THE COST OF CAPITAL FOR

HUBBARD COMPUTER, INC.

1. The book value of the company’s liabilities and equity can be found from a number of
sources. We went to http://www.sec.gov and found Dell’s Form 10q, Dell’s Form 10k
showed the following:

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Dell has one outstanding bond issue as of June 2008, maturing in 2028. The book value of
debt is the book value of this issue, or $300 million.
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 2. We need various pieces of information to estimate the cost of equity. We can use the
dividend growth model or the CAPM, so we will attempt to use both. The following
information is necessary for our calculations. We gathered all the information from
finance.yahoo.com. The screen shots below show this information.

Market price = $23.06

Market capitalization = $47.10 billion
Book value per share = $1.813
Shares outstanding = 2.05 billion
Most recent dividend = $0
Beta = 1.53
3-month Treasury bill rate = 1.83%

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Dell has never paid a dividend so we cannot use the dividend growth model to estimate the
cost of equity. We do have the information to estimate the cost of equity with the CAPM.
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Using the market risk premium of 7 percent from the textbook, we get:
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RE = Rf + β[E(RM) – Rf]
RE = .0183 + 1.53[.07]
RE = 12.54%
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3. To get the yield to maturity on Dell’s bonds, we went to www.finra.org/marketdata. We

gathered the following information:

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 So, the weighted average cost of debt for Dell using both the book value and the market
value is:

Book value Market Weighted Weighted

Coupon (face value, Percentage value Percentage Yield to book market
Rate in millions) of total (in millions) of total maturity values values
7.10 $300 1.00 $305.43 1.00 6.93% 6.93% 6.93%

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Total $300 1.00 $305.43 1.00 6.93% 6.93%

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It is irrelevant whether we use book or market values to calculate the cost of debt for Dell

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since the company has only one bond issue outstanding.

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 4. Using book value weights, the total value of Dell is:

V = $300M + $3.717B
V = $4.017B

So, the WACC based on book value weights is:

WACC = RE(E/V) + RD(D/V)(1 – t)

WACC = (.1254)($3.717/$4.017) + (.0693)($0.300/$4.017)(1 – .35)
WACC = 11.94%

Using the market value weights, the total value of Dell is:

V = $305.43M + $47.10B
V = $47.41B

So, the WACC based on market value weights is:

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WACC = RE(E/V) + RD(D/V)(1 – t)

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WACC = (.1254)($47.10/$47.41) + (.0693)($0.305/$47.41)(1 – .35)

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WACC = 12.49%

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The cost of capital for Dell using Book value weights and market value weights is similar
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because Dell has such a small portion of debt in its capital structure. The difference in this
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case is 0.55 percent.

5. The biggest potential problem with HCI using Dell’s cost of capital is that HCI operates
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stores that generate the company’s sales. Dell generates sales almost exclusively from its
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internet site. This could potentially be a risk factor that affects the cost of capital. Another
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factor that could affect the cost of capital is Dell’s access to capital since it is a public
company, while Hubbard Computer is private.
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