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In order to assess the Dell Inc.’s NPV as well as the capital rationing, it is important to ascertain the most appropriate cost of capital that can be used. The company is ought to derive its corporate cost of capital sinvce Dell Inc. Company’s affiliates are more or less the same in both it services and operation provisions (“Dell Inc. a”, 2012). As a result of this , the Dell Inc. can use capital asset pricing model, making the assumption that this market is within ASX/S&P500 index representation. Therefore, the Dell Inc. can utilize monthly returns for ten years, which is assumed to be starting from year 2001 to 2011, as represented by the following table.
The Dell Inc. Company’s beta is represented below. This Dell Inc. can as well utilize the classical CAPM method so as to ascertain its cost of capital, and the data from the table has revealed the Dell Inc.’s risk premium to be 32.0%, 2.7% risk free rate, and 3.16% cost of equity (“Finra”, 2012). Moreover, Dell Inc. Company's can use the tax adjusted CAPM, in calculating its equity cost. Making use of tax adjusted CAPM calculation method, the Dell Inc. can find the tax adjusted SML slope to be 33.13%, which translates to 11.63% cost of equity, contrary to the 5.6% cost of equity, from the previous calculation (“Dell Inc. b”, 2012).
Deriving Dell Inc.’s WACC
The following calculation presents the Dell Inc. Company’s weighted average cost of capital. Moreover, it is essential to put into account that Dell Inc.’s credit rating may change, a situation that can affect the Dell Inc.’s ability to raise capital and other funding requirements.It can as well be noted that downgrading the credit rating of this Dell Inc. can significantly affect its ability to access big lending facilities (“Unstructured Finance”, 2012).
Summing up, the book value weights give different results from the market value weights for WACC calculation, as shown above. The market value weights are more relevant because they represent the fair values, as opposed to book value weights that are mere estimates. Therefore, this approach suffers the limitation of inaccuracy, that is, failure to give the real position of the company’s cost of capital, and this can be avoided by adopting the data on the market value weights.