1. The Cost of Capital for Goff Computer, Inc. 1
The Cost of Capital for Goff Computer, Inc.
Rahul Parikh
BUS650: Managerial Finance (MAH1209A)
Dr Charles Smith
March 18, 2012.

2. Goff Computer, Inc. 2
The Cost of Capital for Goff Computer, Inc.:
1. Most publicly 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 fillings are available on the SEC Web site
at www.sec.gov. Go to the SEC Web site, 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.
Answer:
The book value of a company's equity is the same as stockholder's equity, which can be
computed by subtracting the total value of liabilities from total assets.
(Total Assets) = (Total) Liabilities + Stockholder's Equity (book value of equity).
Stockholder's Equity (book value of equity) = Total Assets –Total Liabilities.
The book value of the company’s liabilities and equity was found from the site
http://www.sec.gov . I found Dell’s Form 10K, dated January 28, 2011, and snap shot is
attached here with. Dell’s Form 10K shows the following:
Book value of equity: 10-k:
Total Assets =38,599 millions; Total Liabilities = 30,833 (Dell 10-K, January 28, 2011, p.57)
Book value of equity = Total Assets –Total Liabilities
= $38,599 – $30,833
= $7,766 millions, (Dell 10-K, January 28, 2011, p.57).

3. Goff Computer, Inc. 3
The book value of the company’s liabilities and equity was found from the site
http://www.sec.gov . I found Dell’s Form 10q, dated October 28, 2011, and snap shot is
attached here with. Dell’s Form 10q showed the following (Note: 10q form also shows data
of Dell 10K dated January 28, 2011.]:
Book value of equity: 10-Q:
Total Assets =42,043 millions; Total Liabilities = 33,380 (Del 10-Q, October 28, 2011)
Book value of equity = Total Assets –Total Liabilities
= $42,043 – $33,380
= $8,663 millions, (Dell 10-Q, October 28, 2011).

4. Goff Computer, Inc. 4
Book value of debt: It is labeled in the balance sheet as Shareholder's Equity and Liabilities.
Book Value of Debt: 10k = $38,599 millions, (Dell 10-K, January 28, 2011, p.57).
10Q = $42,043 millions, (Dell 10-Q, October 28, 2011).
Long-term Debt: 10k = $5,146 millions, (Dell 10-K, January 28, 2011, p.57).
10Q = $6,430 millions, (Dell 10-Q, October 28, 2011).
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 find the bonds link. What is
the yield on 3-month Treasury bills? Using a 7 percent market risk premium, what is
the cost of equity for Dell using the CAPM?
Answer: To estimate the cost of equity, I collected various pieces of information dated
March 4 2012, to calculate the CAPM. The following information, necessary for my

5. Goff Computer, Inc. 5
calculations, was gathered from finance.yahoo.com. The screen shots below show this
information.
Most recent stock price is: $17.36 (finance.yahoo.com)
Market Capitalization: 30.87B (finance.yahoo.com)
Shares Outstanding: 1,918 millions (Dell 10-K, January 28, 2011).
Dell Beta: 1.39 (finance.yahoo.com)
Yield on 3-month Treasury bills: 0.04 (= 4%); (finance.yahoo.com).

6. Goff Computer, Inc. 6

7. Goff Computer, Inc. 7

8. Goff Computer, Inc. 8
Using a 7% market risk premium, what is the cost of equity for Dell using the CAPM?
Capital Asset Pricing Model (CAPM) Rs = RF + β X (RM – RF)
Expected return on stock(Rs) =
= risk-free rate (RF) + Stock beta (β) x Market Risk Premium (RM – RF)
= 4% + (1.39 * 7.0%)
= 0.04 + (1.39 * .07)
= 0.04 + 0.0973
= 0.1373
= 13.73%
Cost of equity for Dell = 13.73%.
3. 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?
Industry average beta: Below are the top nine competitors in the computer hardware
industry by market capitalization:
Company Beta
IBM 0.6
HPQ 1.47
Dell 1.39
CSCO 1.38
XRX 1.76
STX 2.8
AAPL 1.04
NCR 1.15
EMC 1.17
Industrial Average 1.42
Beta Industry average = 1.42
Cost of equity using industry average beta:
Rs = 4%+ (1.42 x 7.0%)

9. Goff Computer, Inc. 9
= 0.04 + (1.42 * .07)
= 0.04 + 0.0994
= 0.1394
= 13.94%
Cost of equity = 13.94%
Does it matter if you use the beta for Dell or the beta for the industry in this case?
It would not matter whether we use beta for Dell or beta for the industry, because all
companies are not equal to Dell; so there is little difference in the cost of equity. But as Dell’s
beta is very close to average industry beta, I will use the cost of equity using Dell’s beta.
4. 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?
Bond portfolio: To get the yield to maturity on each of randomly taken four Dell’s bonds, I
went on March 4, 2012, to the site:
http://cxa.marketwatch.com/finra/BondCenter/Watchlist.aspx; and following information was
obtained, which is the snap shot as below:

10. Goff Computer, Inc. 10
Values from above table, and figures obtained by clicking each bond links were used to
calculate the cost of debt for Dell. The weighted average cost of debt for Dell using both the
book value and the market value is detailed in following table:
Weighted Weighted
Percent Market Percent Yield to Book Market
Book value of total Quoted value of Maturity values values
(millions) (c) price (millions) total(a) (b) (c*b) (a*b)
Dell GB 300 0.17 126.580 275.016 0.17 4.723% 0.80% 0.80%
Dell GF $600 0.33 104.235 $566.202 0.35 0.842% 0.28% 0.30%
Dell GG 500 0.28 118.345 460.530 0.28 2.401% 0.67% 0.67%
Dell GH 400 0.22 125.005 322.900 0.20 4.583% 1.01% 0.92%
Total $1,800 $1.00 $1,624.65 1.00 2.76% 2.69%
Analyzing above table, it seems that weighted average cost of debt using book value, the
weights are 2.76 percent, and using market value, the weights are 2.69 percent. It seems
irrelevant whether we use book or market values to calculate the cost of debt for Dell, which

11. Goff Computer, Inc. 11
means it would not make a difference whether the book or market values were used because
they are the approximately the same, and yields almost the same cost of debt.
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 percent marginal tax rate.
Which cost of capital number is more relevant?
Calculation:
Using book value weights, the total value of Dell using 10k annual values is:
V = $1,800,000,000 + $7,766,000,000
V = $9,566,000,000
So, the WACC based on book value weights using 10k annual values is:
WACC = (E/V) x Re + (D/V) x Rd x (1-T)
Where:
Re = cost of equity
Rd = cost of debt
E = market value of the firm's equity
D = market value of the firm's debt
V=E+D
E/V = percentage of financing that is equity
D/V = percentage of financing that is debt
T = corporate tax rate
WACC = (0.1373)($ 7.7660/$9.5660) + (.0276)($1.800/$9.5660)(1 – .35)
= (0.1373)*(.812) + (0.0276) * (.188) * (.65)
= (.112) + (.003)

12. Goff Computer, Inc. 12
WACC = 11.5%
Now using the market value weights, the total value of Dell is:
V = $1,624,650,000 + $21,728,000,000
V = $23,325,600,000
WACC based on market value weights is:
WACC = (E/V) x Re + (D/V) x Rd x (1-T)
WACC = (0.1373) * ($21.728/$23.3256) + (.0269) * ($1.62465/$23.3526) *(1 – .35)
= (.128) + (.001)
WACC = 12.9%
Conclusion: The cost of capital for Dell using market value weights is higher than book
value weights because of higher market-to-book ratio for Dell. The market value is more
relevant because it is the actual sale value of the company.
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?
Answer: Using Dell as a representative company to estimate cost of capital, the leading
potential problem with GCI is that it operates stores for company’s sales, while Dell sales
through its internet site. This could potentially be one of the risk factor affecting the cost of
capital. Another factor affecting the cost of capital is that Dell is a fortune 500 company, and
is one of the leaders in its industry, so it can access capital being a public company, while
GCI is privately owned company.
If I had to suggest improvements, I would advice GCI to go as a public sector company, and
sale its products on internet, rather than at stores, just like Dell Inc.

13. Goff Computer, Inc. 13
References:
Apple Inc (AAPL.O), Retrieved March 4, 2012, from
http://www.reuters.com/finance/stocks/financialHighlights?symbol=AAPL.O
Bond Center. US Treasury Bonds Rates Retrieved March 4, 2012, from
http://finance.yahoo.com/bonds
Dell Bonds, Market Data; Retrieved March 4, 2012, from
http://cxa.marketwatch.com/finra/BondCenter/SearchResult.aspx?q=DELL.
Dell Bonds, Watchlist; Retrieved March 4, 2012, from
http://cxa.marketwatch.com/finra/BondCenter/Watchlist.aspx
Dell Inc. (DELL) Retrieved March 4, 2012, from http://finance.yahoo.com/q?s=Dell&ql=1
Dell Inc.'s 2011 Form 10-K (January 28, 2011), Retrieved March 4, 2012,
http://www.sec.gov/Archives/edgar/data/826083/000095012311025579/d78468e10vk
.htm
Dell Inc.'s 2011 Form 10-Q (October 28, 2011), Retrieved March 4, 2012, from
http://www.sec.gov/Archives/edgar/data/826083/000082608311000015/dellq3fy1210
q.htm
Hewlett Packard Co (HPQ.N), Retrieved March 4, 2012, from
http://www.reuters.com/finance/stocks/financialHighlights?symbol=HPQ.N
International Business Machines Corp (IBM.N), Retrieved March 4, 2012, from
http://www.reuters.com/finance/stocks/financialHighlights?symbol=IBM.N
Ross, S., & Westerfield, R., Jaffe, J., & Jordan, B. (2011), Corporate finance: Core
principles and applications (3rd Global ed). Boston, MD: McGraw-Hill Irwin. ISBN:
978-0-07-353068-0.