Cost of Capital
WEIGHTED AVERAGE COST OF CAPITAL FOR DELL COMPUTER
1) From the SEC website, the balance sheet of Dell Computer reveals a
Book value of debt = $3,394,000,000 and
Book value of equity = $4,625,000,000
The same balance shows the breakdown of the long-term debt (book values) in table 1.
Table 1
Coupon Rate
(%) Maturity Book Value
(Face Value in million $)
3.38 06/15/2012 400
4.70 04/15/2013 599
5.63 04/15/2014 500
5.65 04/15/2018 499
5.88 06/15/2019 600
7.10 04/15/2028 396
6.50 04/15/2038 400
2) From finance.yahoo.com,
• The most recent (Oct 30 2009) stock price (Po) = $14.45
• Market value of equity or market capitalisation = $28,260,000000
• Shares outstanding (28,260,000,000/14.45) = 1,955,709,343
• No dividend is paid recently. In this case, the dividend discount model cannot be used
• The three-month treasury bill yield = 0.03%
Cost of Equity
Risk free rate (Rf)= 0.03%
Systematic risk of Equity (Beta, BE) = 1.36
Assuming market risk premium = 8.6%
Using the Capital Asset Pricing Model (CAPM),
Cost of equity (RE) = Rf + BE(RM - Rf)
Where,
RM is expected return on the overall market
(RM - Rf) is the market risk premium
Cost of equity (RE) = 0.0003 + 0.086 x 1.36 = 0.1173 = 11.73%
Therefore, the cost of equity is 11.73%
3) Cost of Debt
From www.nasdbondinfo.com, the yields to maturity (YTM) for DELL bonds are shown in table 2.
Table 2
Price (%) Yield to maturity (%)
103.236 2.102
106.224 2.800
109.157 3.395
105.219 4.889
107.526 4.884
111.230 6.079
101.480 6.386
Table 3 is generated by combining tables 1 and 2
Table 3
Coupon Rate Book Value ($) % of Total Market Value ($) % of Total Yield to Book Values Market Values
(%) (Face Value in million) (in million) Maturity (%) (%) (%)
3.38 400 0.118 412.9 0.114 2.102 0.25 0.24
4.70 599 0.176 636.3 0.176 2.800 0.49 0.49
5.63 500 0.147 545.8 0.151 3.395 0.50 0.51
5.65 499 0.147
1) From the SEC website, the balance sheet of Dell Computer reveals a
Book value of debt = $3,394,000,000 and
Book value of equity = $4,625,000,000
The same balance shows the breakdown of the long-term debt (book values) in table 1.
Table 1
Coupon Rate
(%) Maturity Book Value
(Face Value in million $)
3.38 06/15/2012 400
4.70 04/15/2013 599
5.63 04/15/2014 500
5.65 04/15/2018 499
5.88 06/15/2019 600
7.10 04/15/2028 396
6.50 04/15/2038 400
2) From finance.yahoo.com,
• The most recent (Oct 30 2009) stock price (Po) = $14.45
• Market value of equity or market capitalisation = $28,260,000000
• Shares outstanding (28,260,000,000/14.45) = 1,955,709,343
• No dividend is paid recently. In this case, the dividend discount model cannot be used
• The three-month treasury bill yield = 0.03%
Cost of Equity
Risk free rate (Rf)= 0.03%
Systematic risk of Equity (Beta, BE) = 1.36
Assuming market risk premium = 8.6%
Using the Capital Asset Pricing Model (CAPM),
Cost of equity (RE) = Rf + BE(RM - Rf)
Where,
RM is expected return on the overall market
(RM - Rf) is the market risk premium
Cost of equity (RE) = 0.0003 + 0.086 x 1.36 = 0.1173 = 11.73%
Therefore, the cost of equity is 11.73%
3) Cost of Debt
From www.nasdbondinfo.com, the yields to maturity (YTM) for DELL bonds are shown in table 2.
Table 2
Price (%) Yield to maturity (%)
103.236 2.102
106.224 2.800
109.157 3.395
105.219 4.889
107.526 4.884
111.230 6.079
101.480 6.386
Table 3 is generated by combining tables 1 and 2
Table 3
Coupon Rate Book Value ($) % of Total Market Value ($) % of Total Yield to Book Values Market Values
(%) (Face Value in million) (in million) Maturity (%) (%) (%)
3.38 400 0.118 412.9 0.114 2.102 0.25 0.24
4.70 599 0.176 636.3 0.176 2.800 0.49 0.49
5.63 500 0.147 545.8 0.151 3.395 0.50 0.51
5.65 499 0.147