Example Of Hubbard Computers Essay

Capital budgeting decisions are involved investment in the longer term projects. The capital budgeting decision must satisfy certain conditions for them to be feasible. The decisions must be compatible with the resource of the firm, financial capacity and managerial capability. Capital budgeting decisions must be controllable since the business environment is continually changing and evolving. The capital budgeting decisions must be endorsed by the executive management at all stages of planning. This helps to strengthen managerial capabilities and rectify organizational imbalances and development of budgetary controls.
The common shares of Dell Company are listed on the NASDAQ Stock Market. The shares are listed under the symbol Dell. The most recent report of the share price was for the fiscal year which ended on 1st February 2013. The share price reported is as per the NASDAQ Stock Market. The stock price for the fourth quarter for the fiscal period ended 1st February 2013 was $18.36 per share. The average number of shares outstanding as at 1st February 2012 comprised of diluted and basic outstanding shares. The average number of basic shares was 1,745,000 while the average number of diluted shares was 1,755,000. The most recent cash dividend per ordinary stock was $ 0.16 per stock.
The dividend discount model can be used in the computation of beta for the firm. The dividend discount model helps to value a firm based on the sum of the present value of the future dividend payments of a stock. The future dividend payments should be discounted at an appropriate risk adjusted discount rate. The beta of a stock is the sensitivity of a particular stock as compared with the market prices. The beta for Dell is 1 because the dividends are growing as compared to the previous quarters.
The yield on three month Treasury is 4.379%. CAPM (capital asset pricing model) is used to compute the required rate of return of a particular stock. This is useful if the stock is to be added to an existing portfolio which is well diversified. The formula used in the computation of CAPM is E (Ri) =Rf+βi (E (Rm)-Rf). The historical cost premium is 6.8%. The cost of equity is 6.8%+1 (4.3795-6.8) =5. 1795%.
The yield to maturity of each of the Dell Company bonds is -0.611%. The weighted average cost of capital is the sum of individual weights of the components of the capital structure multiplied by the cost of capital. The weighted average cost of debt using market value is 4.379% * 0.91 = 25.27%. Using the book value weight, the cost of debt is 4.379% * 6.8% = 29.77%. In the computation of weighted average cost of capital, market values are preferred over the book value weights. This is because the market values represent the true price of the stock. Book values, on the other hand, are historical costs. Weighted average cost of capital= weighted cost of debt + weighted cost of equity capital.
The weighted cost of a stock is obtained by the product of individual weight of the stock in the capital structure and the cost of capital. Using market weights, the cost is 25.27% (1 – 0.35) + 5.1795% = 21.605%. Using the book value weight, weighted average cost is 29.77% (1 – 0.35) + 6.8% = 26.15%. The use of book value is more relevant than use of market values. This approach may be faced with problems since the two companies are in different industries and their share price may be different.