Closing Case Chapter 12

Closing Case Chapter 12 - With this said, I believe Id...

Info iconThis preview shows pages 1–2. Sign up to view the full content.

View Full Document Right Arrow Icon
Closing Case Chapter 12 1) A. Book value of debt B. Book value of equity $9.60 C. Long-term Debt and Interest Rate Risk Management Indenture: 1/30/09 2/1/08 600M @ 4.70% 599 500M @ 5.65% 499 400M @ 6.50% 400 Senior Debentures: 300M @ 7.10% 400 359 Senior Notes 200M @ 6.55% 201 1898 560 Other 2 Less current portion (200) Total long-term debt 1898 362 2) A. Most recent stock price listed for Dell: 13.86 B. Market value of equity: 27.08B C. Shares Outstanding: 1.95B D. Beta: 1.41 E Yield: 0.15 F Cost of equity using CAPM: 3) Competitor Beta IBM .79 HP 1.04 Acer Inc .94 Industry .9233 According to our text, there are some problems with Beta: Betas may vary over time; the sample size may be inadequate and betas are influenced but changing financial leverage and business risk. (p.369) The text also mentions there is a very simple guideline to selecting the right beta. If operations of the firm are similar to the operations of the industry, one should use the industry beta simply to reduce estimation error. (p.371)
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Background image of page 2
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: With this said, I believe Id choose the industry beta. 4) Dell.GF Dell.GI 3.399 Dell.GG 5.644 Dell.GK 5.335 Dell.GJ About 11.8%. WACC = Wd [Kd x (1-t)] + We (Ke) Where: Wd = Weight of Market Value of Debt (as a % of market value of capital) Kd = Pre-tax cost of debt t = effective tax rate We = Weight of Market Value of Equity Ke = Cost of Equity (post tax) Market cap of Dell: US$27.08b Market cap of Dell debt: assuming at par (US$0.50b) CAPM to determine Ke: (4.61% + (11%-27.08%)*1.41) = 11.8% Beta = 1.41 Rm = 11% Rf = 4.6% based on 30 year treasury yield Kd (n/a in preliminary 2Q statements due to no balance sheet and n/a in 1Q due to not enough breakdown for interest expense). WACC = 0.8% x (7.3%) (1-23.8%) + 99.2% (11.8%) = 11.8% Sensitivity is really going to depend upon the Rm (market risk) mostly....
View Full Document

This note was uploaded on 07/12/2009 for the course FINANCE BUS650 taught by Professor Rayford during the Spring '09 term at Ashford University.

Page1 / 2

Closing Case Chapter 12 - With this said, I believe Id...

This preview shows document pages 1 - 2. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online