WACC

Cost of Capital for Goff Computers

The 10Q book value debt for Dell was $6,430,000,000. The 10Q book value equity for Dell was $8,663,000,000. The 10K book value debt for Dell was $5,146,000,000. The 10K book value equity for Dell was $7,766,000,000.

What is the most recent stock price listed for Dell?

What is the market value of equity, or market capitalization? 30.95B

How many shares of stock does Dell have outstanding? 18,703,176

What is the beta for Dell?

What is the yield on 3-month Treasury bills? .03

Using a 7% market risk premium, what is the cost of equity for Dell using the CAPM?

Kc = Rf + beta (Km -- Rf)

Kc = .03 + 1.26(7 - .03) = 6.99

Dell's Competitors and Beta:

Apple Inc.

Hewlette-Packard Company

Acer Inc.: .92

Toshiba Corporation

Sony Corporation

Lenovo Group Limited

International Business Machines Corp: .67

Samsung Electronics: .54

EMC Corp

Industry Average

Kc = 7.98

It does matter, because the industry average is higher and most likely more accurate because it takes into account the smaller competitors.

4. Bonds and Yield to Maturity:

5.40: 4.01%

6.50: 3.81%

7.10: 3.39%

4.63: 2.61%

5.88: 2.41%

5.65: 2.21%

3.10: 1.07%

5.63: 0.83%

2.10: 0.93%

1.40: 0.71%

4.70: 1.02%

3.38: 0.81%

Average 1.98%

Book Cost of Debt: $154,380,000

Market Cost of Debt: $101,890,800

Yes it does make a difference, as the book value weight is much higher than the market value.

5. Book Cost of Capital: 12.57%

Market Cost of Capital: 13.2%

The book value is more relevant since it is simply being used as a reference point for another business.

6. Dell's total cost of capital is unique to its own company. The figures are not going to be close enough to GCI's business amounts. This would cause the calculation to be inaccurate for GCI. The most obvious problem would be if GCI intends to use the figures for obtaining investments or if the company goes public.

It would be better to begin with GCI's information and work from there. If anything within the GCI portfolio is unclear, use the industry average, not just one company.

References:

Ross, S., Westerfield, R., Jaffe, J., & Jordan, B. (2011). Corporate Finance: Core Principles & Application (3rd ed.). New York, NY: McGraw-Hill/Irwin

Value-Based Management (2011). WACC- Weighted Average Cost of Capital. Retrieved January 31, 2012. http://www.valuebasedmanagement.net/methods_wacc.html