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# Guillermo Furniture Store Analysis

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The Guillermo Furniture Store has been struggling to remain profitable. Guillermo Navallez needs to make some changes to turn things around. One of his options is to go through a merger or acquisition but Navallez does not prefer this option. An alternative option is for the company to invest in a high-tech solution which will greatly reduce production costs (University of Phoenix, 2011). Lastly, Navallez has the option of becoming a representative for another furniture manufacturer and moving his company from primarily manufacturing to primarily distribution (University of Phoenix, 2011). This paper will analyze the various alternatives, while looking at the optimal weighted average cost of capital (WACC), net present value (NPV), and reviewing a sensitivity analysis and valuation techniques.
Weighted Average Cost of Capital (WACC)
The Guillermo Furniture Store should choose the option that will give it the best competitive advantage. The company needs to determine the WACC in order to determine the minimum return needed on an investment. WACC is the, “weighted average cost of the components of any financing package that will allow the project to be undertaken,” (Emery, Finnerty, & Stowe, 2007, p. 197). For example, if the WACC is 5% a company should not invest in any projects that will provide a return lower than 5%. The WACC of the Guillermo Furniture Store is calculated as follows:
Capital:
Bank loans: \$936,628 + \$29,238 = \$965,866 at 7.5% = 80.4% of Capital and 6.03%
WACC
Equity: \$235,805 at 16% = 19.6% of Capital and 3.14% WACC
Total WACC: 9.17%

Net Present Value (NPV)
“Financial decisions are measured by their net present value (NPV). NPV is the difference between what something is worth and what it costs,” (Emery, Finnerty, & Stowe, 2007, p. 74). Successful companies find a way to achieve a positive NPV. The NPV calculation is the total present…...

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