Chris Roof
Memorandum
To: Michael S. Dell
Dell Chairman of the Board of Directors, CEO
From: Chris Roof
Date: 10/2/14
Subject: Dell 1997 Projections
Dell will be able to fund 50% growth internally for the next year 1997. According
to Exhibit 2: The Balance Sheet, Dell has a surplus cash of $83.73 million. From this
information we could determine that Dell was not dependent on external financial
markets, therefore they were able to increase return on investment capital. Dell became
more efficient in increasing profit margin by having more internal funds and less external
funds. By improving the efficiency of working capital management and operating
efficiency.
Dell will not be able to retire its debt and buyback $500 million and grow at 50%.
According to the results, the adjusted additional funds needed is $529.27 million, which
indicates that Dell will not be able to retire its debt and buyback $500 million in shares.
Dell does not have enough internal funds to retire its debt and buyback $500 million in
shares, while growing at 50%. Dell would have to find funds externally, but that would
only put them in a greater debt. According to Exhibit 3: The sensitivity analysis of the
Cash Conversion Cycle shows us how to improve efficiency by having management
increase accounts payable for the short term. In order for Dells profit margin to increase
they will need to have better control of costs because with a lower COGS then Dell will
be able to have a more efficient CCC while providing more AFN*. According to Exhibit
3: Sensitivity of COGS to CCC, AFN*, and FCF the more that Dell can decrease its
COGS/Sales ratio the lower the CCC and provides more AFN*.
This goal is not feasible in a competitive market unless we buy back less than $500
million shares or lower the growth percentage. If Dell buys back less shares or lowers the
growth percentage then Dell will be able to accomplish their goals.
Dell Will Be Able to Fund its 50% Growth Internally in 1997
After projecting for 1997, Dell will be able to fund its 50% growth in 1997 internally.
This is because there is a surplus of cash of 83,730,000 million with these factors.
Funding this internally will improve Dell’s financial strength by not sourcing additional
funds.
Not Be Able to Retire its Debt, and Buyback $500 million & Grow at 50%
Dell will not be able to retire its debt, buyback $500 million in shares while maintaining a
50% growth. Buying back $500 million in shares and retiring its debt will increase the
burden of liabilities on the firm. Therefore the adjusted additional funds needed is
$529,270,000, which indicates that it cannot fund its operations internally under these
conditions.
Areas of Improvement Dell Should Focus On
Dell should improve ongoing operations by reducing funds needed, therefore increasing
the profit margins and additions to retained earnings. The firm could also increase the
efficiency of its asset use as well as reduce its fixed assets to reach its goal of reducing its
leverage and buying back shares.
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Dell could improve its percentage of accounts payables to Sales 11.80% and
decrease percentage of accounts receivables to sales to 9.71%, creating a surplus
of $26,760,000.
If Dell decreases its percentage of cost of goods sold to sales by 10% to 69.85%,
they would decrease CCC by roughly 6 days, therein creating a surplus in the
adjusted addition funds needed, as well as increasing free-cash flow by
$601,810,000.