Running head: Goff Computer

Goff Computer

BUS 650 Managerial Finance Martin Cain December 17, 2012

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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, 2012 ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Short-term financing receivables, net Inventories, net Other current assets Total current assets Property, plant, and equipment, net Long-term investments 13,85 $ 2 966 6,476 3,327 1,404 3,423 29,448 2,124 3,404

January 28, 2011

13,913 452 6,493 3,643 1,301 3,219 29,021 1,953 704

Goff Computer Long-term financing receivables, net Goodwill Purchased intangible assets, net Other non-current assets Total assets 1,372 5,838 1,857 490 44,53 $ 3

3 799 4,365 1,495 262 $ 38,599

LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Short-term debt Accounts payable Accrued and other Short-term deferred services revenue Total current liabilities Long-term debt Long-term deferred services revenue Other non-current liabilities Total liabilities 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 Treasury stock at cost: 1,154 and 976 shares, respectively Retained earnings Accumulated other comprehensive loss Total stockholders equity Total liabilities and stockholders equity $ 2,867 11,656 3,934 3,544 22,001 6,387 3,836 3,392 35,616 $ 851 11,293 4,181 3,158 19,483 5,146 3,518 2,686 30,833

12,187 11,797 (31,445) (28,704) 28,236 24,744 (61) (71) 8,917 7,766 44,53 $ 3 $ 38,599

10 Q (book value of equity) = total assets total liabilities $45,446 - $35,248 = $10,198 million (November 2012) November 2, 2012 February 3, 2012

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(unaudited) ASSETS Current assets: Cash and cash equivalents Short-term investments Accounts receivable, net Short-term financing receivables, net Inventories, net Other current assets Total current assets Property, plant, and equipment, net Long-term investments Long-term financing receivables, net Goodwill Purchased intangible assets, net Other non-current assets Total assets $ 10,991 281 6,187 3,151 1,364 3,688 25,662 2,156 2,908 1,354 9,191 3,511 664 $ 45,446 $ 13,852 966 6,476 3,327 1,404 3,423 29,448 2,124 3,404 1,372 5,838 1,857 490 44,533

LIABILITIES AND STOCKHOLDERS EQUITY Current liabilities: Short-term debt Accounts payable Accrued and other Short-term deferred services revenue Total current liabilities Long-term debt Long-term deferred services revenue Other non-current liabilities Total liabilities 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 Treasury stock at cost: 1,200 and 1,154 shares, respectively Retained earnings Accumulated other comprehensive loss Total Dell stockholders equity $ 3,724 10,556 3,504 4,027 21,811 5,310 3,943 4,184 35,248 $ 2,867 11,656 3,934 3,544 22,001 6,387 3,836 3,392 35,616

12,489 (32,145) 29,939 (106) 10,177

12,187 (31,445) 28,236 (61) 8,917

Goff Computer Noncontrolling interest Total stockholders equity Total liabilities and stockholders equity 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). 10Q = $45,446 million, (Dell 10-Q, November 2, 2012). 21 10,198 $ 45,446

5 8,917 44,533

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

Goff Computer Using a 7% market risk premium, what is the cost of equity for Dell using the CAPM? Capital Asset Pricing Model (CAPM) Rs = RF + X (RM RF) Expected return on stock(Rs) = = risk-free rate (RF) + Stock beta () 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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Goff Computer US Treasury Bonds Rates Yesterday Last Week 0.03 0.05 0.08 0.10 0.25 0.23 0.35 0.31 0.69 0.62 1.73 1.62 2.90 2.80

Maturity 3 Month 6 Month 2 Year 3 Year 5 Year 10 Year 30 Year

Yield 0.01 0.07 0.23 0.33 0.68 1.70 2.86

Last Month 0.06 0.12 0.24 0.32 0.62 1.59 2.72

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 International Business Machines Corp Hewlett-Packard Company Dell Inc Cisco Systems, Inc. Xerox Corp. Seagate Technology Public Limited Company Apple Inc. NCR Corp EMC Corp. Industrial Average Beta

TICKER IBM HPQ DELL CSCO XRX STX AAPL NCR EMC 0.64 1.41 1.59 1.45 1.72 2.73 0.93 1.12 1.45 1.45

BETA

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

Goff Computer = 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 Dells beta cost of equity.

4. What is the weighted average cost of debt for Dell using the book value weights and the market value weights? Does it make a difference in this case if you use book value weights or market value weights? Percent of total (c) 1.927 0.498 0.645 0.000 $3.07 Market value (millions) $ Percent of total(a) Yield to Maturit y (b) 0.73% 0.614% 0.714% 0% Weighte d Book values (c*b) % % % Weighte d Market values (a*b) % % %

Book value (millions) Dell GF Dell GL Dell GO Dell GP Total $600 500 400 300 $1,800

Quoted price 100.875 100.649 101.858 100.272

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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 = $1,800,000,000 + $8,917,000,000 V = $10717, 000,000 So, the WACC based on book value weights using 10k annual values is: 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 =

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

Goff Computer 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 companys 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 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,

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http://www.sec.gov/Archives/edgar/data/826083/000082608312000006/dell10k020312.h tm#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/dellq3fy1310q.ht m Ross, S., & Westerfield, R., Jaffe, J., & Jordan, B. (2011). Corporate finance: Core principles and applications (3rd ed.).

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