Q. Write a paper of at least 1,500 words that focuses on the analysis of different alternatives available to Guillermo.
Using the Guillermo data provided in the Materials folder by your instructor, prepare an Income Statement for each of the alternatives from the data provided. Compare the results of the two new alternatives to the existing operations and explain the causes for the differences (contribution margins, volumes, leverage, fixed costs, sensitivity analysis, etc.) Assume for the Hi-Tech alternative the new equipment can be leased from the manufacturer for five years at a monthly cost of $23,000 and treated as an operating lease.
Determine the weighted average cost of capital for the existing operations and each of the two alternatives. Assume the equity (market) value of the company is 0.70 sales and the market value of the debt is equal to the balance sheet value. Compute the required rate of return on equity using the CAPM formula: the risk free rate is 3%, the market rate is 12%, and the beta for existing operations is 1.5, the beta for hi-tech alternative is 1.8 and the beta for the broker alternative is 1.2. The cost of debt and the tax rate are as given in the data provided.