HCL Electronics Case Study - Calculate the Weighted Average Cost of Capital - Business Assignment Help

Assignment Task :

Case Study - HCL Electronics
HCL Electronics is a family-run consumer electronics retailer. The company was set up originally 50 years back by Bob as a repair shop for household appliances in Victoria, Australia. The business now has been expanded, and it is now a reputable retailer of different types of electronics and have stores all over Australia. The company’s managing director is Shane, who inherited this business from his grandfather Bob. The company has been affected greatly by the COVID-19 pandemic. Most prominently, HCL’s market share and revenues have substantially decreased, with the demand for its products at low levels not seen in the past. 
Although the immediate impacts of the coronavirus pandemic are beginning to pass and businesses begin to reopen, the upheaval is not over. Uncertainty is now a constant in the global business environment. HCL is currently developing strategies and comparing different options to cope with the change and preparing for what may come next:
To overcome the obstacles entailed by COVID-19 situation, the marketing department has done intensive research and suggested an aggressive 10-year marketing campaign whereby the credit terms to customers will be relaxed together with other marketing strategies. This campaign would result in a (forecasted) increase in sales of 3,000 units per year and a cash expense of $50,000 per year. 
To accommodate the extra demand bring by the marketing campaign, HCL is considering a possible acquisition of a small regional warehouse facility that could be used to stock the products and make direct delivery to the customers of that region. The new warehouse facility would cost $600,000. It will have ten-year usable life and would be depreciated over its life using the straight-line depreciation method (assume no salvage value). HCL’s production manager has produced estimates for the costs associated with the manufacturing of the product. Total variable costs are estimated at $200 per unit, which includes material and labour costs. The unit selling price of the product is $260. 
As per the above forecasts and assume they remain the same every year, the 10-year marketing campaign and cost-saving due to the acquisition of the new facility would generate free cash flows of $109,000 per year. This estimate reflects all associated revenues/costs, ignores the change in working capital, and assumes revenue/costs are constant over time. 

Based on the case study above, you are to write a report addressing the following key questions:
1. Based on the forecasted increase in sales, is it possible for HCL to achieve the corresponding cash and accounting break-even points? Based on your calculations for each - is the marketing department’s proposal acceptable? Explain.
2. Calculate the weighted average cost of capital (WACC) of HCL using available information of a representative company of your choice – “JB HI-FI”. Use the ‘Interest expense’ and ‘Long term debt’
3. Which investment (Shares or Bonds) should HCL sell to raise the necessary funds? Explain the reasons behind your decision.
4. Based on the answers to the previous questions, determine whether to endorse the plan suggested by the marketing. Then discuss potential suggestions on how to improve the plan.
5. Discuss the limitation of the above analyses.
 

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