What is Dell's WACC (weighted average cost of capital)?

Question

Can anyone help me out with figuring out how to find Dell's WACC? I need some help. Thanks

Answer 1

About 11.8%.

WACC = Wd [Kd x (1-t)] + We (Ke)

Where:
Wd = Weight of Market Value of Debt (as a % of market value of capital)
Kd = Pre-tax cost of debt
t = effective tax rate
We = Weight of Market Value of Equity
Ke = Cost of Equity (post tax)

Market cap of Dell: US$61.56b
Market cap of Dell debt: assuming at par (US$0.50b)


CAPM to determine Ke: (4.61% + (11%-4.6%)*1.13) = 11.8%
Beta = 1.13
Rm = 11%
Rf = 4.6% based on 30 year treasury yield

Kd (n/a in preliminary 2Q statements due to no balance sheet and n/a in 1Q due to not enough breakdown for interest expense).
Dell last disclosed it interest expense line item in 2004, which had an effective rate of 2.8%. This is too low, so it has to be adjusted upwards. Using a top-down approach, you can assume about LIBOR + 2% or about 7.3% for a medium-grade credit-worthy company like DELL.

Tax rate is 23.8% per Oct-06 results (tax of $211m/PBT of $888m).

WACC = 0.8% x (7.3%) (1-23.8%) + 99.2% (11.8%) = 11.8%

Sensitivity is really going to depend upon your Rm (market risk) mostly.