ï€ Particular attention will be paid to the presentation of the work.

ï€ Expand your answers, you must demonstrate your understanding of the concepts.

ï€ Police: Times New Roman, size 12, 1.5 spacing.

ï€ A drop box was provided on the "assessment" page of the course website for the delivery of the work.

ï€ A paper version should be also delivered on 7th April 2015.

Case 2: Cost of Capital for Lethbridge Computer Inc. (75 points)

You have recently been hired by Lethbridge Computer Inc. (LCI), in its relatively new treasury management department. LCI was founded eight years ago by Geoff Boycott and currently operates 74 stores in Alberta. The company is privately owned by Geoff and his family, and it had sales of $115 million last year.

LCI primarily sells to customers who shop in the stores. Customers come to the store and talk with a sales representative. The sales representative 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 made to fill the order. Delivery of the computer averages 15 days, and it is guaranteed in 30 days.

LCI's growth to date has come from its profits. When the company had sufficient capital, it would open a new store. Other than scouting locations, relatively little formal analysis has been used in its capital budgeting process. Geoff has just read about capital budgeting techniques and has come to you for help. For starters, the company has never attempted to determine its cost of capital, and Geoff would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. Geoff wants you to use the pure play approach to estimate the cost of capital for LCI, On investigation, Geoff found that Dell USA's business model closely resembles that of LCI, and therefore chose Dell as the representative company for estimating LCI's cost of capital. The following questions will lead you through the steps to calculate this estimate:

Questions

1. Most publicly traded corporations are required to submit quarterly (10Q) and annual reports (10K) to the SEC detailing the financial operations of the company over the past quarter or year, respectively. These corporate filings are available on the SEC website at sec.gov.

a) Go to the SEC website; follow the “Search for Company Filings” link and the “Companies & Other Filers” link; enter “Dell Inc.”; and search for SEC filings made by Dell.

b) Find the most recent 10Q or 10K, and download the form.

c) Look on the balance sheet to find the book value of debt and the book value of equity.

d) If you look further down the report, you should find a section titled “Long-term Debt and Interest Rate Risk Management” that will provide 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 links to answer the following questions:

4

a) What is the most recent stock price listed for Dell?

b) What is the market value of equity, or market capitalization?

c) How many shares of stock does Dell have outstanding?

d) What is the most recent annual dividend?

e) Can you use the dividend discount model in this case?

f) What is the beta for Dell?

g) Now go back to finance.yahoo.com and follow the “bonds” link. What is the yield on 30-year Treasury Bonds?

h) Using the historical market risk premium, what is the cost of equity for Dell using CAPM?

3. You now need to calculate the cost of debt for Dell. Go to finra.org/marketdata, enter Dell as the company, and find the yield to maturity for each of Dell's bonds.

a) What is the weighted average cost of debt for Dell using the book value weights and using the market value weights?

b) Does it make a difference in this case if you use book value weights or market value weights?

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

5. You used Dell as a pure play company to estimate the cost of capital for LCI. Are there any potential problems with this approach in this situation?

Subject | Business |

Due By (Pacific Time) | 03/30/2015 11:52 pm |

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