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 % of Market Share (Dollars) % of Market Share (Units)

Large/midsize businesses & government 42.3% 38.5% Small business and offices 23.7% 23.3% Home consumers 28.7% 33.7% Educational institutions 5.4% 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 Ratio Analysis

GM / Revenue NI / Rev Inventory Turnover Days Sales in InventoryDell 23% 8% 51.78 7.049Compaq 37.20% -8.80% 10.66 34.225IBM 57.80% -4.40% 7.38 49.446HP 31.90% 6.30% 5.19 70.378Gateway 20.20% 4.50% 36.32 10.049

Appendix 2 Profit Margin Ratio Analysis Profit Margin 1995 1996 1997 1998Compaq 5.35% 0.07% 7.55% -8.80%Dell 4.29% 5.14% 6.68% 7.66%Gateway 4.71% 4.99% 1.75% 4.52%HP 7.72% 6.73% 7.27% 6.26%IBM 5.81% 7.15% 7.76% 7.75%

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

Date Before Split

Stock Price

Date of Split

Stock Price

% Change

% Change Between Splits

No of Months Between Event

Average Monthly

Rate12/02/1996 $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 17.2%

Dell Inc.(Closing Prices on Event Day)

Appendix 4 FY 1996 Competitive Advantage Analysis

FY 1996 Competitive Advantage AnalysisConsumer Market Configuration

Price Gross MarginAnnual Cost

of Capital(Assumption)

Dell Days in

Inventory

Channel Markup

(Assumption)

Competitor Channel

Costs(Assumption)

Avg. Rate of Decline for Component

Costs

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 Advantage

Dell Advantage

/ Price

Dell 2,848$ 22.5% 20% 7.05 2,207.20$ Compaq 3,299$ 31.4% 34.22 9% 6% 2,263.11$ 55.914 32.87$ 170.88$ 198.65$ 458.31$ 16%HP 3,198$ 31.9% 70.38 9% 6% 2,177.84$ -29.362 76.59$ 170.88$ 198.65$ 416.76$ 15%Gateway 2,439$ 20.2% 10.05 9% 6% 1,946.32$ -260.878 3.63$ 170.88$ 198.65$ 112.28$ 4%

1.00%

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FY 1996 Competitive Advantage AnalysisBusiness Market Configuration

Price Gross MarginAnnual Cost

of Capital(Assumption)

Dell Days in

Inventory

Channel Markup

(Assumption)

Competitor Channel

Costs(Assumption)

Avg. Rate of Decline for Component

Costs

COGS(Per Unit)

JIT Purchase of Components

(Savings)

Lower Inventory

Costs

No Channel Related Costs

No Channel Markup

Dell Advantage

Dell Advantage

/ Price

Dell 2,555$ 22.5% 20% 7.05 1,980.13$ Compaq 3,077$ 31.4% 34.22 9% 6% 2,110.82$ 130.697 29.49$ 153.30$ 178.21$ 491.69$ 19%HP 3,497$ 31.9% 70.38 9% 6% 2,381.46$ 401.332 68.71$ 153.30$ 178.21$ 801.56$ 31%Gateway 2,208$ 20.2% 10.05 9% 6% 1,761.98$ -218.141 3.26$ 153.30$ 178.21$ 116.63$ 5%

1.00%

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Appendix 5 FY 1998 Competitive Advantage Analysis

FY 1998 Competitive Advantage AnalysisConsumer Market Configuration

Price Gross MarginAnnual Cost

of Capital(Assumption)

Dell Days in

Inventory

Channel Markup

(Assumption)

Competitor Channel

Costs(Assumption)

Avg. Rate of Decline for Component

Costs

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 Advantage

Dell Advantage

/ Price

Dell 1,838$ 22.5% 20% 7.05 1,424.45$ Compaq 2,448$ 31.4% 34.22 9% 6% 1,679.33$ 254.878 21.21$ 110.28$ 128.20$ 514.57$ 28%HP 2,459$ 31.9% 70.38 9% 6% 1,674.58$ 250.129 49.43$ 110.28$ 128.20$ 538.04$ 29%Gateway 1,825$ 20.2% 10.05 9% 6% 1,456.35$ 31.9 2.34$ 110.28$ 128.20$ 272.72$ 15%

1.00%

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FY 1998 Competitive Advantage AnalysisBusiness Market Configuration

Price Gross MarginAnnual Cost

of Capital(Assumption)

Dell Days in

Inventory

Channel Markup

(Assumption)

Competitor Channel

Costs(Assumption)

Avg. Rate of Decline for Component

Costs

COGS(Per Unit)

JIT Purchase of Components

(Savings)

Lower Inventory

Costs

No Channel Related Costs

No Channel Markup

Dell Advantage

Dell Advantage

/ Price

Dell 2,023$ 22.5% 20% 7.05 1,567.83$ Compaq 2,040$ 31.4% 34.22 9% 6% 1,399.44$ -168.385 23.35$ 121.38$ 141.10$ 117.45$ 6%HP 2,400$ 31.9% 70.38 9% 6% 1,634.40$ 66.575 54.41$ 121.38$ 141.10$ 383.46$ 19%Gateway 1,499$ 20.2% 10.05 9% 6% 1,196.20$ -371.623 2.58$ 121.38$ 141.10$ (106.56)$ -5%

1.00%

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Strengths:

Just In Time

Direct to Consumer

Brand Image

Weaknesses:

Workstation Market

Declining PC Prices

Opportunities:

New markets for PCs

New produts to existing markets

Service Contracts

Threats:

Copycats

Saturated Markets

Maintaining Culture

Appendix 6 SWOT Analysis of Dell

Appendix 7 Dell DuPont Analysis

1992 1993 1994 1995 1996 1997 1998 1999

Net Income 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%

Operating Efficiency(Profit Margin) 6% 5% -1% 4% 5% 7% 8% 8%

Total Asset Turnover(Asset Use Efficieny) 159% 217% 252% 218% 247% 259% 289% 265%

Equity Multiplier(Financial Leverage) 204% 251% 242% 244% 221% 276% 330% 296%

Return on Assets 9.11% 11.00% -3.16% 9.35% 12.66% 17.31% 22.12% 21.23%

DuPont Analysis

ROE = NI/Sales x Sales / Assets x Assets / Total Equity

Appendix 8 Dell Market Value Analysis

2000 2001 2002 2003 2004

R evenue 18,243 27,000 39,959 59,140 87,527

G ross Margin 4,106 6,077 8,994 13,311 19,700

S G &A 1,788 2,646 3,916 5,796 8,579

R esearch & Dev 272 403 596 882 1,305

Net Income 2,046 3,028 4,482 6,633 9,816

157,736

Net C ashflows 2,046 3,028 4,482 6,633 167,553

D is count F actor (9.41% Disc R ate) 0.9140 0.8354 0.7635 0.6979 0.6378

1,870 2,530 3,422 4,629 106,873

$119,323 2548 = $46.83

Market Value S hares

Actual Market Value as of 01/03/2000

S tabilized Value as of 2004 9,816 x 1 + .03 10,111

0.0941 - 0.03 0.0641 $157,736

Market Value of Dell Inc

= =

Appendix 9 Dell Income Statement

1992 1993 1994 1995 1996 1997 1998 1999Percent of

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%

Income Statement ($ Million)

1992 1993 1994 1995 1996 1997 1998 1999

AssetsCurrent Assets: Cash 95.3 337.0 527.2 646.0 1,352.0 1,844.0 3,181.0 4,132.0 Accounts Receivable 374.0 410.8 538.0 726.0 903.0 1,486.0 2,481.0 2,678.0 Inventory 303.2 220.3 292.9 429.0 251.0 233.0 273.0 391.0 Other Current Assets 80.2 80.3 112.2 156.0 241.0 249.0 404.0 480.0 Total Current Assets 852.8 1,048.4 1,470.4 1,957.0 2,747.0 3,812.0 6,339.0 7,681.0 Fixed Assets PPE 70.4 86.9 117.0 179.0 235.0 342.0 523.0 765.0 Investments - - - - - - - 2,721.0 Intangible Assets - - - - - - - 304.0 Other Assets 3.8 5.2 6.7 12.0 11.0 14.0 15.0 - Total Assets 927.0 1,140.5 1,594.0 2,148.0 2,993.0 4,168.0 6,877.0 11,471.0

Liabilities And Owners' EquityCurrent Liabilities: Debt/Current Liabilities 8.5 - 0.4 60.0 27.0 146.0 - - Accounts Payable 295.1 282.7 447.1 466.0 1,040.0 1,643.0 2,397.0 3,538.0 Income Tax Payable 27.2 17.6 24.9 - - - - - Other Current Liabilities 163.0 237.7 279.0 413.0 591.0 908.0 1,298.0 1,654.0 Total Current Liabilities 494 538 751 939 1,658 2,697 3,695 5,192 Long Term Debt 48.4 100.0 113.4 113.0 18.0 17.0 512.0 508.0 Other Liabilities 15.6 31.4 77.4 123.0 232.0 261.0 349.0 463.0 Preferred Stock - 0.013 0.013 0.001 279.000 - - - Common Stock 369.2 471.1 651.7 973.0 806.0 1,293.0 2,321.0 5,308.0 Total Liabilities & Net Worth 927 1,140 1,594 2,148 2,993 4,268 6,877 11,471 Earnings Per Share 2.59 (1.06) 3.15 2.65 2.70 2.56 1.05 0.61 Shares Outstanding 157 149 166 194 192 2622 2517 2548

51.0 102.0 (36.0) 149.0 272.0 518.0 944.0 1,460.0 2.59 (1.06) 3.15 2.65 2.70 2.56 1.05 0.61 19.7 (96.2) (11.4) 56.2 100.7 202.3 899.0 2,393.4

19 (96) (11) 56 100 202 899 2,393

Debt-to-Asset Ratio 64.0 131.4 190.9 236.0 250.0 278.0 861.0 971.0927.0 1140.5 1594.0 2148.0 2993.0 4168.0 6877.0 11471.0

6.90% 11.52% 11.97% 10.99% 8.35% 6.67% 12.52% 8.46%

Debt-to-Equity Ratio 64.0 131.4 190.9 236.0 250.0 278.0 861.0 971.0369.2 471.1 651.7 973.0 1085.0 1293.0 2321.0 5308.0

0.173 0.279 0.293 0.243 0.230 0.215 0.371 0.183 times times times times times times times times

Current RatioCurrent Assets 852.8 1,048.4 1,470.4 1,957.0 2,747.0 3,812.0 6,339.0 7,681.0

Current Liabilities 493.8 538.0 751.4 939.0 1,658.0 2,697.0 3,695.0 5,192.0 Current Ratio 1.73 1.95 1.96 2.08 1.66 1.41 1.72 1.48

BALANCE SHEET

Appendix 10 Dell Balance Sheet

Appendix 11 Dell Sources and Uses Statement

1998 1998 Source Use

Assets

Cash 3,181.0 4,132.0 951.0

Accounts Receivable 2,481.0 2,678.0 197.0

Inventory 273.0 391.0 118.0

Other Current Assets 404.0 480.0 76.0

6,339.0 7,681.0 - 1,342.0

PPE 523.0 765.0 242.0 Investments - 2,721.0 2,721.0 Intangible Assets - 304.0 304.0 Other Assets 15.0 - 15.0

538.0 3,790.0 15.0 3,267.0

Liabilities Debt/Current Liabilities - - - Accounts Payable 2,397.0 3,538.0 1,141.0 Income Tax Payable - - - Other Current Liabilities 1,298.0 1,654.0 356.0

3,695.0 5,192.0 1,497.0 -

Long Term Debt 861.0 971.0 110.0 - Other Liabilities 349.0 463.0 114.0

1,210.0 1,434.0 224.0 -

Net Source/Use $1,736.0 $4,609.0

Sources and Uses Statement

Appendix 12 Selected Financial Statements as a Percentage of Sales

1992 1993 1994 1995 1996 1997 1998 1999

Net Sales 126.29% 42.65% 20.95% 52.40% 46.51% 58.87% 47.99% 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

Other Current Assets 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% 19.39% 19.40

Net Income 34.07% 10.94% 10.20% 12.35% 4.74% 3.00% 2.21% 2.14% 2.15

Selected Financial Statement Items as Percentage of Sales

Fore

cast

Appendix 13 Calculation of Beta

S UMMAR Y O UT P UT

R egress 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 VA

df S S MS F S ignificance F

R egress ion 1 0.00019295 0.000192948 0.0913972 0.76377113

R es idual 46 0.09711042 0.002111096

T otal 47 0.09730337

C oeffic ients S tandard E rror 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

a Pre-Tax 7.53% = 7.53%

After Tax 7.53% x 65.00% = 4.89%

b 5.36% + 0.99 x 4.09% = 9.41%Risk Premium

c 4.89% x 19.52% x 9.41% x 80.48% = 8.53%

Amount of Debt 236 1209 = 19.5%

Amount of Equity 973 1209 = 80.5%

Capitalization 1209 100.0%

Moody's Corporate Bond Rating

3/9/1995 Bi 8.20%

3/12/1997 Ba3 7.86%

3/11/1997 Baa1 7.86%

3/26/1998 Baa1 7.22%

5/11/1999 A3 7.02%

5/11/1999 A3 7.02%

Average Annual Interest Rate 7.53%

Risk Premium 9.45% - 5.36% = 4.09%

Risk free Rate Beta Market Rate Risk free Rate

= ( 5.36% )+( 0.99 ) ( 9.45% - 5.36%

= 9.41%

Computation of WACC Rate

Discount Rate

Computation of Rate CAPM

Cost of Debt

Cost of Equity

Cost of Capital

Appendix 14 Calculation of Discount Rate

High low Open Close Change Mos Rate Annual Rate1/31/1996 636.18 597.29 615.93 636.01 20.08 3.26%2/29/1996 664.23 633.71 636.02 640.43 4.42 0.69%3/29/1996 656.97 627.63 640.43 645.5 5.07 0.79%4/30/1996 656.68 624.14 645.5 654.18 8.68 1.34%5/31/1996 681.1 630.07 654.17 669.14 14.96 2.29%6/28/1996 680.32 658.75 669.12 670.64 1.5 0.22%7/31/1996 675.88 605.88 670.63 639.95

-30.69 -4.58%8/30/1996 670.68 639.49 639.95 651.99 12.04 1.88%9/30/1996 690.88 643.97 651.99 687.31 35.32 5.42%10/31/1996 714.1 684.44 687.31 705.27 17.96 2.61%11/29/1996 762.12 701.3 705.27 757.02 51.75 7.34%12/31/1996 761.75 716.69 757.02 740.74

-16.28 -2.15% 10.52%1/31/1997 794.67 729.55 740.74 786.16 45.42 6.13%2/28/1997 817.68 773.43 786.16 790.82 4.66 0.59%3/31/1997 814.9 756.13 790.82 757.12

-33.7 -4.26%4/30/1997 804.13 733.54 757.12 801.34 44.22 5.84%5/30/1997 851.87 793.21 801.34 848.28 46.94 5.86%6/30/1997 902.09 838.82 848.28 885.2 36.92 4.35%7/31/1997 957.73 884.54 885.14 954.31 69.11 7.81%8/29/1997 964.17 893.34 954.29 899.47

-54.84 -5.75%9/30/1997 960.59 899.47 899.47 947.28 47.81 5.32%10/31/1997 983.12 855.27 950.92 914.62

-32.66 -3.45%11/28/1997 964.55 900.61 914.62 955.3984 40.7784 4.46%12/31/1997 986.25 924.92 955.4 970.43 15.0316 1.57% 9.96%1/30/1998 992.65 912.83 970.43 980.28 9.85 1.02%2/27/1998 1,051.66 980.28 980.28 1,049.34 69.06 7.04%3/31/1998 1,113.07 1,030.87 1,049.34 1,101.76 52.42 5.00%4/30/1998 1,132.98 1,076.70 1,101.75 1,111.75 9.99 0.91%5/29/1998 1,130.52 1,074.39 1,111.75 1,090.82

-20.93 -1.88%6/30/1998 1,145.15 1,074.67 1,090.82 1,133.86 43.04 3.95%7/31/1998 1,190.58 1,119.44 1,133.84 1,120.73

-13.13 -1.16%8/31/1998 1,121.79 957.42 1,120.67 957.43

-163.3 -14.57%9/30/1998 1,066.11 939.98 957.28 1,017.06 59.63 6.23%10/30/1998 1,103.78 923.32 1,017.01 1,098.69 81.63 8.03%11/30/1998 1,192.97 1,098.67 1,098.67 1,163.70 65.01 5.92%12/31/1998 1,244.93 1,136.89 1,175.28 1,229.40 65.7 5.65% 10.09%1/29/1999 1,280.40 1,207.83 1,229.23 1,279.64 50.24 4.09%2/26/1999 1,283.91 1,213.50 1,275.93 1,238.33

-41.31 -3.23%3/31/1999 1,323.88 1,216.03 1,238.33 1,286.41 48.08 3.88%4/30/1999 1,371.67 1,282.55 1,286.37 1,335.18 48.77 3.79%5/28/1999 1,375.98 1,277.31 1,335.18 1,301.85

-33.33 -2.50%6/30/1999 1,372.93 1,277.51 1,301.84 1,372.86 71.01 5.45%7/30/1999 1,420.14 1,328.49 1,372.71 1,328.72

-44.14 -3.22%8/31/1999 1,382.75 1,267.73 1,328.72 1,320.41

-8.31 -0.63%9/30/1999 1,361.39 1,256.29 1,320.41 1,287.53

-32.88 -2.49%10/29/1999 1,373.18 1,245.39 1,282.71 1,363.27 75.74 5.88%11/30/1999 1,425.31 1,346.48 1,362.93 1,389.41 26.14 1.92%12/31/1999 1,473.16 1,387.44 1,388.91 1,469.25 79.84 5.75% 7.22%Average Rate from 1993 to 1999 0.37786543 4 = 9.45%

S&P500 Returns

Appendix 15 S&P 500 Returns

Appendix 16 Dell Monthly Stock Price

Date Open High Low Close Volume Adj Close

1/3/1995 40.88 47.75 39.75 42.63 84173400 0.7

2/1/1995 43.00 46.88 39.50 41.50 102363200 0.7

3/1/1995 41.88 45.88 39.75 43.75 89329500 0.7

4/3/1995 43.63 54.88 42.44 54.75 89505600 0.9

5/1/1995 54.63 58.63 48.50 50.38 102684500 0.8

6/1/1995 50.63 61.75 49.50 60.13 101986000 0.9

7/3/1995 60.25 70.12 59.63 65.00 110201200 1.0

8/1/1995 65.00 77.37 62.00 77.00 107104800 1.2

9/1/1995 76.50 93.87 75.25 85.00 146264900 1.3

10/2/1995 85.00 95.62 45.25 46.63 147814800 1.5

11/1/1995 46.25 49.38 39.25 44.25 67155500 1.4

12/1/1995 44.00 44.13 28.94 34.63 85117200 1.1

1/2/1996 35.38 36.75 23.00 27.37 119125200 0.9

2/1/1996 27.00 37.25 26.75 34.38 120217200 1.1

3/1/1996 32.13 34.88 27.37 33.50 105634800 1.1

4/1/1996 34.13 47.00 33.88 45.88 90967300 1.4

5/1/1996 45.75 55.63 43.00 55.38 76194100 1.7

6/3/1996 55.25 57.25 45.50 50.88 93404300 1.6

7/1/1996 51.13 56.50 40.38 55.50 96618900 1.7

8/1/1996 55.38 69.25 55.13 67.12 82224100 2.1

9/3/1996 65.87 87.50 65.50 77.75 170559000 2.410/1/1996 77.37 88.75 75.62 81.37 123206200 2.511/1/1996 81.50 102.62 76.87 101.62 144458500 3.212/2/1996 101.75 115.00 51.00 53.13 123662200 3.3

1/2/1997 53.13 72.37 49.88 66.12 85929700 4.12/3/1997 66.62 76.00 59.88 71.12 110294300 4.53/3/1997 71.12 75.62 60.75 67.62 86682900 4.24/1/1997 66.75 85.25 66.12 83.69 91510200 5.25/1/1997 84.12 115.75 83.62 112.50 117646300 7.06/2/1997 114.00 123.50 102.62 117.44 98290900 7.37/1/1997 117.69 173.50 77.00 85.50 119329700 10.7

8/1/1997 86.50 88.12 75.00 82.06 68189700 10.3

9/2/1997 83.00 101.25 82.87 96.87 55297200 12.1

10/1/1997 98.00 103.87 73.00 80.12 82255200 10.0

11/3/1997 82.12 87.25 70.00 84.19 83280700 10.5

12/1/1997 85.56 96.25 75.25 84.00 79134200 10.5

1/2/1998 84.81 101.06 79.37 99.44 80488800 12.4

2/2/1998 101.12 140.38 100.87 139.88 90542000 17.5

3/2/1998 141.75 143.88 61.00 67.75 77806500 16.9

4/1/1998 68.00 81.37 62.63 80.75 43955900 20.2

5/1/1998 81.87 98.50 80.75 82.41 79697300 20.6

6/1/1998 81.31 95.56 77.25 92.81 61258700 23.2

7/1/1998 94.12 118.25 90.00 108.59 71408500 27.2

8/3/1998 108.00 129.38 98.25 100.00 102322700 25.0

9/1/1998 102.62 115.50 53.00 65.75 73222300 32.9

10/1/1998 63.13 66.31 40.75 65.50 77984800 32.8

11/2/1998 66.56 73.50 59.88 60.81 51471400 30.4

12/1/1998 59.63 75.81 59.56 73.19 31833800 36.6

1/4/1999 74.87 100.37 73.44 100.00 39935100 50.0

2/1/1999 101.87 110.00 77.37 80.12 79858400 40.1

3/1/1999 80.06 87.50 35.38 40.88 41653600 40.9

4/1/1999 41.69 48.98 35.38 41.19 30127200 41.2

5/3/1999 41.63 45.06 32.88 34.44 31323000 34.4

6/1/1999 34.44 39.44 31.37 37.00 23566700 37.0

7/1/1999 37.06 44.63 35.75 40.88 22462900 40.9

8/2/1999 40.38 49.06 37.56 48.81 32116500 48.8

9/1/1999 48.25 49.94 41.75 41.81 25101000 41.8

10/1/1999 40.13 46.50 37.38 40.13 27142500 40.1

11/1/1999 40.00 45.13 39.31 43.00 29162900 43.0

12/1/1999 42.81 53.97 40.50 51.00 28781800 51.0

Del l Stock Prices Monthly

S&P Index PriceS&P Index

Returns Stock Price Dell's Returns1/31/1996 636.01 0.006934 42.63 0.23 0.005 2/29/1996 640.43 0.007917 41.5 0.23 0.005 3/29/1996 645.5 0.013431 43.75 0.23 0.005 4/30/1996 654.18 0.022853 54.75 0.23 0.004 5/31/1996 669.14 0.002257 50.38 0.23 0.004 6/28/1996 670.64 -0.045748 60.13 0.23 0.004 7/31/1996 639.95 0.018814 65 0.23 0.003 8/30/1996 651.99 0.054203 77 0.23 0.003 9/30/1996 687.31 0.026101 85 0.23 0.003 10/31/1996 705.27 0.073376 46.63 0.23 0.005 11/29/1996 757.02 -0.021505 44.25 0.23 0.005 12/31/1996 740.74 0.061317 34.63 0.23 0.006 1/31/1997 786.16 0.005928 27.37 0.21 0.008 2/28/1997 790.82 -0.042614 34.38 0.21 0.006 3/31/1997 757.12 0.058406 33.5 0.21 0.006 4/30/1997 801.34 0.058577 45.88 0.21 0.005 5/30/1997 848.28 0.043453 55.38 0.21 0.004 6/30/1997 885.2 0.078146 50.88 0.21 0.004 7/31/1997 954.31 -0.057466 55.5 0.21 0.004 8/29/1997 899.47 0.053154 67.12 0.21 0.003 9/30/1997 947.28 -0.034478 77.75 0.21 0.003 10/31/1997 914.62 0.044587 81.37 0.21 0.003 11/28/1997 955.3984 0.015732 101.62 0.21 0.002 12/31/1997 970.43 0.010150 53.13 0.21 0.004 1/30/1998 980.28 0.070449 66.12 0.09 0.001 2/27/1998 1,049.34 0.049946 71.12 0.09 0.001 3/31/1998 1,101.76 0.009076 67.62 0.09 0.001 4/30/1998 1,111.75 -0.018826 83.69 0.09 0.001 5/29/1998 1,090.82 0.039438 112.5 0.09 0.001 6/30/1998 1,133.86 -0.011615 117.44 0.09 0.001 7/31/1998 1,120.73 -0.145797 85.5 0.09 0.001 8/31/1998 957.43 0.062396 82.06 0.09 0.001 9/30/1998 1,017.06 0.080294 96.87 0.09 0.001 10/30/1998 1,098.69 0.059126 80.12 0.09 0.001 11/30/1998 1,163.70 0.056375 84.19 0.09 0.001 12/31/1998 1,229.40 0.041009 84 0.09 0.001 1/29/1999 1,279.64 -0.032283 99.44 0.05 0.001 2/26/1999 1,238.33 0.038794 139.88 0.05 0.000 3/31/1999 1,286.41 0.037944 67.75 0.05 0.001 4/30/1999 1,335.18 -0.024970 80.75 0.05 0.001 5/28/1999 1,301.85 0.054438 82.41 0.05 0.001 6/30/1999 1,372.86 -0.032046 92.81 0.05 0.001 7/30/1999 1,328.72 -0.006254 108.59 0.05 0.000 8/31/1999 1,320.41 -0.028552 100 0.05 0.001 9/30/1999 1,287.53 0.062539 65.75 0.05 0.001 10/29/1999 1,363.27 0.019062 65.5 0.05 0.001 11/30/1999 1,389.41 0.057844 60.81 0.05 0.001 12/31/1999 1,469.25 -0.050904 73.19 0.05 0.001

Beta Estimation of Dell Computer

Appendix 17 Beta Estimation of Dell Computer