with the discounted rate are a necessity in this calculation. Guillermo Furniture Store...