1 The book value of the 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 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 April 17, 2020, and snap short is attached here with Dell’s Form 10K shows the following: Book value of equity: 10-K: Total Assets = 118.861 millions; Total Liabilities = 115.077 Book value of equity = Total Assets – Total Liabilities = $118.861 - $115.077 = $3.784 millions 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 April 17, 2020, and snap shot is attached here with Dell’s Form 10q showed the following Book value of equity: 10-Q: Total Assets = 116.814 millions; Total Liabilities = 112.003 millions Book value of equity = Total Assets – Total Liabilities = $116.814 - $112.003 = 4.811 millions Book Value of Debt: 10K = $118.861 millions 10Q = $116.814 millions Long-term Debt: 10K = $44.319 millions 10Q = $44.727 millions I collected information on April 2020 to calculate the CAPM th Most recent stock price of Dell: $36.44 Market capitalization: 26.95B Shares outstanding: 254.4M Beta of Dell: 0.8766 Yield on 3-month Treasury Bills: 0.091% With 7% market risk premium, using CAPM to calculate cost of equity: R = R + β × (R – R ) S F M F = 0.091% + 0.8766 × 7% = 0.0623 = 6.23% Cost of equity for Dell= 6.23% Company Beta Dell 0,8 IBM 1,27 HPQ 1,34 XRX 2,08 Lenovo 1,25 AAPL 1,17 ASUS 0,61 CSCO 0,99 Acer 1,04 Average beta = 1,172 Cost of equity using the average beta: Rs = 0,091% + 1,172 x 7% = 8,295% * It would not matter whether we use beta for Dell or beta for industry, because if you believe that the operations of Dell is similar to the operations of the rest of the industry, you should use the industry beta to reduce estimation error But if you believe that the operations of Dell is fundamentally different from those in the rest of the industry, the Dell’s beta should be used Book Perc Quote Marke Perc value ent d t ent (millio of value value of ns) total (millio (millio total © ns) ns) (a) DEL L GB 300 0.17 126.58 275.01 0.17 Yield Weigh Weigh to ted ted Matu book marke rity values t (b) (c*b) values (a*b) 4.723 0.80% % 0.80% DEL L GF 600 0.33 104.23 566.20 0.35 0.842 0.28% % 0.30% DEL L GG 500 0.28 118.34 460.53 0.28 2.401 0.67% % 0.67% DEL L GH 400 0.22 125.00 322.90 0.20 4.583 1.01% % 0.92% TOT AL 1800 1.00 1624.6 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 weight are 2.69 percent It seems irrelevant whether we use book or market values to calculate the cost of debt for Dell,which means it would not make a diffence whether the book or market values were used because they are the approximately the same, and yields almost the same cos of debt Using book value weights, the total value of Dell using 10K annual values is: V= 1.800.000.000 + 3.784.000.000 V= 5.584.000.000 So, the WACC based on book value weights using 10K annual value is: WACC= (E/V)*Rs + (D/V)*Rb*(1-T) Where: Rs= cost of equity Rb= cost of debt E= market value of the firm’s equity D= market value of the firm’s debt V= D+E E/V= percentage of financing that is equity D/V= percentage of financing that is debt T= corporate tax rate WACC= (3.784.000.000/5.584.000.000)*0,0623 + (1.800.000.000/5.584.000.000)*0,0276*(1-0,35) = 0,048 =4,8% Now using the market value weights, the total value of Dell is: V= 1.624.650.000 + 26.950.000.000 V= 28.574.650.000 WACC based on market value weights is: WACC= (E/V)*Rs + (D/V)*Rb*(1-T) WACC= (26.950.000.000/28.574.650.000)* 0,0623 + (1.624.650.000/28.574.650.000)*0,0269*(1-0,35) = 0,0598 = 5,98% 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 Using Dell as a representative company to estimate cost of capital, the potential problem with CGI is that it operates stores for company’s sales, while Dell sales through internet site This could 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 ine of the leaders in its industry, so it can access capital being a pubic company, while CGI is privately owned company The improvement which I might suggest that CGI should go as a public sector company and sale its products on internet like Dell ... V= D+E E/V= percentage of financing that is equity D/V= percentage of financing that is debt T= corporate tax rate WACC= (3.784.000.000/5.584.000.000)*0,0623 + (1.800.000.000/5.584.000.000)*0,0276*(1-0,35)