Goff Computers

Goff Computer, Inc. Case Study

In the competitive industry of computer sales, Goff Computer, Inc. (GCI) has remained profitable. Additional retail locations have been funded by profits alone. Due to its steady growth, a better means of capital budgeting should be determined. Since the company is privately owned and its profits fuel growth, then it has little to no debt. Finding their cost of capital may help Goff Computers realize opportunities to propel them from competitor status to the level of industry leader.

Since Goff Computer, Inc. is a privately owned company, there is limited information available to determine their cost of equity. In order to overcome these limitations, we have decided to use Dell, Inc. as a representative company. We will assume that GCI has many of the same attributes as Dell and perform our calculations based on these assumptions.

Since Dell, Inc. is a publicly traded corporation, it is required to file financial reports on a quarterly and annual basis. These filings can be found on the U.S. Securities and Exchange Commission’s website. We can use information such as the book value of debt and the book value of equity for Dell from their latest filing. (See Appendix 1)

In our first calculation, we determine Dell’s cost of equity. We used the capital asset pricing model (CAPM) to determine this value. One of the necessary figures needed to complete the equation is the company Beta. Since Dell is a publicly traded company, this information can be found on Yahoo! Finance. Beta measures the variability of the company’s stock against fluctuations in the market. The other values necessary for this calculation are the risk-free rate and the market risk premium. The risk-free rate is the same as the rate of return on Treasury Bills. The market risk premium is currently at 7%. Using this information, we performed the following calculation:

|Dell...