QUESTION 2: DELL Inc. is a multinational company based in Round Rock, Texas which develops, manufactures, sells, and supports personal computers, servers, data storage devices, network switches, software, televisions, computer peripherals, and other technology-related products with more than 95,000 employees worldwide.1 DELL grew during the 1980s and 1990s to become (for a time) the largest seller of PCs and servers. In 2006, Fortune magazine ranked DELL as the 25th-largest company in the Fortune 500 list and 8th on its annual Top 20 list of the most-admired companies in the United States. A 2006 publication also identified DELL as one of 38 high-performance companies in the S&P 500 which had consistently out-performed the market over the previous 15 years. John Karter is in equity research and needs to prepare his upcoming report for DELL. Required Q2a: Calculate DELL'S ROE in 2005 and show the decomposition of DELL's ROE based on the basic DuPont formula (that is, profit margin, asset turnover and leverage). How does DELL's performance compare to that of an average US or European firm? . Note: DELL's financial statements are reported i Exhibits 2 and 3 (at the end of this exam) and please use balance sheet figures from the 2005 financial statements. (5 marks) Q2b: The analyst thinks that DELL should have recognised an impairment on property, plant, and equipment (PPE) and recasts the firm's financial statements after recognizing such an impairment. Please note that all of the information in this examination is fictional and it should not be taken as indicative of actual reporting by DELL Inc. (Please turn over) 3 Explain how each of the financial ratios in your answer to question Q2a will be affected by the PP&E impairment. Be specific about the effect of the impairment on the numerator and the denominator of each ratio (note: you are NOT required to make any calculations using the information from DELL's financial statements). (6 marks) QUESTION 2: DELL Inc. is a multinational company based in Round Rock, Texas which develops, manufactures, sells, and supports personal computers, servers, data storage devices, network switches, software, televisions, computer peripherals, and other technology-related products with more than 95,000 employees worldwide.1 DELL grew during the 1980s and 1990s to become (for a time) the largest seller of PCs and servers. In 2006, Fortune magazine ranked DELL as the 25th-largest company in the Fortune 500 list and 8th on its annual Top 20 list of the most-admired companies in the United States. A 2006 publication also identified DELL as one of 38 high-performance companies in the S&P 500 which had consistently out-performed the market over the previous 15 years. John Karter is in equity research and needs to prepare his upcoming report for DELL. Required Q2a: Calculate DELL'S ROE in 2005 and show the decomposition of DELL's ROE based on the basic DuPont formula (that is, profit margin, asset turnover and leverage). How does DELL's performance compare to that of an average US or European firm? . Note: DELL's financial statements are reported i Exhibits 2 and 3 (at the end of this exam) and please use balance sheet figures from the 2005 financial statements. (5 marks) Q2b: The analyst thinks that DELL should have recognised an impairment on property, plant, and equipment (PPE) and recasts the firm's financial statements after recognizing such an impairment. Please note that all of the information in this examination is fictional and it should not be taken as indicative of actual reporting by DELL Inc. (Please turn over) 3 Explain how each of the financial ratios in your answer to question Q2a will be affected by the PP&E impairment. Be specific about the effect of the impairment on the numerator and the denominator of each ratio (note: you are NOT required to make any calculations using the information from DELL's financial statements). (6 marks)