470 PART6Cost of Capital and Long-Term Financial Policy MINICASE Cost of Capital for Hubbard Computer, Inc. You have recently been hired by Hubbard Computer, Inc. (HCD, in its relatively new treasury management department. HCI was founded eight years ago by Bob Hubbard and cur rently operates 74 stores in the Southeast. The company is pri- vately owned by Bob and his family, and it had sales of enter "Dell Inc.": and search for SEC Dell. Find the most recent 100 or 10 b the form. Look on the balance sheet to fd value of debt and the book value of equity t beik further down the report, you should find a Long-term Debt and Interest Rate Risk e that will provide a breakdown of Dell $97 million last year Customers come to the store and talk with a sales represent2. To estimate the cost of equity for tive. The sales representative assists the customer in determin- ing the type of computer and peripherals that are necessary f 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 primarily sells to customers who shop in the stores. yahoo.com and enter the ticker symbolE the links to answer the following questions most recent stock price listed for Del? Wh ket value of equity, or market capitalization? Ho shares of stock does Dell have outstandingt most recent annual dividend? Can you use the discount model in this case? What is the beta for De Now go back to finance.yahoo.com and follow the Bonds" link. What is the yield on three-month Tres Wh i Whar ist dvid HCT'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 come to you for help. For starters, the company has never attempted to determine its cost of capital, and Bob would like you to per- form 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 representa tive company. The following questions will lead you through the steps to calculate this estimate bills? Using the historical market risk premim wh the cost of equity for Dell using CAPM? 3. You now need to calculate the cost of debe for Dell Co to www.finra.org/marketdata, enter Dell as the compory and find the yield to maturity for each of Dell's boods What is the weighted average cost of debt for Dell w ing the book value weights and using the market value weights? Does it make a difference in this case if you use book value weights or market value weights? 4. You now have all the necessary information to calculat the weighted average cost of capital for Dell Calkelane this using book value weights and market value weights QUESTIONS assuming Dell has a 35 percent marginal tax rate. Whih number is more relevant? Most publicly traded corporations are required to submit quarterly (10Q) and annual reports (10K) to the SEC de- tailing the financial operations of the company over the past quarter or year, respectively. These corporate filings are available on the SEC Web site at www.sec.gov. Go to the SEC Web site; follow the "Search for Company Filings" link and the "Companies&Other Filers" link; I. You used Dell as a pure play company to estimate cost of capital for HCI. Are there any potential proklem with this approach in this situation? 5. 470 PART6Cost of Capital and Long-Term Financial Policy MINICASE Cost of Capital for Hubbard Computer, Inc. You have recently been hired by Hubbard Computer, Inc. (HCD, in its relatively new treasury management department. HCI was founded eight years ago by Bob Hubbard and cur rently operates 74 stores in the Southeast. The company is pri- vately owned by Bob and his family, and it had sales of enter "Dell Inc.": and search for SEC Dell. Find the most recent 100 or 10 b the form. Look on the balance sheet to fd value of debt and the book value of equity t beik further down the report, you should find a Long-term Debt and Interest Rate Risk e that will provide a breakdown of Dell $97 million last year Customers come to the store and talk with a sales represent2. To estimate the cost of equity for tive. The sales representative assists the customer in determin- ing the type of computer and peripherals that are necessary f 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 primarily sells to customers who shop in the stores. yahoo.com and enter the ticker symbolE the links to answer the following questions most recent stock price listed for Del? Wh ket value of equity, or market capitalization? Ho shares of stock does Dell have outstandingt most recent annual dividend? Can you use the discount model in this case? What is the beta for De Now go back to finance.yahoo.com and follow the Bonds" link. What is the yield on three-month Tres Wh i Whar ist dvid HCT'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 come to you for help. For starters, the company has never attempted to determine its cost of capital, and Bob would like you to per- form 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 representa tive company. The following questions will lead you through the steps to calculate this estimate bills? Using the historical market risk premim wh the cost of equity for Dell using CAPM? 3. You now need to calculate the cost of debe for Dell Co to www.finra.org/marketdata, enter Dell as the compory and find the yield to maturity for each of Dell's boods What is the weighted average cost of debt for Dell w ing the book value weights and using the market value weights? Does it make a difference in this case if you use book value weights or market value weights? 4. You now have all the necessary information to calculat the weighted average cost of capital for Dell Calkelane this using book value weights and market value weights QUESTIONS assuming Dell has a 35 percent marginal tax rate. Whih number is more relevant? Most publicly traded corporations are required to submit quarterly (10Q) and annual reports (10K) to the SEC de- tailing the financial operations of the company over the past quarter or year, respectively. These corporate filings are available on the SEC Web site at www.sec.gov. Go to the SEC Web site; follow the "Search for Company Filings" link and the "Companies&Other Filers" link; I. You used Dell as a pure play company to estimate cost of capital for HCI. Are there any potential proklem with this approach in this situation? 5