Cost of Capital

Topics: Capital asset pricing model, Weighted average cost of capital, Market capitalization Pages: 4 (753 words) Published: November 29, 2009
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
(%)MaturityBook Value
(Face Value in million \$)
3.3806/15/2012400
4.7004/15/2013599
5.6304/15/2014500
5.6504/15/2018499
5.8806/15/2019600
7.1004/15/2028396
6.5004/15/2038400

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 (%)
103.2362.102
106.2242.800
109.1573.395
105.2194.889
107.5264.884
111.2306.079
101.4806.386

Table 3 is generated by combining tables 1 and 2

Table 3
Coupon RateBook Value (\$)% of TotalMarket Value (\$)% of TotalYield toBook ValuesMarket Values (%)(Face Value in million) (in million) Maturity (%)(%)(%) 3.384000.118412.90.1142.1020.250.24

4.705990.176636.30.1762.8000.490.49
5.635000.147545.80.1513.3950.500.51
5.654990.147525.0...