Guillermo’s Furniture Manufacturing Company is in Sonora, Mexico in a gorgeous vacation spot. Guillermo’s is the largest furniture store in the area and made furniture for years, until the late 1990s that a new competitors joined the furniture business that has put a dent into Guillermo’s business.
Competitors have new technology when to allow them to come in with lower prices and lure customers but Guillermo has to decide on the best options for the company either upgrade or move forward working as he did making quality products for customer’s expectation. In order for Guillermo to improve his company, Guillermo has to seek other alternatives and make financial ...view middle of the document...
Cost of capital is a required return on Guillermo existing operations, which the current cost of capital of $195,564 of net income before taxes can replicate the total risk of the entire business existing assets, but the new project’s risk (the incremental project) might be extremely different from the average (Emery, Finnerty, & Stowe 2007).
Third alternative is the broker’s project that requires the return by articulates the cost of capital for a capital budgeting projection. Guillermo investment return of $50,955 before taxes was taken out. A return investment’s require a minimum but return investors thinks something must fabricate when financing a product that investors are sure when an investment is in return in due time. When management acts for the shareholders’ best interest, cost of capital plans for required return of Guillermo interest in common stock and retained earning totaling of $235,805 for the year of 2008, which carry over the year of 2009, the investors return could earn on comparable capital market securities that have the same risk (Emery, Finnerty, & Stowe 2007).
Guillermo did not like the idea of merging with a larger competitor and retired as the new competitor is squeezing every dollar out of the overhead costs, which the current overhead of $222,705. Guillermo is looking at options to expand his management responsibilities by looking at other organizations that will take more of his time. Capital budgeting has a serious role in Guillermo’s strategic plan. Strategic planner’s produce ideas as regard to new businesses that firm’s should enter; Guillermo should develop skills to improve his existing business to achieve greater profitability (Emery, Finnerty, & Stowe 2007). Guillermo must have his organization process in systematic order and review the status of all projects to a degree, which decrease his production cost that could process as postaudit.
The major goal of the postaudit is improvement. Improvements come primarily in two areas: (1) forecasting and (2) operations. When people know records of estimates, either forecasts or operational goals, will maintain and later compared to the outcomes, they tend to be more careful making their estimates (Emery, Finnerty, and Stowe p. 233). Guillermo current sales forecast of $2,532 could improve by lowering the cost of furniture’s for anyone able to afford it. The new competitors are selling their furniture’s at lower prices to lure the low-income people who can afford to buy. Therefore, Guillermo is thinking about coordinate his existing distributors by using chain distributors to sell his furniture and become a spoke person for the existing distributor to help sell. Guillermo will retain his high end custom work but the company will move from main manufacturing to the main distribution.
Optimal WACC (Weighted Average Cost of Capital)
Weighted average cost of capital is the rate of return for Guillermo to look...