Guillermo??™s Furniture FIN/571-Corporate Finance University of Phoenix 2012
Guillermo??™s Furniture The quote by renowned author and speaker, Orvel Ray Wilson, ???Customers buy for their reasons, not yours,??? exemplifies the finance principle of Self-Interested Behavior and is the reality Guillermo Furniture faces with competition (e-Coach, 2012 & Emery, Finnerty, & Stowe, 2007, p. 20). Explain Relation of Finance Concepts Entry by an international competitor into Sonora??™s furniture market threatens stability of the business by providing customization of furniture at lower prices. Guillermo??™s higher priced products benefit the competition, presenting a zero-sum situation, whereby one company??™s gain is another??™s loss. However, not content to risk business failure, Guillermo assessed the competition??™s policy choices but chose to maintain independence and forego the opportunity cost of family time versus expansion (UOPX Scenario, 2012 & Emery, et al., 2007, pp. 22-24). Further examination of the technological innovation employed by the competition not only offers the opportunity for maximizing production and decreasing production costs but also presents the risk of implementing a paradigm shift in existing business operations and the associated financial challenges of model conversion. Clearly, a decision to ???copy??? the other company is not the optimal solution for Guillermo, indicative of the Behavioral Principle??™s limitations. Conversely, a move to a combination of manufacturing and distribution for another potential competitor diversifies the business, reducing risks, increasing market share, and maximizing company value, thus realizing the benefit of the Diversification Principle. Moreover, Guillermo??™s patented process for the flame-retardant coating grants exclusivity that affords an opportunity to enhance product value, sell the service to the potential partner manufacturer, and build brand loyalty (UOPX Scenario, 2012 & Emery, et al., 2007, pp. 25 & 28).
An analysis of Guillermo??™s Furniture balance sheet reveals a current ratio of 2.87x, illustrating the company??™s approximate triple current assets to current liabilities, a strong shortterm financial position. The quick ratio of 2.16x is a better indicator of the firm??™s ability to meet short-term obligations but is offset by the effectiveness of an average collection period of 45 days. The company??™s cash ratio of 12.3% may appeal to creditors but also indicates a substantial amount of idle cash not utilized for profit generation or shareholder benefit. Guillermo??™s debt/equity ratio of 4.70x shows a large amount of external financing and company expenses used to repay the debt. A reinvestment of the cash for profit generation can reduce the need for debt financing, increase shareholder value, and reduce risk to potential investors (UOPX Scenario, 2012 & Emery, et al., 2007, pp. 60-62, 64). An important note regarding data on the balance sheet is that the information is historical versus current, thus indicative of differences in book and current market values of assets and liabilities, limiting the information??™s usefulness (Emery, et al., 2007, p. 50). Conclusion As Guillermo
concert tickets chicago contemplates the best direction for his company, several financial principles are applicable to his situation. Foundational to any decision is the Self-Interested Behavior concept in addition to the Signaling Principle, which conveys the firm??™s position and outlook about its future to internal and external stakeholders. Moreover, the principles of Valuable Ideas and Corporate Advantage enhance product and service value, generate economic efficiency, and promote innovative solutions for sustainability and growth in the market.
References e-Coach Website. (2012). Creating Customer Value: Customer Success Quotes. Retrieved March 11, 2012, from http://www.1000ventures.com/business_guide/crosscuttings/quotes_customer.html Emery, D. R., Finnerty, J. D., & Stowe, J. D. (2007). Corporate Financial Management (3rd ed.). Prentice Hall. Retrieved March 6, 2012, from University of Phoenix, Week One, rEsource. FIN571??“Corporate Finance course website. University of Phoenix, (2012). Guillermo??™s Furniture Store Scenario. Retrieved March 7, 2012, from University of Phoenix, Week One, rEsource. FIN571??“Corporate Finance course website.