Group 3:

1. Nguyễn Thị Ngọc Diệp

2. Phan Thanh Dũng

3. Vũ Trọng Đức

4. Đàm Nguyệt Hà

5. Nguyễn Vina Nhật Hạ

6. Nguyễn Mai Thu Hạnh

Mini Case: Cost of Capital for Hubbard Computer, Inc. (Pg. 482)

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

annual reports (10K) to the SEC detailing the financial operations of the company

over the past 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, and search for SEC fi lings made by Dell. Find the most

recent 10Q or 10K, and download the form. 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 “Long-term Debt and Interest Rate Risk

Management” that will provide a breakdown of Dell’s long-term debt.

The company’s book value equity equals the stockholder’s equity, which is likely to be

calculated by subtracting total liabilities from total assets.

Total Assets = Total liabilities + Book value of equity (Stockholder’s Equity)

Stockholder’s equity = Total Assets – Total Liabilities.

The company’s book value and equity was retrieved from http://www.sec.gov the

company’s (Dell) form 10K, dated February 3, 2017 attached below as a snapshot. The

site gives Dell’s Form 10K as follows:

Book value of equity: 10-k:

Total Assets is 118,206 million and total Liabilities is 98,966 (Dell 10-k, February 3,

2017, p.79)

Book value of equity = $118,206 - $98,966 = $19,240 million.

Based on the site (http://www.sec.gov) Dell’s Form 10q dating November 3, 2017 which

is shown in the snapshot below. The company’s Form 10q indicated the following:

Book value of equity: 10-Q:

Total Assets is 118,394 million and total liabilities is 102,806 (Dell 10-q, November 3,

2017)

Book value of equity = $118,394 -$102,806 = $15,588 million

(Dell 10-q, November, 2017).

Book value of debt (Shareholder’s Equity and Liabilities)

10k = $118,206 million.

10Q = $102,806 million

Long-term Debt: 10k = $43,061 million

 10Q = $45,416 million

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

ticker symbol DELL. Follow the links to answer 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 most recent annual dividend? Can you use the dividend discount model in this

case? What is the beta for Dell? Now go back to fi nance.yahoo.com and follow the

“Bonds” link. What is the yield on three-month Treasury bills? Using the historical

market risk premium, what is the cost of equity for Dell using CAPM?

The gathered information from finance.yahoo.com. is as follows:

Market price = $11.20

Market capitalization = $21.78 billion

Shares outstanding = 1.94 billion

Most recent dividend = $0

Beta = 1.41

3-month Treasury bill rate = 0.10%

Dell Company from the site is noted to have never paid dividend therefore the dividend

growth model cannot be used in estimating the cost of equity (Ross, 2007). Therefore

using 7 percent as the market risk premium from the given textbook the cost of equity

with the CAPM will be as follows:

RE = Rf + β [E (RM) – Rf]

RE = 0.001 + 1.4 [0.07]

RE = 9.97%

3. You now need to calculate the cost of debt for Dell. Go to

www.finra.orgymarketdata, enter Dell as the company, and find the yield to

maturity for each of Dell’s bonds. What is the weighted average cost of debt for Dell

using the book value weights and using the market value weights? Does it make a

difference in this case if you use book value weights or market value weights?

Based on this calculating yield to maturity on each of the picked four Dell’s bonds. From

the website: http://cxa.marketwatch.com/finra/BondCenter/Watchlist.aspx. The following

snapshot gives the information retrieved from the site.

From the above table, the bonds were used in the calculation of the cost of debt off Dell,

Inc. The weighted average cost of debt for Dell using both the market value and book

value is as shown below.

Book Perce Quote Market Perce Yield to Weighte Weighte

value nt of d price value nt of Maturit d Book d

(million total (millions total y (b) values Market

s) (c) ) (a) (c*b) values

(a*b)
Dell 300 0.17 126.58 275.016 0.17 4.723% 0.80% 0.80%

GB 0
 Dell $600 0.33 104.23 $566.20 0.35 0.842% 0.28% 0.30%

GF 5 2
Dell 500 0.28 118.34 460.530 0.28 2.401% 0.67% 0.67%

GG 5
Dell 400 0.22 125.00 322.900 0.20 4.583% 1.01% 0.92%

GH 5
Tota $1,800 $1.00 $1,624.6 1.00 2.76% 2.69%

l 5

It can be noted that in the above table the WACC of debt through the book value, the

weights are given as 2.76%, and through the use of market value, the weights are 2.69%

(Ross, Westerfield & Jordon, 2013). Thus, it seems irrelevant whether the book value or

market value is used in calculating the cost of debt of Dell, which has the meaning that

there will be no difference whether market or book values are used.

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

of capital for Dell. Calculate this using book value weights and market value

weights, assuming Dell has a 35 percent marginal tax rate. Which number is more

relevant?

From the book value weights, Dell’s total value using the 10k values is as follows

V= $1,800,000,000 + $19,240,000,000

V= $21,040,000,000

Thus, the WACC = (E/V)*Re + (D/V) x Rd x (1-T)

In this case:

Re = Cost of equity

Rd = Cost of debt

E = the firm’s market value

V = E+D

E/V = % of financing that is debt

T = Corporate tax rate

WACC = (0.1373) x ($19,240/$21,040) + (0.0276) x ($1,800/$21,040) (1-0.35)

= (0.1373)*(0.9144) + (0.0276)*(0.0856)*(0.65)

= (0.1255 + 0.0015)

= 0.127 = 12.7%

Therefore WACC = 12.7%

Using the market value weights, Dell’s total value will be;

V= $1,624,650,000 + $21,728,000,000

V= $23,325,600,000

WACC regarding the market value weights is as follows;

WACC = (E/V)*Re + (D/V) * Rd x (1-T)

WACC = (0.1373)*($21.728/$23, 325) + (0.0269)*($1.6246/$23,325) * (0.65)

WACC = 12.9%

From the two that is book value weights and market value weights, it is noted that the

market value is more relevant as it is the actual value of company regarding sale (Ross,

Westerfield & Jordon, 2013).

5. You used Dell as a pure play company to estimate the cost of capital for HCI. Are

there any potential problems with this approach in this situation?

Using Dell as a representative company to estimate cost of capital, the leading potential

problem with GCI is that it operates stores for company’s sales, while Dell sales through

its internet site. This could potentially be one of the risk factor affecting the cost of

capital. Another factor affecting the cost of capital is that Dell is a fortune 500 company,

and is one of the leaders in its industry, so it can access capital being a public company,

while GCI is privately owned company.

If I had to suggest improvements, I would advice GCI to go as a public sector company,

and sale its products on internet, rather than at stores, just like Dell Inc.