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Guillermo Furniture Store Analysis

# Guillermo Furniture Store Analysis - Weighted Average Cost...

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Weighted Average Cost of Capital What would be the Weighted Average cost of Capital in the first scenario? Guillermo's current assets consist of cash, accounts receivables, inventory and pre-paid insurance for a hypothetical amount of 400 million. The amount of debt the company is carrying is 300 million. If the firm cannot realize any future growth in revenues, then the value of the firm has decreased. If Guillermo is trying to raise cash for financing, the financial sheet that would be presented to potential investors must show that the company is earning enough on its' existing assets to satisfy creditors and investors. Guillermo's must look at what the company's WACC is using the following formula: WACC=( 1-L)r ?+L(1-T)r ?. According to the website, 'Value Based Management.net, WACC is an expression of cost and is used to see if intended investments or strategies, or purchases are worthwhile to undertake. It is expressed in terms of percentage rates, like interest. Therefore if this theory is applied to Guillermo's Furniture Store, let's propose the following projections: The market value of debt =300 million The market value of equity =400 million The cost of debt=8% Corporate Tax Rate =35% Cost of Equity=18% Then the WACC of Guillermo's would be: 300:700*8%(*1-35%) 400:700*18% WACC = 12,5% Using the previous information, regardless of which scenario Guillermo should decide to undertake, the minimum return that the company should realize should be 12.5% to be able to satisfy creditors and investors that it can handle any addition financial undertakings. Notes from the third week power point presentation states that 'the value of the firm depends on: the expected future cash flows to be generated by the firm's assets, and the required return on these cash flows. If the firm cannot realize any future growth in revenues, then the value of the firm has decreased. Restructuring Guillermo's Restructuring the plant into a highly automated facility using robots to decrease the cost

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of labor is another option available to Guillermo. How can he determine if this option would provide the greatest cost savings and benefit both his bottom line and investors and creditors? What are the opportunity costs? In the scenario, Guillermo acknowledges that "converting the plant into a highly automated facility would be expensive, but he saw how he could also decrease dramatically his production costs." To make sound business decision, Guillermo should conduct a sensitivity analysis report should provide them with information to determine if this would be a viable business option. This report should be charted to rank the assumptions from the most important to the least important. You can find out which assumptions are influencing your forecasts the most, reducing the amount of
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Guillermo Furniture Store Analysis - Weighted Average Cost...

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