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Intro to Financial Analysis

Part1

Compare the GAAP and economic balance sheets.

Dell, Inc. www.dell.com

Using the GAAP balance sheet, for each item, determine where it should be classified in the economic balance sheet (i.e., core operations, nonoperating net assets, debt claims, other capital claims, or equity claims). Create a two-column table in Word to show the corresponding accounts.

Determine whether any other items should appear on the economic balance sheet that is not on the GAAP balance sheet.

Determine if information exists in the annual report or elsewhere that can assist in valuing the non-operating net assets, debt, and other capital claims.
Part 2

Estimate the cost of equity, WACC, and unlevered cost of equity.

Use the same company (Dell).

Find the beta for your company use: http://finance.yahoo.com/q/ks?s=AIG
Estimate your company's cost of equity.
Estimate your company's weighted-average cost of capital.
Estimate your company's unlevered cost of equity.
Show your calculations in an Excel document. Be sure to label each calculation clearly.

Part 3

Combined income and cash flow statement

Download the company's annual report from its website, or the company's Form 10-K from the U.S. Securities and Exchange Commission (SEC) website [www.sec.gov].

Confirm that the firm's income, dividends, and other capital transactions explain the change in equity for the most recent year. (You may need to consult the statement of shareholders' equity.)
Confirm that the firm's cash flow statement begins with the same net income amounts found in the income statement.
Confirm that the firm's cash flow statement shows a change in cash that is equal to the difference between cash shown on the balance sheet at the beginning and end of the year. In Excel, construct a combined income statement and cash flow statement.
Write 1-2 paragraphs that answers the following: what would you do if you found there was a huge difference in the net income amounts and the reported cash flow amounts? How could technology limit the likelihood of this happening again?
Trend analysis

Finally, prepare a trend analysis of operating ratios for at least three years' worth of financial data. Prepare the analysis in Excel. You may wish to create a common-sized income statement first, but it isn't required.

If you adjusted for any nonrecurring items in step (1), explain the adjustments in a separate Word document. Use any other information in your company's annual report to explain the change in revenues, gross margin percentage, and operating margin percentage. Add this information to a Word document.

Solution Preview

Part1

Compare the GAAP and economic balance sheets.

Dell, Inc www.dell.com

Using the GAAP balance sheet, for each item, determine where it should be classified in the economic balance sheet (i.e., core operations, nonoperating net assets, debt claims, other capital claims, or equity claims). Create a two-column table in Word to show the corresponding accounts.

Determine whether any other items should appear on the economic balance sheet that is not on the GAAP balance sheet.

Determine if information exists in the annual report or elsewhere that can assist in valuing the non operating net assets, debt, and other capital claims.

About the company

Michael Dell founded Dell Computer Corporation in 1984 with a simple vision and business concept - that personal computers can be built to order and sold directly to consumers. Dell's principal products include desktop PCs, notebook computers, workstations, and servers. Its products and services are sold in more than 140 countries. Dell Direct Model focused on two aspects: (i) by passing distributors and retail dealers eliminated the markups of resellers, and (ii) building to order greatly reduced the costs and risks associated with carrying large stocks of parts, components and finished goods. This model has proved successful as now Dell is one of the largest computer companies in the world.

Benefits of Direct Model
Dell Direct model, a Web-enabled infrastructure that allows customers to customize their PCs and order other products they need or desire. This virtual integration structure eliminates the need to manufacture everything, and instead uses the power of the Internet to share and exchange information with suppliers and vendors to build a truly superior supply chain that keeps inventory turnover low (seven days!) and costs to a minimum (dotcom.com/news/dell.html). By late 1997, it became the industry leader by keeping costs low and wringing efficiency out of the direct sales and build-to-order business model. Dell time and again introduces the latest relevant technology much more quickly than companies with slow-moving, indirect distribution channels, turning over inventory in just under five days on average. The Dell Direct model changed the way the world shops for technology and revolutionized the computer manufacturing industry with five simple principles:
1. Stay close to the customer
2. Provide a single point of accountability
3. Empower consumers with customization
4. Drive down costs through continual improvement
5. Deliver standards-based technology that is easy to use
(Adapted from the website of Dell)

Thus Dell's focus is on innovation at reduced cost. Their mantra is continuous improvement which is also popularly known as Dell effect.
Thus Dell has revolutionized the industry to make computing accessible to customers around the globe, including businesses, institutional organizations and individual consumers. Because of Dell's direct model?and the industry's response to it?information technology is more powerful, easier to use and more affordable, giving customers the opportunity to take advantage of powerful new tools to improve their businesses and personal lives. Dell's direct-to-customer business model is the key to the company's dramatic growth and success. Unlike many other computer manufacturers who built multiple reseller channels, Dell has focused on selling directly to customers. This helps eliminate the middleman and offers customers more powerful, more richly configured systems than most competitors. The direct model enables Dell to develop a thorough understanding of customer expectations, which, in turn, strengthens customer relationships and increases customer satisfaction and loyalty.
One of the characteristics that distinguish Dell from its other competitors is that DELL provides the mode to custom the computers of the customer's choice and taste and delivers the system to the customer
Dell is the low-cost leader. Dell's highly efficient supply chain management and manufacturing organization, efficient direct-to-customer model, and concentration on standards-based technologies allow Dell to maintain the lowest cost structure in the industry and to pass those savings to customers. Additionally, Dell's focus on cost control during fiscal 2003 resulted in the lowest operating expense (measured as a percent of net revenue) in Dell's history and the lowest among its major competitors. Dell's relentless focus on reducing its operating costs allows it to consistently provide customers with a superior value.
Dell can continue to peruse their predetermined business model without making any changes. They have to make sales and operations planning that transcends company boundaries to involve every link of the supply ...

Solution Summary

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$2.19