The Cost of Capital for Goff Computer, Inc - Assignment Example

The Cost of Capital for Goff Computer, Inc Golf Computers, Inc. (GCI) estimated Cost of equity using Dell computers as representative company.1.(a) Capital budgeting - refers to the process of determining whether available long term ventures are worth investing by evaluating inflows and outflow for each project relative to anticipated returns over a given period (Dayananda, 2002). (b)The following information was obtained from Balance sheet of Dell in SEC website at www.sec.gov 2nd May 2012(millions) _ 3rd February 2012 millions (millions)Book value of total debts $9,034 $9,254Book value for equity $ 112 $107Dell total long term debt $5,310 $6,387 Source: (United States Securities & Exchange Commission, 2012)2. (i) Estimating Dell cost of equity from finance.yahoo.com.

(Enter Dell Symbol & find the following) (a)What is the most recent stock price listed for Dell? Dell stock price =$10.56 (b) What is the Market Value of equity, or market capitalization? Market capitalization= $18.54B (c)How many shares of stock does Dell have outstanding? Number of outstanding Shares= 1,737.27 (d) What is the beta for Dell? Beta for Dell (β) = 1.36 Source: (Yahoo Finance, 2012)(i)Back to finance.yahoo.com using the bond link find (a) What is the yield on 3-month Treasury bills?

=2.949%(b) Using a 7% market risk premium, what is the cost of equity for Dell using the CAPM?CAPM=Ks=Krf+ (Rm-Krf) β Ks=2.949 %+( 7%) 1.36=12.01%Source: (Yahoo Finance, 2012)3. from www.reuters.com (a)Find the list of the competitors in the industry. Competitors Beta (β)Samsung Electronics Co., Ltd (005930.KS) 0.68Samsung Electronics Co., Ltd (005935.KS) 0.68Sony Corporation (6758.T) 1.

66Toshiba Corp (6758.T) 1.59 International business Machines.Corp. (IBM.N) 0.67 Apple Inc. (AAPL.OQ) 1.21Acer Incorporated (2353.TW) 0.98 EMC Corporation (EMC.N) 1.08Hewlett-Packard (HPQ.N) 1.07Lenovo Group Limited (0992.HK) 1.35 Total beta for dell competitor’s β10.

97Source: (Reuters.com, 2012) (b)Find the beta for each of these competitors, & calculate the industry average betaIndustrials average beta (β) =beta for all competitors + Beta for Dell = 10.97+1.36= 1.1209 Number of competitors 11 (c)Using the industry average beta, cost of equity for dell? Ks=Krf + (Rm-Krf) β Ks=2.949 %+( 7%) 1.1209 = 10.80% (d) Does it matter if you use the beta for Dell or the beta for the industry in this case?

Industrial beta is lower than beta for Dell with a difference of 0.2391. It can be scrutinized that Dell cost of equity is higher when Dell beta is used. On the contrary, Dell cost of equity is lower when industrial beta is used. 4. From cxa.marketwatch.com/finra/BondCenter/Default.aspx,enter Dell as a company(a) Find the yield to maturity for each of Dell’s bonds.Dell Bonds Yields Treasury 0% & 3% Corporate 3.01% & 5.0%Municipal 5.

01% & 10%(b) What is the weighted average cost of debt for Dell using the book value weights and the market value weights?The Book value weight was 2.94% while that of market value weight was 3.00 % (Finra, 2012).(c) Does it make a difference in this case if you use book value weights or market value weights?There is only a slight difference that can be scrutinized and therefore no much great difference between the two. 5. Using the information you already have,(a) 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 rateWeighted average cost of capital WACC= Kd (D/V) (1-T) + Ke (E/V) Whereby, Kd=cost of debt=3%=0.

03Ke=cost of equity=10.80%=0.1080 D=debt market value=$1,624,650,000E=equity market value=$21,728,000,000V=total value of debt and equity=$1,624,650,000+$21,728,000,000=$23,352,650,000Source: Finra, 2012).Therefore, WACC=0.03($1,624,650,000÷$23,352,650,000) (1-0.35) + 0.1080($21,728,000,000 ÷$23,352,650,000) = =0.001357+0.100486=0.101843 =10.18% (b) Which cost of capital number is more relevant?The value of market cost of capital is more relevant than the book value because it reflects all the actual events in the market unlike book value cost of capital.6. What are some of the potential problems of using Dell as a representative company for GCI to estimate cost of debt and which improvements you May suggest?

The basic potential problem is that the two companies operate differently whereby, Dell operate through online while GCI operate in a store. Additionally, Dell Company can be able to raise more capital than GCI because it has listed its stocks in the stock market unlike GCI (Yahoo Finance, 2012). I would therefore, suggests GCI Company to embrace online commerce and publicize its stocks in the stock exchange market in order to raise more capital just like Dell.ReferencesDayananda, D. (2002). Capital budgeting: Financial appraisal of investment projects.

Cambridge [u.a.: Cambridge Univ. Press.Finra. (2012).Bonds. Retrieved :< http://cxa.gtm.idmanagedsolutions.com /finra/Bond Center/ Default.aspx>on 14th December 2012.Yahoo Finance. (2012). Dell Inc. (DELL). Retrieved :< http://finance.yahoo.com/q?s=DELL> on 13th December 2012.United States Securities & Exchange Commission. (2012 May, 4).Dell Quartery Report Pursuant to Section 12 or 15 of Securities Exchange Act Of 1934.Washinton, D.C.20549.Retrieved :on 13th December 2012.Reuters.com (2012). Dell Inc. (DELL).

Retrieved :on 14th December 2012.