Matching Dell

Case Commentary by C3

Nathan Lyons-Smith, Brilliant Manyere, Bill Green

11/18/2009

Contents
Executive Summary....................................................................................................................................... 3
Background ................................................................................................................................................... 4
Problem ......................................................................................................................................................... 4
Financial Analysis .......................................................................................................................................... 4
Market Pricing Analysis ................................................................................................................................. 6
Segment Analysis .......................................................................................................................................... 7
Dells Competitive Advantage ....................................................................................................................... 7
Conclusion ..................................................................................................................................................... 9
Appendix 1 FY 1998 Inventory Turnover and Days in Inventory Ratio Analysis ...................................... 10
Appendix 2 Profit Margin Ratio Analysis.................................................................................................. 10
Appendix 3 Average Monthly Rate of Change of Dell Stock 1996 - 1999 ................................................ 10
Appendix 4 FY 1996 Competitive Advantage Analysis ............................................................................. 11
Appendix 5 FY 1998 Competitive Advantage Analysis ............................................................................. 12
Appendix 6 SWOT Analysis of Dell ........................................................................................................... 13
Appendix 7 Dell DuPont Analysis ............................................................................................................. 14
Appendix 8 Dell Market Value Analysis ................................................................................................... 15
Appendix 9 Dell Income Statement ......................................................................................................... 16
Appendix 10 Dell Balance Sheet .............................................................................................................. 17
Appendix 11 Dell Sources and Uses Statement ....................................................................................... 18
Appendix 12 Selected Financial Statements as a Percentage of Sales .................................................... 18
Appendix 13 Calculation of Beta .............................................................................................................. 19
Appendix 14 Calculation of Discount Rate ............................................................................................... 20
Appendix 15 S&P 500 Returns ................................................................................................................. 21
Appendix 16 Dell Monthly Stock Price ..................................................................................................... 22
Appendix 17 Beta Estimation of Dell Computer ...................................................................................... 23

Executive Summary
Dell has been incredibly profitable and experienced astounding growth over the last several
years. We are now in 1999 and we must decide if we should buy, sell, or hold Dell stock.
Strategically, Dell has run the table on the market. They have capitalized on a new business
model and forged their profits in an industry with very slim profit margins. They benefitted greatly from
the expansion of computer use in the late 90s, the explosion of the internet, and the health of the
economy. Dells competitive advantages come from:
1. Just In Time (JIT) purchasing of components (avoiding falling prices)
2. Lower inventory costs (avoiding carrying and inventory costs based on cost of capital)
3. Distribution channel related costs and markups (which increases prices to the customer)
Dells startup mentality and lean business operations have made it a great company. Their inventory
turnover ratio is around 52 and they keep their inventory for an average of only 7 days. These are
astounding figures for any company and Dell will have to work very hard to leverage JIT and their
distributor network to ensure they remain at this level. Now, the market for new computers has slowed
down because everyone has one. Dell has fewer growth options and its stock likely will not continue to
grow at the same rate. Additionally, profits continue to remain razor thin, new companies can enter
easily, and Dell must continue to run its operations tightly if they wish to continue making a profit. Dell
has traditionally targeted its products to a small number of segments. Future success for Dell will
involve breaking into new segments that are controlled by its competitors, IBM and HP.
Financially, Dell is in a very good position. After collecting relevant data, we conclude that the
estimated value of Dell stock is $46.83 per share. Dell has traditionally not paid dividends for a reason.
Our opinion is that the companys earnings will stabilize in 2004. Long term investors of stocks are
encouraged to accumulate the company stock and hold for about four years.

Background
Dell emerged in the mid-1980s, during a period of unimaginable expansion in both the
popularity and purchasing of Personal Computers. During the late 1990s, personal computer purchases
soared as a result of lower prices, easy availability, and the rise of the internet. Just about every family
bought a PC for use at home and many jobs began involving computer skills at the work place.
Consumers were demanding PCs and Dell burst on to the scene with its direct to consumer business
model and grew rapidly. Before Dell, computers were delivered to customers through three channels:
1) Retail Stores

2) Distributors (smaller resellers)

3) Integrated Resellers

Dell quickly exploited a fourth avenue, direct sales to the customer. This strategy enabled Dell
to hold less inventory, improve customer satisfaction, and also increase their ability to provide custom
configured machines in a timely fashion. Previous customizable computers were bought through IBM.
IBM was selling the Model 0, a barebones computer, delivered to an intermediate who would load the
computer with the desired options. This created transportation and logistics costs and increased lead
time. Dells model was a switch in paradigms, and it worked. In 1998, Dell was selling mainly to
businesses and the government (77% of sales). At this time, this segment was purchasing just over 42%
of all PCs in the U.S. Dell began selling to everyday people and their profits soared further.

Problem
Dell has been highly profitable and grown incredibly until this point. Will they continue to be as
profitable and achieve similar levels of growth? Should we buy, sell, or hold Dell stock? The following
analysis will analyze Dells situation and present a recommendation.

Financial Analysis
In FY 1998, Dells Inventory Turnover ratio was 51.78, which was five to ten times higher than
HP, Compaq, and IBM. Only Gateway, which had a similar direct sales network, was close with a ratio of

36.32 (Appendix 1). Dells average Days in Inventory metric was 7.0 days, compared to 10.0 to 70.4 for
their closest competitors. This greatly reduced Dells costs and was a key to their early success.
Dells sales growth from 1991 to 1992 was explosive at an annual rate of 126.29% with a profit
margin of 6%. The yearly return on assets was 9.11% during this period. Dell was however losing money
reducing the profit margins to 5% in 1993 as sales increased by an annual rate of 42.65%. Dell
experienced stiff competition in price cuts on computers sales from Gateway and other Computer
makers, which resulted in a decline of the sales growth of 20.95% and a loss of over 1%. Dell reacted to
its immediate growth by restructuring its divisions by putting customers into categories of larger and
smaller firms initially, and then by globally accounts of each division. The increase in sales averaged
51.44% over the next four years. The strategic changes paid off with an increase in profit margin of 4%
and 5% in 1995 and 1996 respectively and 7% and 8% in 1997 and 1998 respectively. The return on
assets, averaged 21.68% annually in 98-99, was positively correlated with the increased profit margins.
Investors showed confidence in Dell market value by acquiring the stock, causing the price to
rise. The company management wished to keep the stock price in ranges affordable to all investors.
The stock price was split 2-1 five times but continued to increase at an average monthly rate of 17.2%
during the period between 12/2/1996 to 03/08/1999. The price increase was positively correlated with
the Company Earnings. This profit margin data is tabulated in Appendix 2 and the stock in Appendix 3.
The Corporate earnings were $0.65 per share in December 1999 but earnings were based on
more shares outstanding. Dell has room for growth particularly among new buyers who did not own a
computer as well as repeat buyers wishing to replace old models with the new models with the latest
technology. Computer technology has been changing rapidly during the past decade and is expected to
continue likewise. Dell should continue on investing in research and development in order to keep up
with the new technology introduced by hardware makers. Software and hardware continues to change,
and Dell will always be able to sell the new equipment to people wanting an upgrade. Dell will however

be able to control their profit margins since the company builds computers after receiving orders from
the customers unlike other companies that forecast demand and build units with no committed buyer.

Market Pricing Analysis

The Personal Computer industry has suffered from increasing sales and dwindling profits. There
was only a small demand for computers during the early 1990s and when the demand started to grow
in the mid 1990s, the producers faced increasing competition and decreasing prices. The first factor for
declining prices was increase competition at several levels. There were many firms selling PCs to
consumers and there were many firms making components and selling them to the companies such as
Dell. Computer component prices typically fell 25-30% each year.
The second factor in the decline of prices was the expectations of the customer. Dell helped
drive down the cost of computers by making its operations as lean as possible, and then offering direct
sales to the customer. For many competitors, this caused a rapid attempt to change their operating
structure. HP launched the HP Shopping Village, Compaq launched their Optimized Distribution Model
(ODM), and IBM started their Authorized Assembly Program (AAP). They wanted to copy Dell.
A third factor was the relative ease required to enter the market. Capital requirements to set up
an assembly line to produce PC's are also relatively low and assembly is not very complicated.
Another factor of price decline was that the capabilities of the components were advancing so
rapidly that a large inventory of older parts could easily become obsolete before they were all sold.
Prices for older systems would plummet when new ones were introduced.

This left the large

manufacturers, whose strategy it was to stock computers and parts for quick delivery, holding a near
worthless inventory when newer components were released. In 1998, computer prices fell by an
estimated 1% every week.

Segment Analysis
In 1998, Dell defined 4 major markets for the industry. Their market share percentage in dollars
and units is shown in the table below.
Segment
Large/midsize businesses & government
Small business and offices
Home consumers
Educational institutions

% of Market
Share (Dollars)
42.3%
23.7%
28.7%
5.4%

% of Market
Share (Units)
38.5%
23.3%
33.7%
5.8%

All of these market segments held some advantage over the industry. The most influential of the
segments was the large to midsized businesses and government. The financial market share of this
segment was higher than the unit share, resulting in the trend for prices for this segment staying higher
than for other segments. Manufacturers had to commit for a long term of warranty and replacement
parts to lure business. In the home consumers segment, the reverse situation exists; the unit share is
larger than the financial share. This segment is price sensitive. This segment typically purchased
computers infrequently (transactional customers, as Dell categorized them) they had no shifting costs
(to change brands) nor did they have loyalty to a special brand. This segment typically bought from the
lowest priced manufacturer. In 1998, 30% of this segment was first time buyers.

Dells Competitive Advantage

Dells business strategy involved receiving orders directly from customers and avoiding
distribution channels. This enabled Dell to attain cost leadership and competitive advantage in the PC
market. The decision to eliminate wholesale and retail dealers proved to be a significant cost cutting
measure. It also provided for a less expensive and efficient way of distribution and production of
computers. Furthermore the direct model also gave Dell a better understanding of their customers, as
their sales team remained in close contact with them, versus their resellers and distributors.

Dell was able to accomplish this by aligning and integrating their supply chain directly with
customer expectations. The company built highly integrated and efficient external and internal sales
forces. The external sales force was entrusted with the responsibilities of understanding customer
expectations and making sure that each and every aspect of the PC was build according to customer
specifications, and concentrated on Relationship Customers, while the internal sales force
concentrated on the Transactional Customer, and focused on providing information to callers to the
Dell phone hotline.
The competitive advantage they held over the competition is difficult to quantify. In general,
Dells competitive advantage is derived from 3 sources, namely:
4. Just In Time (JIT) purchasing of components (avoiding falling prices)
5. Lower inventory costs (avoiding carrying and inventory costs based on cost of capital)
6. Distribution channel related costs and markups (which increases prices to the customer)
Appendix 4 and Appendix 5 show the valuation of Dells competitive advantage, both in 1996
and 1998. IBM has been removed from the appendix because of that firms diversified business
portfolio. The appendix shows that in 1996, Dells competitive advantage over their three major
competitors was between 4% and 6% in consumer markets, and 5% and 31% in the business market. In
1998, this advantage was 6% to 29% in both markets (although Dell temporarily lost competitive
advantage against Gateway in 1998).
Dells Weaknesses include their small market share in the workstation and business server
market. They also need to fight declining PC prices and the easy entry by competitive firms.
Dells Opportunities are areas for Dell to expand. They have saturated their existing markets and they
need to find new markets to sell their PCs. Additionally, Dell can try to develop new products for its
existing markets and to try to break into the workstation market and sell service contracts.
Dells Threats include more copycat firms, saturated markets, and the problems created from
trying to maintain their corporate culture. A graphical breakdown of the SWOT analysis is in Appendix 6.

Out of this era emerged Dell; profitable and excelling in an industry that faced declining profits.
From 1995 to 1998, Dells profit margin increased, from 4.29% to 7.66%. By comparison, Compaq
slipped from 5.35% to a net loss, and Gateway from 4.71% to 4.5%. IBM increased slightly and HP
decreased slightly as corporations, but these companies were much more diversified. In 1998, IBM and
HPs computer business accounted for 20% and 25% (respectively) of their entire business. These two
companies are not pure play comparators because the computer business accounted for a much smaller
percentage of overall revenue than the 90% for Dell, Compaq, and Gateway.

Conclusion
Dell has created tremendous value over a long period of time. At this point, it is a mature
company with fewer growth prospects than it previously had. A large majority of the customers who
wanted a personal computer have purchased one. Dell needs to figure out if there are additional
computing products that they can sell to existing markets. Dells future growth also relies upon finding
new markets for personal computers. Additionally, Dells growth relies upon it breaking into the
workstation and server market that is held tightly by HP and IBM. These opportunities will
We do not recommend Dell stock because we feel there are other companies that will give a better
return on our investment. Dell
After collecting relevant data and make needed computations, an estimate of the market value
of Dell Inc. was completed. The estimated value was $46.83 per share*. Our opinion is that the
companys earnings will stabilize in 2004. Long term investors of stocks are encouraged to accumulate
the company stock and hold for about four years. Dell has traditionally not paid dividends for a reason.
Management is confident of the corporations performance and continues to invest retained earnings.

*Calculations and necessary data collected and presented in appendices 7-17

Appendix 1 FY 1998 Inventory Turnover and Days in Inventory Ratio

Analysis
FY 1998

Dell
Compaq
IBM
HP
Gateway

Ratio Analysis

GM / Revenue NI / Rev
23%
8%
37.20%
-8.80%
57.80%
-4.40%
31.90%
6.30%
20.20%
4.50%

Inventory Turnover
51.78
10.66
7.38
5.19
36.32

Days Sales in Inventory

7.049
34.225
49.446
70.378
10.049

Appendix 2 Profit Margin Ratio Analysis

Profit Margin
Compaq
Dell
Gateway
HP
IBM

1995
5.35%
4.29%
4.71%
7.72%
5.81%

1996
0.07%
5.14%
4.99%
6.73%
7.15%

1997
7.55%
6.68%
1.75%
7.27%
7.76%

1998
-8.80%
7.66%
4.52%
6.26%
7.75%

Appendix 3 Average Monthly Rate of Change of Dell Stock 1996 - 1999

Dell Inc.
(Closing Prices on Event Day)
% Change
Between
Splits

Average
Monthly
Rate

Date Before
Split

Stock
Price

Date of
Split

Stock
Price

%
Change

12/02/1996

$113.50

12/09/1996

$60.50

1.65%

07/25/1997

$163.50

07/28/1997

$78.87

-0.88%

170.2%

7.60

22.4%

03/06/1998

$138.50

03/09/1998

$63.13

-2.21%

75.6%

7.37

10.3%

09/04/1998

$109.50

09/08/1998

$59.94

2.37%

73.5%

5.97

12.3%

03/05/1999

$145.38

03/08/1999

$86.00

4.58%

142.5%

5.93

24.0%

Average Monthly Rate of Change

No of Months
Between Event

17.2%

Appendix 4 FY 1996 Competitive Advantage Analysis

FY 1996 Competitive Advantage Analysis
Consumer Market Configuration

Competitor

Price

Gross
Margin

Dell
Compaq
HP

$
$
$

2,848
3,299
3,198

22.5%
31.4%
31.9%

Gateway

2,439

20.2%

Annual Cost Dell Days

Channel
in
of Capital
Markup
(Assumption) Inventory (Assumption)

20%

Competitor Avg. Rate of

Decline for
Channel
Component
Costs
(Assumption)
Costs

7.05
34.22
70.38

9%
9%

6%
6%

10.05

9%

6%

1.00%

COGS
(Per Unit)

JIT Purchase of
Components
(Savings - Lower
COGS result from
JIT purchasing)

Lower
Inventory
Costs

No
Channel
Related
Costs

No
Channel
Markup

Dell
Dell
Advantage
Advantage
/ Price

$ 2,207.20
$ 2,263.11
$ 2,177.84

55.914
-29.362

$
$

32.87
76.59

$ 170.88
$ 170.88

$ 198.65
$ 198.65

$
$

458.31
416.76

16%
15%

$ 1,946.32

-260.878

3.63

$ 170.88

$ 198.65

112.28

4%

Lower
Inventory
Costs

No
Channel
Related
Costs

No
Channel
Markup

Dell
Dell
Advantage
Advantage
/ Price

FY 1996 Competitive Advantage Analysis

Business Market Configuration

Competitor

Price

Gross
Margin

Dell
Compaq
HP

$
$
$

2,555
3,077
3,497

22.5%
31.4%
31.9%

Gateway

2,208

20.2%

Annual Cost Dell Days

Channel
in
of Capital
Markup
(Assumption) Inventory (Assumption)

20%

Competitor Avg. Rate of

Decline for
Channel
Component
Costs
(Assumption)
Costs

7.05
34.22
70.38

9%
9%

6%
6%

10.05

9%

6%

1.00%

COGS
(Per Unit)

JIT Purchase of
Components
(Savings)

$ 1,980.13
$ 2,110.82
$ 2,381.46

130.697
401.332

$
$

29.49
68.71

$ 153.30
$ 153.30

$ 178.21
$ 178.21

$
$

491.69
801.56

19%
31%

$ 1,761.98

-218.141

3.26

$ 153.30

$ 178.21

116.63

5%

Appendix 5 FY 1998 Competitive Advantage Analysis

FY 1998 Competitive Advantage Analysis
Consumer Market Configuration

Competito
r

Price

Dell
Compaq
HP
Gateway

$
$
$
$

1,838
2,448
2,459
1,825

Gross
Margin

Annual Cost Dell Days

Channel
in
of Capital
Markup
(Assumption) Inventory (Assumption)

22.5%
31.4%
31.9%
20.2%

20%

7.05
34.22
70.38
10.05

9%
9%
9%

Competitor Avg. Rate of

Decline for
Channel
Component
Costs
(Assumption)
Costs

6%
6%
6%

1.00%

COGS
(Per Unit)

$
$
$
$

1,424.45
1,679.33
1,674.58
1,456.35

JIT Purchase of
Components
(Savings - Lower
COGS result from
JIT purchasing)

254.878
250.129
31.9

No
Channel
Related
Costs

No
Channel
Markup

Dell
Dell
Advantage
Advantage
/ Price

21.21
49.43
2.34

$ 110.28
$ 110.28
$ 110.28

$ 128.20
$ 128.20
$ 128.20

$
$
$

Lower
Inventory
Costs

No
Channel
Related
Costs

No
Channel
Markup

Dell
Dell
Advantage
Advantage
/ Price

$ 121.38
$ 121.38
$ 121.38

$ 141.10
$ 141.10
$ 141.10

$ 117.45
$ 383.46
$ (106.56)

Lower
Inventory
Costs

$
$
$

514.57
538.04
272.72

28%
29%
15%

FY 1998 Competitive Advantage Analysis

Business Market Configuration

Competito
r

Price

Dell
Compaq
HP
Gateway

$
$
$
$

2,023
2,040
2,400
1,499

Gross
Margin

22.5%
31.4%
31.9%
20.2%

Annual Cost Dell Days

Channel
in
Markup
of Capital
(Assumption) Inventory (Assumption)

20%

7.05
34.22
70.38
10.05

9%
9%
9%

Competitor Avg. Rate of

Decline for
Channel
Component
Costs
(Assumption)
Costs

6%
6%
6%

1.00%

COGS
(Per Unit)

$
$
$
$

1,567.83
1,399.44
1,634.40
1,196.20

JIT Purchase of
Components
(Savings)

-168.385
66.575
-371.623

$
$
$

23.35
54.41
2.58

6%
19%
-5%

Appendix 6 SWOT Analysis of Dell

Strengths:
Just In Time
Direct to Consumer
Brand Image

Weaknesses:
Workstation Market
Declining PC Prices

Opportunities:
New markets for PCs

Threats:
Copycats

New produts to existing

markets

Saturated Markets

Service Contracts

Maintaining Culture

Appendix 7 Dell DuPont Analysis

DuPont Analysis
ROE = NI/Sales x Sales / Assets x Assets / Total Equity
1992

1993

1994

1995

1996

1997

1998

1999

51

102

-36

149

272

518

944

1460

Sales

890

2014

2873

3475

5296

7759

12327

18243

Total Assets

560

927

1140

1594

2148

2993

4268

6877

Total Equity

274

369

471

652

973

1085

1293

2321

DuPont Identity

19%

28%

-8%

23%

28%

48%

73%

63%

6%

5%

-1%

4%

5%

7%

8%

8%

159%

217%

252%

218%

247%

259%

289%

265%

204%

251%

242%

244%

221%

276%

330%

296%

9.11%

11.00%

-3.16%

9.35%

12.66%

17.31%

22.12%

21.23%

Net Income

Operating Efficiency
(Profit Margin)

Total Asset Turnover

(Asset Use Efficieny)

Equity Multiplier
(Financial Leverage)

Return on Assets

Appendix 8 Dell Market Value Analysis

Market V alue of Dell Inc
2000
R evenue

2001

2002

2003

2004

18,243

27,000

39,959

59,140

87,527

G ros s Margin

4,106

6,077

8,994

13,311

19,700

S G &A

1,788

2,646

3,916

5,796

8,579

272

403

596

882

1,305

2,046

3,028

4,482

6,633

9,816

R es earch & D ev
Net Income

157,736
Net C as hflows
D is count F actor (9.41%

Dis c R ate)

2,046

3,028

4,482

6,633

167,553

0.9140

0.8354

0.7635

0.6979

0.6378

1,870

2,530

3,422

4,629

106,873

$119,323
Market Value

2548

$46.83

S hares

Actual Market V alue as of 01/03/2000

S tabilized V alue as of 2004

9,816 x

1 + .03

0.0941 -

0.03

10,111
0.0641

=
$157,736

Appendix 9 Dell Income Statement

Income Statement ($ Million)

1992

1993

1994

1995

1996

1997

1998

Percent of
1999 Sales

Revenue

890

2,014

2,873

3,475

5,296

7,759

12,327

18,243

100.0%

Gross Margin

282

449

433

738

1,067

1,666

2,722

4,106

22.5%

SG&A

182

268

423

424

595

826

1,202

1,788

9.8%

Research & Dev

33

42

49

65

95

126

204

272

1.5%

Operating Income

69

139

(39)

249

377

714

1,316

2,046

11.2%

Net Income

51

102

(36)

149

272

518

944

1,460

8.0%

Appendix 10 Dell Balance Sheet

1992
Assets
Current Assets:
Cash
Accounts Receivable
Inventory
Other Current Assets
Total Current Assets
Fixed Assets
PPE
Investments
Intangible Assets
Other Assets
Total Assets
Liabilities And Owners' Equity
Current Liabilities:
Debt/Current Liabilities
Accounts Payable
Income TaxPayable
Other Current Liabilities
Total Current Liabilities
Long TermDebt
Other Liabilities
Preferred Stock
Common Stock
Total Liabilities & Net Worth
Earnings Per Share
Shares Outstanding

Debt-to-Asset Ratio

Debt-to-Equity Ratio

Current Ratio
Current Assets
Current Liabilities
Current Ratio

BALANCE SHEET
1993
1994
1995

1996

1997

1998

1999

95.3
374.0
303.2
80.2
852.8

337.0
410.8
220.3
80.3
1,048.4

527.2
538.0
292.9
112.2
1,470.4

646.0
726.0
429.0
156.0
1,957.0

1,352.0
903.0
251.0
241.0
2,747.0

1,844.0
1,486.0
233.0
249.0
3,812.0

3,181.0
2,481.0
273.0
404.0
6,339.0

4,132.0
2,678.0
391.0
480.0
7,681.0

70.4
3.8
927.0

86.9
5.2
1,140.5

117.0
6.7
1,594.0

179.0
12.0
2,148.0

235.0
11.0
2,993.0

342.0
14.0
4,168.0

523.0
15.0
6,877.0

765.0
2,721.0
304.0
11,471.0

8.5
295.1
27.2
163.0
494
48.4
15.6
369.2
927

282.7
17.6
237.7
538
100.0
31.4
0.013
471.1
1,140

0.4
447.1
24.9
279.0
751
113.4
77.4
0.013
651.7
1,594

60.0
466.0
413.0
939
113.0
123.0
0.001
973.0
2,148

27.0
1,040.0
591.0
1,658
18.0
232.0
279.000
806.0
2,993

146.0
1,643.0
908.0
2,697
17.0
261.0
1,293.0
4,268

2,397.0
1,298.0
3,695
512.0
349.0
2,321.0
6,877

3,538.0
1,654.0
5,192
508.0
463.0
5,308.0
11,471

2.59

(1.06)

3.15

2.65

2.70

2.56

1.05

2622

2517

0.61
2548

157

149

166

51.0
2.59
19.7
19

102.0
(1.06)
(96.2)
(96)

(36.0)
3.15
(11.4)
(11)

149.0
2.65
56.2
56

272.0
2.70
100.7
100

518.0
2.56
202.3
202

944.0
1.05
899.0
899

1,460.0
0.61
2,393.4
2,393

64.0
927.0

131.4
1140.5

190.9
1594.0

236.0
2148.0

250.0
2993.0

278.0
4168.0

861.0
6877.0

971.0
11471.0

6.90%

11.52%

11.97%

10.99%

8.35%

6.67%

12.52%

8.46%

64.0
369.2
0.173

131.4
471.1
0.279

190.9
651.7
0.293

236.0
973.0
0.243

250.0
1085.0
0.230

278.0
1293.0
0.215

861.0
2321.0
0.371

971.0
5308.0
0.183

times

times

times

times

times

times

times

times

1,470.4
751.4
1.96

1,957.0
939.0
2.08

852.8
493.8
1.73

1,048.4
538.0
1.95

194

192

2,747.0
1,658.0
1.66

3,812.0
2,697.0
1.41

6,339.0
3,695.0
1.72

7,681.0
5,192.0
1.48

Appendix 11 Dell Sources and Uses Statement

Sources and Uses Statement
1998
Assets
Cash
Accounts Receivable
Inventory
Other Current Assets

PPE
Investments
Intangible Assets
Other Assets

1998

Source

3,181.0
2,481.0
273.0
404.0
6,339.0
523.0
15.0
538.0

4,132.0
2,678.0
391.0
480.0
7,681.0
765.0
2,721.0
304.0
3,790.0

15.0
15.0

2,397.0
1,298.0
3,695.0
861.0
349.0
1,210.0

3,538.0
1,654.0
5,192.0
971.0
463.0
1,434.0

1,141.0
356.0
1,497.0
110.0
114.0
224.0

Use
951.0
197.0
118.0
76.0
1,342.0
242.0
2,721.0
304.0
3,267.0

Liabilities

Debt/Current Liabilities
Accounts Payable
Income Tax Payable
Other Current Liabilities
Long Term Debt
Other Liabilities

Net Source/Use

$1,736.0

$4,609.0

Appendix 12 Selected Financial Statements as a Percentage of Sales

1992
Net Sales

1993

1994

1995

1996

1997

1998

1999

126.29%

42.65%

20.95%

52.40%

46.51%

58.87%

47.99%

Forecast

Selected Financial Statement Items as Percentage of Sales

48.00

Cash

10.71%

16.73%

18.35%

18.59%

25.53%

23.77%

25.81%

22.65% 23.00

Accounts Receivable

42.02%

20.40%

18.73%

20.89%

17.05%

19.15%

20.13%

14.68% 15.00

Inventory

34.07%

10.94%

10.20%

12.35%

4.74%

3.00%

2.21%

2.14%

2.14

9.02%

3.99%

3.91%

4.49%

4.55%

3.21%

3.28%

2.63%

2.63

Accounts Payable

33.16%

14.04%

15.56%

13.41%

19.64%

21.18%

19.45%

Net Income

34.07%

10.94%

10.20%

12.35%

4.74%

3.00%

2.21%

Other Current Assets

19.39% 19.40
2.14%

2.15

Appendix 13 Calculation of Beta

S UMMAR Y O UT P UT

R egres s ion S tatis tics

Multiple R

0.044530395

R S quare

0.001982956

Adjus ted R S quare

-0.01971307

S tandard E rror

0.045946667

O bs ervations

48

ANO V A
df
R egres s ion

SS

MS

0.00019295 0.000192948

R es idual

46

0.09711042 0.002111096

T otal

47

0.09730337

C oefficients S tandard E rror

S ignificance F

0.0913972 0.76377113

t S tat

P -value

L ower 95% Upper 95%

Intercept

0.014929

0.010840

1.377214

0.175111

(0.006891) 0.036748

X Variable 1

0.989788

3.273978

0.302320

0.763771

(5.600388) 7.579964

Appendix 14 Calculation of Discount Rate

Computation of WACC Rate

a

Cost of Debt

Pre-Tax
After Tax

5.36%

Cost of Equity

Cost of Capital

7.53%

0.99

7.53%

7.53%

65.00%

4.89%

4.09%

9.41%

8.53%

Risk Premium

4.89%

19.52%

9.41%

80.48%

Amount of Debt

236

1209

19.5%

Amount of Equity

973

1209

80.5%

Capitalization

1209

100.0%

9.45%

8.20%
7.86%
7.86%
7.22%
7.02%
7.02%
7.53%
4.09%

Moody's Corporate Bond Rating

3/9/1995
3/12/1997
3/11/1997
3/26/1998
5/11/1999
5/11/1999
Average Annual Interest Rate
Risk Premium

Bi
Ba3
Baa1
Baa1
A3
A3
-

5.36% =

Computation of Rate CAPM

Risk free
Rate

Discount Rate

=(

5.36% )+(

0.99

Risk free Rate

Market Rate

Beta
)(

9.45%

5.36%

9.41%

Appendix 15 S&P 500 Returns

S&P500 Returns
1/31/1996
2/29/1996
3/29/1996
4/30/1996
5/31/1996
6/28/1996
7/31/1996
8/30/1996
9/30/1996
10/31/1996
11/29/1996

High
636.18
664.23
656.97
656.68
681.1
680.32
675.88
670.68
690.88
714.1
762.12

low
597.29
633.71
627.63
624.14
630.07
658.75
605.88
639.49
643.97
684.44
701.3

Open
615.93
636.02
640.43
645.5
654.17
669.12
670.63
639.95
651.99
687.31
705.27

Close
636.01
640.43
645.5
654.18
669.14
670.64
639.95
651.99
687.31
705.27
757.02

12/31/1996
1/31/1997
2/28/1997
3/31/1997
4/30/1997
5/30/1997
6/30/1997
7/31/1997
8/29/1997
9/30/1997
10/31/1997
11/28/1997

761.75
794.67
817.68
814.9
804.13
851.87
902.09
957.73
964.17
960.59
983.12
964.55

716.69
729.55
773.43
756.13
733.54
793.21
838.82
884.54
893.34
899.47
855.27
900.61

757.02
740.74
786.16
790.82
757.12
801.34
848.28
885.14
954.29
899.47
950.92
914.62

740.74
786.16
790.82
757.12
801.34
848.28
885.2
954.31
899.47
947.28
914.62
955.3984

12/31/1997
1/30/1998
2/27/1998
3/31/1998
4/30/1998
5/29/1998
6/30/1998
7/31/1998
8/31/1998
9/30/1998
10/30/1998
11/30/1998

986.25
992.65
1,051.66
1,113.07
1,132.98
1,130.52
1,145.15
1,190.58
1,121.79
1,066.11
1,103.78
1,192.97

924.92
912.83
980.28
1,030.87
1,076.70
1,074.39
1,074.67
1,119.44
957.42
939.98
923.32
1,098.67

955.4
970.43
980.28
1,049.34
1,101.75
1,111.75
1,090.82
1,133.84
1,120.67
957.28
1,017.01
1,098.67

970.43
980.28
1,049.34
1,101.76
1,111.75
1,090.82
1,133.86
1,120.73
957.43
1,017.06
1,098.69
1,163.70

12/31/1998
1/29/1999
2/26/1999
3/31/1999
4/30/1999
5/28/1999
6/30/1999
7/30/1999
8/31/1999
9/30/1999
10/29/1999
11/30/1999

1,244.93
1,280.40
1,283.91
1,323.88
1,371.67
1,375.98
1,372.93
1,420.14
1,382.75
1,361.39
1,373.18
1,425.31

1,136.89
1,207.83
1,213.50
1,216.03
1,282.55
1,277.31
1,277.51
1,328.49
1,267.73
1,256.29
1,245.39
1,346.48

1,175.28
1,229.23
1,275.93
1,238.33
1,286.37
1,335.18
1,301.84
1,372.71
1,328.72
1,320.41
1,282.71
1,362.93

1,229.40
1,279.64
1,238.33
1,286.41
1,335.18
1,301.85
1,372.86
1,328.72
1,320.41
1,287.53
1,363.27
1,389.41

12/31/1999
1,473.16
1,387.44
Average Rate from 1993 to 1999

1,388.91

1,469.25

Change
20.08
4.42
5.07
8.68
14.96
1.5
-30.69
12.04
35.32
17.96
51.75
-16.28
45.42
4.66
-33.7
44.22
46.94
36.92
69.11
-54.84
47.81
-32.66
40.7784

Mos Rate Annual Rate

3.26%
0.69%
0.79%
1.34%
2.29%
0.22%
-4.58%
1.88%
5.42%
2.61%
7.34%
-2.15%
10.52%
6.13%
0.59%
-4.26%
5.84%
5.86%
4.35%
7.81%
-5.75%
5.32%
-3.45%
4.46%

15.0316
1.57%
9.85
1.02%
69.06
7.04%
52.42
5.00%
9.99
0.91%
-20.93
-1.88%
43.04
3.95%
-13.13
-1.16%
-163.3
-14.57%
59.63
6.23%
81.63
8.03%
65.01
5.92%
65.7
5.65%
50.24
4.09%
-41.31
-3.23%
48.08
3.88%
48.77
3.79%
-33.33
-2.50%
71.01
5.45%
-44.14
-3.22%
-8.31
-0.63%
-32.88
-2.49%
75.74
5.88%
26.14
1.92%
79.84
5.75%
0.37786543 4 =

9.96%

10.09%

7.22%
9.45%

Appendix 16 Dell Monthly Stock Price

Da te
Open
Hi gh
1/3/1995
40.88
2/1/1995
43.00
3/1/1995
41.88
4/3/1995
43.63
5/1/1995
54.63
6/1/1995
50.63
7/3/1995
60.25
8/1/1995
65.00
9/1/1995
76.50
10/2/1995
85.00
11/1/1995
46.25
12/1/1995
44.00
1/2/1996
35.38
2/1/1996
27.00
3/1/1996
32.13
4/1/1996
34.13
5/1/1996
45.75
6/3/1996
55.25
7/1/1996
51.13
8/1/1996
55.38
9/3/1996
65.87

Del l Stock Pri ces Monthl y

Low
Cl os e
Vol ume
Adj Cl os e
47.75
39.75
42.63
84173400
0.7
46.88
39.50
41.50
102363200
0.7
45.88
39.75
43.75
89329500
0.7
54.88
42.44
54.75
89505600
0.9
58.63
48.50
50.38
102684500
0.8
61.75
49.50
60.13
101986000
0.9
70.12
59.63
65.00
110201200
1.0
77.37
62.00
77.00
107104800
1.2
93.87
75.25
85.00
146264900
1.3
95.62
45.25
46.63
147814800
1.5
49.38
39.25
44.25
67155500
1.4
44.13
28.94
34.63
85117200
1.1
36.75
23.00
27.37
119125200
0.9
37.25
26.75
34.38
120217200
1.1
34.88
27.37
33.50
105634800
1.1
47.00
33.88
45.88
90967300
1.4
55.63
43.00
55.38
76194100
1.7
57.25
45.50
50.88
93404300
1.6
56.50
40.38
55.50
96618900
1.7
69.25
55.13
67.12
82224100
2.1
87.50
65.50
77.75
170559000
2.4

10/1/1996
11/1/1996
12/2/1996
1/2/1997
2/3/1997
3/3/1997
4/1/1997
5/1/1997
6/2/1997
7/1/1997

77.37
81.50
101.75
53.13
66.62
71.12
66.75
84.12
114.00
117.69

88.75
102.62
115.00
72.37
76.00
75.62
85.25
115.75
123.50
173.50

75.62
76.87
51.00
49.88
59.88
60.75
66.12
83.62
102.62
77.00

81.37
101.62
53.13
66.12
71.12
67.62
83.69
112.50
117.44
85.50

123206200
144458500
123662200
85929700
110294300
86682900
91510200
117646300
98290900
119329700

2.5
3.2
3.3
4.1
4.5
4.2
5.2
7.0
7.3
10.7

8/1/1997
9/2/1997
10/1/1997
11/3/1997
12/1/1997
1/2/1998
2/2/1998
3/2/1998
4/1/1998
5/1/1998
6/1/1998
7/1/1998
8/3/1998
9/1/1998
10/1/1998
11/2/1998
12/1/1998
1/4/1999
2/1/1999
3/1/1999
4/1/1999
5/3/1999
6/1/1999
7/1/1999
8/2/1999
9/1/1999
10/1/1999
11/1/1999
12/1/1999

86.50
83.00
98.00
82.12
85.56
84.81
101.12
141.75
68.00
81.87
81.31
94.12
108.00
102.62
63.13
66.56
59.63
74.87
101.87
80.06
41.69
41.63
34.44
37.06
40.38
48.25
40.13
40.00
42.81

88.12
101.25
103.87
87.25
96.25
101.06
140.38
143.88
81.37
98.50
95.56
118.25
129.38
115.50
66.31
73.50
75.81
100.37
110.00
87.50
48.98
45.06
39.44
44.63
49.06
49.94
46.50
45.13
53.97

75.00
82.87
73.00
70.00
75.25
79.37
100.87
61.00
62.63
80.75
77.25
90.00
98.25
53.00
40.75
59.88
59.56
73.44
77.37
35.38
35.38
32.88
31.37
35.75
37.56
41.75
37.38
39.31
40.50

82.06
96.87
80.12
84.19
84.00
99.44
139.88
67.75
80.75
82.41
92.81
108.59
100.00
65.75
65.50
60.81
73.19
100.00
80.12
40.88
41.19
34.44
37.00
40.88
48.81
41.81
40.13
43.00
51.00

68189700
55297200
82255200
83280700
79134200
80488800
90542000
77806500
43955900
79697300
61258700
71408500
102322700
73222300
77984800
51471400
31833800
39935100
79858400
41653600
30127200
31323000
23566700
22462900
32116500
25101000
27142500
29162900
28781800

10.3
12.1
10.0
10.5
10.5
12.4
17.5
16.9
20.2
20.6
23.2
27.2
25.0
32.9
32.8
30.4
36.6
50.0
40.1
40.9
41.2
34.4
37.0
40.9
48.8
41.8
40.1
43.0
51.0

Appendix 17 Beta Estimation of Dell Computer

Beta Estimation of Dell Computer

1/31/1996
2/29/1996
3/29/1996
4/30/1996
5/31/1996
6/28/1996
7/31/1996
8/30/1996
9/30/1996
10/31/1996
11/29/1996
12/31/1996
1/31/1997
2/28/1997
3/31/1997
4/30/1997
5/30/1997
6/30/1997
7/31/1997
8/29/1997
9/30/1997
10/31/1997
11/28/1997
12/31/1997
1/30/1998
2/27/1998
3/31/1998
4/30/1998
5/29/1998
6/30/1998
7/31/1998
8/31/1998
9/30/1998
10/30/1998
11/30/1998
12/31/1998
1/29/1999
2/26/1999
3/31/1999
4/30/1999
5/28/1999
6/30/1999
7/30/1999
8/31/1999
9/30/1999
10/29/1999
11/30/1999
12/31/1999

S&P Index Price

S&P Index
Returns

Stock Price

636.01
640.43
645.5
654.18
669.14
670.64
639.95
651.99
687.31
705.27
757.02
740.74
786.16
790.82
757.12
801.34
848.28
885.2
954.31
899.47
947.28
914.62
955.3984
970.43
980.28
1,049.34
1,101.76
1,111.75
1,090.82
1,133.86
1,120.73
957.43
1,017.06
1,098.69
1,163.70
1,229.40
1,279.64
1,238.33
1,286.41
1,335.18
1,301.85
1,372.86
1,328.72
1,320.41
1,287.53
1,363.27
1,389.41
1,469.25

0.006934
0.007917
0.013431
0.022853
0.002257
-0.045748
0.018814
0.054203
0.026101
0.073376
-0.021505
0.061317
0.005928
-0.042614
0.058406
0.058577
0.043453
0.078146
-0.057466
0.053154
-0.034478
0.044587
0.015732
0.010150
0.070449
0.049946
0.009076
-0.018826
0.039438
-0.011615
-0.145797
0.062396
0.080294
0.059126
0.056375
0.041009
-0.032283
0.038794
0.037944
-0.024970
0.054438
-0.032046
-0.006254
-0.028552
0.062539
0.019062
0.057844
-0.050904

42.63
41.5
43.75
54.75
50.38
60.13
65
77
85
46.63
44.25
34.63
27.37
34.38
33.5
45.88
55.38
50.88
55.5
67.12
77.75
81.37
101.62
53.13
66.12
71.12
67.62
83.69
112.5
117.44
85.5
82.06
96.87
80.12
84.19
84
99.44
139.88
67.75
80.75
82.41
92.81
108.59
100
65.75
65.5
60.81
73.19

Dell's Returns

0.23
0.23
0.23
0.23
0.23
0.23
0.23
0.23
0.23
0.23
0.23
0.23
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.21
0.09
0.09
0.09
0.09
0.09
0.09
0.09
0.09
0.09
0.09
0.09
0.09
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05
0.05

0.005
0.005
0.005
0.004
0.004
0.004
0.003
0.003
0.003
0.005
0.005
0.006
0.008
0.006
0.006
0.005
0.004
0.004
0.004
0.003
0.003
0.003
0.002
0.004
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.001
0.000
0.001
0.001
0.001
0.001
0.000
0.001
0.001
0.001
0.001
0.001