You have recently moved to the US and have been hired as a finance executive by Hubbard Computer, Inc. (HCI), in its relatively new treasury management department. HCI was founded eight years ago by Bob Hubbard and currently operates 74 stores in the southeast of the country. The company is privately owned by Bob and his family, and it had sales of $97 million last year.
HCI 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.
HCI’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. Bob has just read about capital budgeting techniques and has recruited you to bring your finance skills to assist in the development of the company.
The company has never before attempted to determine its cost of capital and, as your first task, Bob 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. Bob wants you to use the pure play approach to estimate the cost of capital for HCI, and he has chosen Dell as a representative company. The following questions will lead you through the steps to calculate this estimate.<www.sec.gov>. 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. Find the most recent 10Q or 10K, and download the form. 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 ‘Long-term Debt and Interest Rate Risk Management’ that will provide a breakdown of Dell’s long-term debt.