Essay about Dell's Working Capital Case Solution

2552 Words Nov 4th, 2013 11 Pages
Dell’s Working Capital

Substantive Issues

Dell manufactures, sells, and services personal computers. The company markets directly to its customers and builds computers after receiving a customer order. This build-to-order model enables Dell to have much smaller investments in working capital than its competitors. It also enables Dell to enjoy more fully the benefits of reductions in component prices and to introduce new products more rapidly. Dell has grown quickly and has been able to finance that growth internally by its efficient use of working capital and its profitability.

Dell’s Competitive Advantage:

The extent of Dell’s working capital advantage over its competitors can be assessed using data contained in Table A
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Short-term investments are assumed to be constant. The projected 1996 assets equal about $2.2B, an increase of about $582 million. If 1995 profit margins of 4.3% had held, Dell would have realized $227 million in net income, leaving a funding requirement of $355 million ($582 million minus $227 million) assuming that liabilities remain constant as detailed in the Fixed Liabilities projection in Exhibit TN-1. The Proportional Liabilities projection assumes that the liabilities grow as sales grow based on the 1995 sales ratios. Those projections show that Dell would have excess funding of $139 million. Thus, as of 1995, Dell would be projected to be able to grow at 32% without increasing its leverage.

Exhibit TN-2 presents Dell’s sustainable growth rate. In 1995, Dell’s sustainable growth rate was 31.6%, which was below the 52% of actual growth in 1996. Typically, when a firm grows beyond its sustainable growth rate, it either increases leverage or obtains additional equity. Dell was able to grow beyond its sustainable growth rate without increasing leverage or obtaining additional equity because short-term investments were assumed not to grow with sales in Exhibit TN-1. To gauge the impact of these short term investments on sustainable growth, the Panel B of Exhibit TN-2 presents the sustainable growth rate adjusted for the short-term investments by subtracting them from the prior-year assets and equity. Net income should also be adjusted

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