Cost of Capital Essay
BUS650: Managerial Finance (MAH1209A)
Dr Charles Smith
March 18, 2012.
The Cost of Capital for Goff Computer, Inc.:
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 fillings are available on the SEC Web site at www.sec.gov. Go to the SEC Web site, 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 …show more content…
Industry average beta: Below are the top nine competitors in the computer hardware industry by market capitalization: Company | Beta | IBM | 0.6 | HPQ | 1.47 | Dell | 1.39 | CSCO | 1.38 | XRX | 1.76 | STX | 2.8 | AAPL | 1.04 | NCR | 1.15 | EMC | 1.17 | Industrial Average | 1.42 |
Beta Industry average = 1.42
Cost of equity using industry average beta:
Rs = 4%+ (1.42 x 7.0%)
= 0.04 + (1.42 * .07)
= 0.04 + 0.0994
Cost of equity = 13.94%
Does it matter if you use the beta for Dell or the beta for the industry in this case?
It would not matter whether we use beta for Dell or beta for the industry, because all companies are not equal to Dell; so there is little difference in the cost of equity. But as Dell’s beta is very close to average industry beta, I will use the cost of equity using Dell’s beta.
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?
Bond portfolio: To get the yield to maturity on each of randomly taken