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problem: You have recently been employed by Doff Computer, Inc. (DCI), in the finance area. DCI was founded 8 years before by Chris Doff and currently operates 74 stores in the Southeast. DCI is privately owned by Chris and his family and had sales of 97 million dollar last year.

DCI primarily sells to in-store customers. 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 assembled to fill the order. Delivery of the computer averages fifteen days, but is guaranteed in thirty days.

DCI's growth to date has been financed from its benefits. Whenever the company had sufficient capital, it would open a new store. Relatively little formal analysis has been used in the capital budgeting process. Chris has just read about capital budgeting techniques and has come to you for help. The company has never attempted to determine its cost of capital, and Chris would like you to perform the analysis. Since the company is privately owned, it is difficult to determine the cost of equity for the company. You have determined that to estimate the cost of capital for DCI, you will use Dell as a representative company. The following steps will allow you to find out this estimate.

find out the weighted average cost of capital for Dell using book value weights and market value weights assuming Dell has a 35 percent marginal tax rate. Determine the cost of capital number is more relevant? Show all work to receive full credit.

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M918940

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