Dell Case Study

How did Dell fund its 53% growth in 1996?

 Total Current Assets / Sales = 1110/3475 = 32%  New Sales = Old Sales*(1+53%) = 3475*1.53=5296

 Increase in Sales = New Sales-Old Sales = 1821

 Total Current Asset Increase Needed = 1821*32% = 582  Total Current Liabilities / Sales = 942/3475 = 27.1%  Opportunity of Liability increase = 1821*27.1%=495  Lacking Funds = 582 – 495 = 87

 Profit Margin = Net Income / Sales = 149/3475 = 4.3%

 New Net Income = 5296*4.3% = 227  In addition Short-Term Investments = 484

Assuming Dell sales will grow 50% in 1997, how might the company fund this growth internally?

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New Sales (1997) = 5276*(1+50%) = 7944 Increase in Sales = New – Old = 7944 – 5276 = 2648 Increase Operating Assets = Old*0.5 = 1557*0.5 = 779 Total Current Liabilities / Sales = 1175/5296= 22.2% Opportunity of Liability increase = 2648*22.2%=588 Lack of Funds = 779 – 588 = 191 Profit Margin = NI/S = 272/5296 = 5.1% New Net Income = New Sales * 5.1% = 7944*5.1% = 408 Short-Term Investments (1997) = 484*22.2% = 591 So, Dell could fund this growth internally

How much would working capital need to be reduced and/or profit margin increased?

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Funds Needed = Operating Assets * 0.5 = 779 Liability Increase Opportunity = 588 Additional Funds Needed = 779-588 = 191 If Dell Takes 191 liabilities, its Working Capital will not decrease. but the company can fund this lack by New Net Income that is enough with the current profit margin of 4.3% Net Income = 408 Company can pay dividends by 408-191 = 217 Or the company can NOT take liabilities at all and almost Double Profit Margin from 5.1 to 9.8 so It gets 779 Net Income. In this option Company shouldn’t pay Dividends.

How would your answers to Question 3 change if Dell also repurchased $500 million of common stock in 1997 and repaid its long-term debt?

 If Company Funds its Assets Growth Lack of 191 from Net

Income of 408, It will have remaining 408-191=217...