Annual Report for Dell Corp Thesis

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The company shares are currently trading at 21.73, a decrease of 0.23% from the previous day. The strong financial performances in the second quarter of 2008, published at the end of August 2008, will most likely increase the stock prices in the next coupe of weeks. The 52 weeks range for Dell stock was between $18.13 and $30.77, with a one year target estimate aimed at $26.53. The earnings per share ratio was $1.34.

In order to calculate the weighted average cost of capital, we will use the following formula: WACC = Wd (Kd)(1-t)+(Wpfd)(Kpfd) +(We)(Ke), where Wd= the proportion of the financing taken on by debt; Wpfd= the proportion of the financing taken provided by preferred stock; We= the proportion of the financing provided by equity

Kd= the interest rate that the bank requires (we will use the average yield for the debt); Kpfd= dividend/share price; Ke= R (r)+ Beta (Market Risk Premium). Dell currently doesn't issue preferred stock, so the WACC formula will resume to WACC = Wd [Kd x (1-t)] + We (Ke)

In order to calculate Ke, we will use CAPM, where Beta = 1.13, Rm = 11% and Rf = 4.6% based on 30-year treasury yield.

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Thus, Ke =(4.61% + (11%-4.6%)*1.13) = 11.8%

For Wd (Kd)(1-t), we estimate the tax rate to be 23.8% (per the results published by the company in October 2006). At the same time, we can now estimate WACC as 0.8% x (7.3%) (1-23.8%) + 99.2% (11.8%) = 11.8%

Following this financial analysis, investment in Dell seems an optimum choice. First of all, the company follows a prudent short- and long-term financial policy, which focuses on financing the company development out of generated cash rather than long or short-term debt. The levels of inventory are significantly low, which decreases costs and assumes that the company produces to sell to its market.

At the same time, the financial results for Q2 of 2008, although not yet reflected in the share price, show strong figures. The decrease in ROI or ROA is not….....

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