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Guillermo Furniture Store Analysis

In: Business and Management

Submitted By lisamanney
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Pages 5
Guillermo Furniture Store Analysis
FIN 571
May 20, 2012

Guillermo Navallez has had a very successful furniture business in Sonora, Mexico. Lately, however, the retail environment has changed. Competition has moved in to the area, and labor costs have risen. This has caused Guillermo’s profits to decrease significantly. Guillermo now needs to research options for his business, in order to stay competitive in the market. One option would be to purchase automated equipment that would make his furniture precisely as he designed, and significantly reduce his labor costs. The other option would be to become a distributor to a furniture company in Norway, and sell both his own, and the other company’s products. This paper will analyze the different options available to Guillermo, and the financial outcomes of each alternative. It will determine the Weighted Average Cost of Capital, as well as the multiple valuation techniques of the available options, and make a final recommendation as to which alternative Guillermo should explore.
While weighing his decision, Guillermo must analyze the income potentials for each alternative at the current production rate, and at another lower rate, to ensure he would be able to stay in business in the demand for his products dropped. It is not realistic to only look at one rate, as business cycles tend to rise and fall, and Guillermo needs to be able to ride the highs and lows of the retail market, and be able to keep his business. We will examine the three alternatives at the current production cycle, and at ½ of the current production rate, to see which option would be the least detrimental to Guillermo.
First Alternative – Continue Current Method of Doing Business
The first alternative we will analyze is if Guillermo continues to produce his furniture as he currently does. This option will have the assumption that

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