Running head: Goff Computer

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1. Most publicly traded corporations are required to submit 10Q (quarterly) and 10K

(annual) reports to the SEC detailing their financial operations over the previous

quarter or year, respectively. These corporate filings are available on the SEC website at

www.sec.gov. Go to the SEC website, follow the "Search for Company Filings" link, the

"Companies & Other Filers" link, enter "Dell Computer", and search for SEC filings

made by Dell. Find the most recent 10Q and 10K and download the forms. Look on the

balance sheet to find the book value of debt and the book value of equity. If you look

further down the report, you should find a section titled either "Long-term Debt" or

"Long-term Debt and Interest Rate Risk Management" that will list a breakdown of

Dell's long-term debt.

10 K (book value of equity) = total assets – total liabilities

$44,533 - 35,616 = $8,917 million

February 3,
January 28,
2012 2011
ASSETS
Current assets:
Cash and cash equivalents $13,852 $ 13,913
Short-term investments 966 452
Accounts receivable, net 6,476 6,493
Short-term financing receivables, net 3,327 3,643
Inventories, net 1,404 1,301
Other current assets 3,423 3,219
Total current assets 29,448 29,021
Property, plant, and equipment, net 2,124 1,953
Long-term investments 3,404 704
Long-term financing receivables, net 1,372 799
Goodwill 5,838 4,365
Purchased intangible assets, net 1,857 1,495
Other non-current assets 490 262
Total assets $44,533 $ 38,599
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LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Short-term debt $ 2,867 $ 851
Accounts payable 11,656 11,293
Accrued and other 3,934 4,181
Short-term deferred services revenue 3,544 3,158
Total current liabilities 22,001 19,483
Long-term debt 6,387 5,146
Long-term deferred services revenue 3,836 3,518
Other non-current liabilities 3,392 2,686
Total liabilities 35,616 30,833
Commitments and contingencies (Note 10)
Stockholders’ equity:
Common stock and capital in excess of $.01 par value; shares
authorized: 7,000; shares issued: 3,390 and 3,369, respectively;
shares outstanding: 1,761 and 1,918, respectively 12,187 11,797
Treasury stock at cost: 1,154 and 976 shares, respectively (31,445) (28,704)
Retained earnings 28,236 24,744
Accumulated other comprehensive loss (61) (71)
Total stockholders’ equity 8,917 7,766
Total liabilities and stockholders’ equity $44,533 $ 38,599

10 Q (book value of equity) = total assets – total liabilities

$45,446 - $35,248 = $10,198 million (November 2012)

November 2,
February 3,
2012 2012
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 10,991 $ 13,852
Short-term investments 281 966
Accounts receivable, net 6,187 6,476
Short-term financing receivables, net 3,151 3,327
Inventories, net 1,364 1,404
Other current assets 3,688 3,423
Total current assets 25,662 29,448
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Property, plant, and equipment, net 2,156 2,124

Long-term investments 2,908 3,404
Long-term financing receivables, net 1,354 1,372
Goodwill 9,191 5,838
Purchased intangible assets, net 3,511 1,857
Other non-current assets 664 490
Total assets $ 45,446 $ 44,533

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Short-term debt $ 3,724 $ 2,867
Accounts payable 10,556 11,656
Accrued and other 3,504 3,934
Short-term deferred services revenue 4,027 3,544
Total current liabilities 21,811 22,001
Long-term debt 5,310 6,387
Long-term deferred services revenue 3,943 3,836
Other non-current liabilities 4,184 3,392
Total liabilities 35,248 35,616
Commitments and contingencies (Note 11)
Stockholders’ equity:
Common stock and capital in excess of $.01 par value; shares
authorized: 7,000; shares issued: 3,411 and 3,390, respectively;
shares outstanding: 1,736 and 1,761, respectively 12,489 12,187
Treasury stock at cost: 1,200 and 1,154 shares, respectively (32,145) (31,445)
Retained earnings 29,939 28,236
Accumulated other comprehensive loss (106) (61)
Total Dell stockholders’ equity 10,177 8,917
Noncontrolling interest 21 —
Total stockholders’ equity 10,198 8,917
Total liabilities and stockholders’ equity $ 45,446 $ 44,533

Long term debt –

10Q = $5,310 million, (Dell 10-Q, November 2, 2012)

10k = $6,387 million, (Dell 10-K, February 3, 2012)

Book Value of Debt -

10k = $44,533 million, (Dell 10-K, February 3, 2012).

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10Q = $45,446 million, (Dell 10-Q, November 2, 2012).

2. To estimate the cost of equity for Dell, go to finance.yahoo.com and enter the ticker

symbol "DELL". Follow the various links to find answers to the following questions:

What is the most recent stock price listed for Dell? What is the market value of equity,

or market capitalization? How many shares of stock does Dell have outstanding? What

is the beta for Dell? Now go back to finance.yahoo.com and follow the "Bonds" link.

What is the yield on 3-month Treasury bills? Using a 7 percent market risk premium,

what is the cost of equity for Dell using the CAPM?

Most recent stock price is: $10.20

Market Capitalization: 17.74B

Shares Outstanding: 1.74B

Dell Beta: 1.59

Yield on 3-month Treasury bills: 0.01

Using a 7% market risk premium, what is the cost of equity for Dell using the CAPM?

Capital Asset Pricing Model (CAPM) Rs = RF + β X (RM – RF)

Expected return on stock(Rs) =

= risk-free rate (RF) + Stock beta (β) x Market Risk Premium (RM – RF)

= 1% + (1.59 * 7.0%)

= 0.01 + (1.59 * .07)

= 0.01 + 0.1113

= 0.1213

= 12.13

Cost of equity for Dell = 12.13%

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US Treasury Bonds Rates

Maturity Yield Yesterday Last Week Last Month
3 Month 0.01 0.03 0.05 0.06
6 Month 0.07 0.08 0.10 0.12
2 Year 0.23 0.25 0.23 0.24
3 Year 0.33 0.35 0.31 0.32
5 Year 0.68 0.69 0.62 0.62
10 Year 1.70 1.73 1.62 1.59
30 Year 2.86 2.90 2.80 2.72
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3. Find the beta for each of these competitors, and then calculate the industry average

beta. Using the industry average beta, what is the cost of equity? Does it matter if you

use the beta for Dell or the beta for the industry in this case?

COMPANY TICKER BETA

International Business Machines IBM 0.64
Corp
Hewlett-Packard Company HPQ 1.41
Dell Inc DELL 1.59
Cisco Systems, Inc. CSCO 1.45
Xerox Corp. XRX 1.72
Seagate Technology Public STX 2.73
Limited Company
Apple Inc. AAPL 0.93
NCR Corp NCR 1.12
EMC Corp. EMC 1.45
Industrial Average Beta 1.45

Cost of equity using industry average beta:

Rs = 1%+ (1.45 x 7.0%)

= 0.01 + (1.45 * .07)

= 0.01 + 0.1015

= 0.1115

= 11.15%

Cost of equity = 11.15%

Does it matter if you use the beta for Dell or the beta for the industry in this case?

In this situation, the percentage does not show a big difference. Since all the companies are

different or not equal, I would probably suggest using the Dell’s beta cost of equity.

4. What is the weighted average cost of debt for Dell using the book value weights and
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the market value weights? Does it make a difference in this case if you use book value

weights or market value weights?

Weighte Weighte
Percent Market Percent Yield to d Book d Market
Book value of total Quoted value of Maturit values values
(millions) (c) price (millions) total(a) y (b) (c*b) (a*b)

Dell GF $600 1.927 100.875 $ 0.73% % %

Dell GL 500 0.498 100.649 0.614% % %
Dell GO 400 0.645 101.858 0.714% % %
Dell GP 300 0.000 100.272 0%
Total $1,800 $3.07

5. You now have all the necessary information to calculate the weighted average cost of

capital for Dell. Calculate the weighted average cost of capital for Dell using book value

weights and market value weights assuming Dell has a 35 percent marginal tax rate.

Which cost of capital number is more relevant?

Calculation:
Using book value weights, the total value of Dell using 10k annual values is:
V = $1,800,000,00 + $8,917,000,00

V = $10717, 000,00

So, the WACC based on book value weights using 10k annual values is:
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WACC = (E/V) x Re + (D/V) x Rd x (1-T)

Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
T = corporate tax rate
WACC= (E/V) x Re + (D/V) x Rd x (1-T)
WACC = (0.1373) * ($21.728/$23.3256) + (.0269) * ($1.62465/$23.3526) *(1 – .35)
= (.128) + (.001)
WACC = 12.9%

6. You used Dell as a representative company to estimate the cost of capital for GCI.

What are some of the potential problems with this approach in this situation? What

improvements might you suggest?

By using Dell as a representative company to estimate cost of capital for GCI, one of the risks

factor affecting the cost of capital is by the operation of the company’s stores for sale. On the

other hand, Dell utilizes its website for sales and can be considered one of the leaders among

other competitors in the industry. GCI may want to utilize the internet for sales or may want

to go public which would offer more access to capital and other resources.

References:

Bond Center. US Treasury Bonds Rates Retrieved December 16, 2012 from

http://finance.yahoo.com/bonds

Dell Bonds, Market Data; Retrieved December 16, 2012, from

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http://cxa.marketwatch.com/finra/BondCenter/SearchResult.aspx?q=DELL.

Dell Bonds, Watchlist; Retrieved March 4, 2012, from

http://cxa.marketwatch.com/finra/BondCenter/Watchlist.aspx

Dell Inc.'s 2012 Form 10-K (February 3, 2012), Retrieved December 16, 2012,

http://www.sec.gov/Archives/edgar/data/826083/000082608312000006/dell10k02031

2.htm#s34F8580BBA49EF2048DC5E66D9D41ECC

Dell Inc.'s 2012 Form 10-Q (November 2, 2012), Retrieved December 16, 2012, from

http://www.sec.gov/Archives/edgar/data/826083/000082608312000019/dellq3fy1310

q.htm

Ross, S., & Westerfield, R., Jaffe, J., & Jordan, B. (2011). Corporate finance: Core principles

and applications (3rd ed.).