Purchase Solution

Goff Computer, Inc (GCI): Determine the cost of capital using Dell

Not what you're looking for?

Ask Custom Question

Goff Computer, Inc (GCI): Determine the cost of capital

You have recently been hired by Goff Computer, Inc (GCI), in the finance area. GCI was founded eight years ago by Chris Goff and currently operates 74 stores in the Southeast. GCI is privately owned by Chris and his family and had sales of $97 million last year.

GCI primarily sells to in-store customers. Customers come to the store and talk with a sales representative. The sales rep assists the customer in determining the type of computer and peripherals that are necessary for the individual customer's computing needs. After the order is taken, the customer pays for the order immediately, and the computer is assembled to fill the order. Delivery of the computer averages 15 days, but is guaranteed in 30 days.

GCI's growth to date has been financed from its profits. Whenever the company had sufficient capital, it would open a new store. Relatively little formal analysis has been used in the capital budgeting process. Chris has just read about capital budgeting techniques and has come to you for help. The company has never attempted to determine its cost of capital, and Chris would like you to perform the analysis. Since the company is privately owned, it is difficult to determine the cost of equity for the company. You have determined that to estimate the cost of capital for GCI, you will use Dell as a representative company. The following steps will allow you to calculate this estimate.

1. Most publicity 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 filings are available on the SEC website at www.sec.gov. Go to the SEC website, 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 the book value of equity. If you look further down the report, you should find a section titled either "Long-term Debt" or "Long-term Debt and Interest Rate Risk Management" that will list a breakdown of Dell's long-term debt.

2. To estimate the cost of equity for Dell, go to finance.yahoo.com and enter the ticker symbol "DELL". Follow the various links to find answers to 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 beta for Dell? Now go back to finance.yahoo.com and follow the "Bonds" link. What is the yield on 3-month Treasury bills? Using the historical market risk premium, what is the cost of equity for Dell using the CAPM?

3. Go to investor.reuters.com and find the list of competitors in the industry. Find the beta for each of these competitors, and then calculate the industry average beta. Using the industry average beta, what is the cost of equity? Does it matter if you use the beta for Dell or the beta for the industry in this case?

4. You now need to calculate the cost of debt for Dell. Go to www.nasdbondinfo.com, 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 the market value weights? Does it make a difference in this case if you use book value weights or market value weights?

5. You now have all the necessary information to calculate the weighted average cost of capital for Dell. Calculate the weighted average cost of capital for Dell using book value weights and market value weights assuming Dell has a 35% marginal tax rate. Which cost of capital number is more relevant?

6. You used Dell as a representative company to estimate the cost of capital for GCI. What are some of the potential problems with this approach in this situation? What improvements might you suggest?

Purchase this Solution
Solution provided by:
Sonia Agarwal, CA
Education
  • Chartered Accountant (Equivalent to CPA in US), Institute of Charted Accountants of India
  • Bachelor of Commerce, West Bengal University
Recent Feedback
  • "I got this feedback and I wanted to know if you can explain it to me. I noticed something within your workings which I believe is incorrect.  It looks like you've mistaken the Debt ratio for the Equity Multiplier.  You've done a calculation to determine Return on Equity (ROE) but if you take a look at the ratios provided for us you'll see ROE listed on the bottom line already.  You can use ROE, Profit Margin and Total Asset Turnover to figure out the Equity Multiplier amount.  Equity multiplier is not provided for us and we need to calculate it.  I really hope this is helpful to you.  "
  • "Very attentive to detail. Answers are designed in easy to understand format."
  • "Fast response and thorough answer"
  • "thank you very much! "
  • "thank you so much !!!!!!!"
Purchase this Solution
Free BrainMass Quizzes
Lean your Process

This quiz will help you understand the basic concepts of Lean.

Income Streams

In our ever changing world, developing secondary income streams is becoming more important. This quiz provides a brief overview of income sources.

Managing the Older Worker

This quiz will let you know some of the basics of dealing with older workers. This is increasingly important for managers and human resource workers as many countries are facing an increase in older people in the workforce

Production and cost theory

Understanding production and cost phenomena will permit firms to make wise decisions concerning output volume.

Academic Reading and Writing: Critical Thinking

Importance of Critical Thinking

View More Free Quizzes
Related BrainMass Solutions

  • Goff Computer cost of capital, cost of equity and cost of debt

    315560 Goff Computer cost of capital, cost of equity and cost of debt Goff Computer, Inc (GCI): Determine the cost of capital You have recently been hired by Goff Computer, Inc (GCI), in the finance area.

  • Goff Computer: Cost of Capital

    Step 6: The potential problems of using dell as a representative company are: It doesn't represent the accurate financial situation for Goff Computer, Inc. Dell established long back than Goff Computer, Inc.

  • Corporate Finance and Cost of Capital

    PART B: Read about "The Cost of Capital for Goff Computer, Inc" Question: (#4 in the text) You now need to calculate the cost of debt for Dell.

  • Capital Structure for General Dynamics, Sprint and Dell

    Dell Inc should target this capital structure to avoid a situation where the cost of debt financing may outweigh the return that the company may generate through greater debt.

  • Sales Revenue, Costs of Goods Sold, and Inventory Amounts

    542766 Sales Revenue, Costs of Goods Sold, and Inventory Amounts The following table presents sales revenue, cost of goods sold, and inventory amounts for three computer/electronics companies, Dell Inc., Hewlett-Packard Company, and Apple Inc.

  • Determine free cash flow, IRR, NPV of a project

    265541 Dell Computer: Determine free cash flow, IRR, NPV of a project Determine the cash flows associated with this project.

  • Nonprice Competition

    A 25% boost in demand is anticipated, even though only 15 percent of all eligible customers are expected to redeem their coupons. Each redeemed coupon costs GCI $6, so the expected cost of this promotion is .30$ (=0.15x$6/3) per unit sold.

  • Intro to Financial Analysis

    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).

  • Dell, Inc. Questions from annual report cost objects, direct

    406561 Dell, Inc.

View More Related Solutions