Question 1: What were the estimated sales growth rates possible for Dell under the assumptions of internal financing and sustainable growth rate estimates in 1995 and 1996? (Be careful: Dell’s fiscal year ends January 31.) How much did sales of Dell grow in the corresponding years?

The sustainable growth rate is the maximum growth rate a firm can sustain without having to increase its financial leverage. The sustainable growth rate is computed using the formula ROE x (1-d), where d is the payout rate, or the proportion of earnings paid out to the common shareholders as dividends. ROE is the amount of net income returned as a percentage of shareholder equity. Return on equity measures a corporation's profitability by illustrating how much profit a company generates with the money shareholders have invested. To estimate the sustainable growth rate, we only require the ROE and payout rate; but if we used the direct formula, we would not understand the source of the growth rate. Our team believes that, in order to have a more comprehensive illustration of the source of the sustainable growth rate (used in our valuation), we should employ the DuPont Analysis. The DuPoint analysis breaks down the Return on Equity into three distinct elements:

Operating efficiency, which is measured by profit margin (derived from Return on Sales) Net Income/Sales

Asset use efficiency, which is measured by total asset turnover (Sales/ Total Assets) Financial leverage, which is measured by the equity multiplier (Total Assets/ Equity)

The final result will be the same as using the ROE formula ROE= Net Income / Equity. However, the DuPont analysis enables us to analyze each component of the ROE in order to better understand the determinants of the sustainable growth rate. The following table shows our results:

Sustainable Growth 1995-1996 using DuPont Formula

Profit Margin Asset Turnover Equity MultiplierNet Income(t)/Sales(t) Sales(t)/Assets(t-1) Assets(t-1)/Equity(t-1) % Retained Roe(1-d) sustainable growth

Sustainable growth using all assets1995 4.2878% 3.0482 2.4204 100% 31.63% 46.27%1996 5.1360% 3.3225 2.4448 100% 41.72% 71.58%As shown above, we computed the sustainable growth rate using the assumption that the percentage of retained earnings was 100% (1-d =1) (Through research, our team discovered that Dell started to payout dividends only in 2012). Considering that Dell’s fiscal year ends in January, we used the data at time t-1 in order to evaluate the Asset use efficiency and the financial leverage of the ROE. The sustainable growth in 1995 was 46.27% and 71.58% in 1996. A firm whose growth transcends its sustainable growth rate would either increase their leverage or obtain additional equity. Dell could finance its higher growth without increasing leverage or obtaining equity: for example it could improve working capital management efficiency. Dell can expand at the sustainable growth rate without using external financing