Guillermo Furniture Analysis

1226 words - 5 pages

Guillermo Furniture Analysis

University of Phoenix


Abstract

Guillermo Furniture stores had a dominate position in custom furniture. They were could sale their furniture at premium prices. New competition has caused Guillermo to rethink its strategy. The store must analyze the most advantageous way to stay competitive in their current market. Their choices are to stay the current course, become hi-tech, or a brokerage company.

Guillermo Furniture Analysis
Guillermo Furniture store was dominant in its region in developing customize furniture. However, they are starting to lose money because of competition from overseas and rising labor cost. The company must make a decision ...view middle of the document...

Emery J. D., 2007). Prepare a detailed analysis reviewing the Weighted Average Cost of Capital (WACC), and determine the Net Present Value (NPV). The definition of WACC is a calculation of the total cost of capital used by an enterprise, made by totaling the cost of each source of capital used multiplied by its proportional share of the total capital used. The NPV is the difference between what something is worth and what it costs (the present value of its expected futrue cash flows-market value) (Douglas R. Emery J.D., 2007).
Guillermo Furniture used the following to evaluate its WACC and NPV:
Comparable Companies

Current Hi-Tech Broker Average

DATA Amount of equity 265,282 891,543 663,663
Amount of debt 222,705 695,979 612,708
Tax rate 42% 42% 42%
Equity beta 0.23 0.23 0.23

RESULT 1+ (1-T)D/E 1.49 1.45 1.54
Unlevered equity beta 0.15 0.16 0.15 0.15

Current
DATA % Debt 84%
(Hilton, 2008) (Marks, 2007) % Equity 16%
Tax rate 42%

RESULT 1+ (1-T)D/E 4.03
Unlevered project beta 0.15 = average of unlevered equity betas of comparable firms
Project equity beta 0.62

DATA Risk-free rate 0.16% = yield on long-term discount rate
Market risk premium 0.42% = historical average excess return of DOW Jones

RESULT Project equity beta 0.62
Market risk premium 0.42%
Equity risk premium 0.26%
Plus risk-free rate 0.16%
Cost of equity 0.42%

Note: The estimate of the market risk premium is the arithmetic average from DOW Jones.
.

DATA Cost of debt 0.42%

RESULT Weighted
Weights Cost

After-tax cost of debt 0.2% 84.0% 0.2%
Cost of equity 0.4% 16.1% 0.1%
Weighted average cost of capital 0.272%

Hi-Tech
DATA % Debt 78%
% Equity 22%
Tax rate 42%

RESULT 1+ (1-T)D/E 3.06
Unlevered project beta 0.15 = average of unlevered equity betas of comparable firms
Project equity beta 0.47

DATA Risk-free rate 0.16% = yield on long-term discount rate
Market risk premium 0.42% = historical average excess return of DOW Jones

RESULT Project equity beta 0.47
Market risk premium 0.42%
Equity risk premium 0.20%
Plus risk-free rate 0.16%
Cost of equity 0.36%

Note: The estimate of the market risk premium is the arithmetic average from DOW Jones.


DATA Cost of debt 0.42%

RESULT Weighted
Weights Cost

After-tax cost of debt 0.2% 78.1% 0.2%
Cost of equity 0.4% 21.9% 0.1%
Weighted average cost of capital 0.269%

Brokerage
Project...

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