1. After looking at the at the financial statement for fiscal year ending January 30, 2009, the book value of debt, total liabilities, is $22,229. The book value of equity for this company is $4,271. Dell’s long-term debt for the fiscal year end is $1,898 (sec. gov). 2. -The most recent stock price listed for Dell is 14. 44. -The market value of equity, or market capitalization for Dell is 28. 24 B -Beta equals the expected rate of return minus the risk free rate divided by the expected market return minus the risk free rate.
The beta for Dell is 1. 36. -The yeild on 3-month Treasury bills is 0. 01. -The cost of equity for Dell using the CAPM is 44. 12%. 7. 93% + 17. 26% = 25. 19%, Market Risk Premium. rs=rf + Beta (rm-rf); =. 10 + 1. 36 (. 2509); = . 4412; = 44. 12% 3. The key competitors of Dell are Apple, IBM, and Hewlett-Packard. The beta for the following companies respectively is 1. 58, 0. 81, and 1. 05 (reuters. com/finance). -The industry average beta is 1. 15. Using the industry average beta, the cost of equity is 38. 85% rs=rf + Beta (rm-rf); =. 10 + 1. 15 (. 2509); = . 3885; = 38. 85% -Because the beta for Dell and the average beta are different, it does matter which one you use because they will create different cost of equities. 4. The cost of debt for Dell is Interest/1,898. BondYieldBook ValueMarket Value Dell. GJ1. 739100104. 155 Dell. GF2. 535100107. 100 Dell. GI3. 029100110. 716 Dell. GG5. 025100104. 250 Dell. GK4. 912100107. 96 Dell. GB6. 264100109. 051 Dell. GH6. 242100103. 400 Total700745. 968 The weighed cost of debt by using the book value is 4. 249. The weighed cost of debt when the book value is used is so close to the weighed cost of debt when the market value is used, that it would not make a difference which one is used. 5. The weighed average cost of capital for Dell is. WACC= The more relevant cost of capital number is market value based on cost, because it is the current cost. 6.
Potential problems with using Dell as a representative company to estimate the cost of capital for GCI could happen because of the differences in the financial and risk profile. A suggestion that was given would be for the improvement to adjust the risk factor by adjusting the discount rate. Reference Ross, S. , Westerfield, R. , Jaffe, J. , and Jordan, B. (2009) Corporate Finance: Core principles & applications. (2nd ed. ). Boston,MD: McGraw-Hill/Irwin. www. sec. gov www. finance. yahoo. com www. reuters. com/finance www. finra. org/marketdata