COST OF CAPITAL FOR SWAN MOTORS Mini Case You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded 8 years ago by Joe Swan. Joe found a method to manufacture a cheaper battery with much greater energy density than was previously possible. giving a car powered by the battery a range of 700 miles before requiring a charge. The cars manufactured by SMI are midsized and carry a price that allows the company to compete with other mainstream auto manufacturers. The company is privately owned by Joe and his family. and it had sales of $97 million last year SMI primarily sells to customers who buy the cars online, although it does have a limited number of company-owned dealerships. Most sales are online. The customer selects any cus tomization and makes a deposit of 20 percent of the purchase price. After the order is taken, the car is made to order, typically within 45 days. SMI's growth to date has come from its profits When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Joe has just read about capital budget ing techniques and has come to you for help. For starters, the company ha to determine its cost of capital, and Joe would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. Joe wants you to use the pure play approach to estimate the cost of capital for SMI, and he has cho- sen Tesla Motors as a representative company. The following questions will lead you through the steps to calculate this estimate. s never attempted 1. Most publicly traded corporations are required to submit 10Q (quarterly) and 10K ports to the SEC detailing their financial operations over the previous respectively. These corporate filings are available on the SEC website at www o the SEC website, follow the "Search for Company Filings" link and the "C Other Filers" link, enter "Tesla," and search for SEC filings made by Tesla. Find the recent 10Q and 10K and download the forms. Look on the balance sheet to find the value of debt and the book value of equity. If you look further down the report, you sholi find a section titled either "Long-Term Debt" or "Long-Term Debt and Interest Rate Rd Management" that will list a breakdown of Tesla's long-term debt. quarter .sec Or gov Companies& 2. To estimate the cost of equity for Tesla, go to finance.yahoo.com and enter the ticker s bol "TSLA. Follow the various links to find answers to the following questions the most recent stock price listed for Tesla? What is the market value capitalization? How many shares of stock does Tesla have outstanding? What i for Tesla? Now go back to finance.yahoo.com and follow the "Bonds" link. What yield on 3-month Treasury bills? Using a 7 percent market risk premium, what is the of equity for Tesla using the CAPM? of equity, or market is the 3. Go to www.reuters.com and find the list of competitors in the industry. Find the beta fr each of these competitors, and then calculate the industry average beta. Using the industry average beta, what is the cost of equity? Does it matter if you use the beta for Tesla on beta for the industry in this case? .com/BondCenter/Results.jsp, enter Tesla as the company, and find the yield to maturity for each of Tesla's bonds. What is the weighted average cost of debt for Tesla using the book value weights and the market value weights? Does it make a difference in this case if you use book value weights or market value weights? 4. You now need to calculate the cost of debt for Tesla. Go to finra-markets.mormingst capital for Tesla. Calculate the weighted average cost of capital for SMI using book a weights and market value weights assuming SMI has a 35 percent marginal tas rate. Wi 5. You now have all the necessary information to calculate the weighted average cost of are some of the potential problems with this approach in this situation? What impo ments might you suggest? 6. You used Tesla as a representative company to estimate the cost of capital for SM COST OF CAPITAL FOR SWAN MOTORS Mini Case You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded 8 years ago by Joe Swan. Joe found a method to manufacture a cheaper battery with much greater energy density than was previously possible. giving a car powered by the battery a range of 700 miles before requiring a charge. The cars manufactured by SMI are midsized and carry a price that allows the company to compete with other mainstream auto manufacturers. The company is privately owned by Joe and his family. and it had sales of $97 million last year SMI primarily sells to customers who buy the cars online, although it does have a limited number of company-owned dealerships. Most sales are online. The customer selects any cus tomization and makes a deposit of 20 percent of the purchase price. After the order is taken, the car is made to order, typically within 45 days. SMI's growth to date has come from its profits When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Joe has just read about capital budget ing techniques and has come to you for help. For starters, the company ha to determine its cost of capital, and Joe would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. Joe wants you to use the pure play approach to estimate the cost of capital for SMI, and he has cho- sen Tesla Motors as a representative company. The following questions will lead you through the steps to calculate this estimate. s never attempted RI II RiSK lost publicly traded corporations are required to submit 10Q (quarterl reports to the SEC detailing their financial operations over the previous quarte respectively. These and 10K (annual) to the SEC website, follow the "Search for Company Filings" link and the "Com Other Filers" link, enter "Tesla," and search for SEC filings made by Tesla. Find th recent 10Q and 10K and download the forms. Look on the balance sheet to find th alue of debt and the book value of equity. If you look further down the report ind a section titled either "Long-Term Debt" or "Long-Term Debt and Interest Rate Management" that will list a breakdown of Tesla's long-term debt. o estimate the cost of equity for Tesla, go to finance.yahoo.com and enter the ticker bol "TSLA." Follow the various links to find answers to the the most recent stock price listed for Tesla? What is the market value of equity capitalization? How many shares of stock does Tesla have outstanding? What i for Tesla? Now go back to finance.yahoo.com and follow the "Bonds" link. What yield on 3-month Treasury bills? Using a 7 percent market risk premium, what is the of equity for Tesla using the CAPM? cively. These corporate filings are available on the SEC website at w mpanies most e book you should sym- following questions: What is , or s the beta is the cost 3. Go to www.reuters.com and find the list of competitors in the industry. Find the beta for n calculate the industry average beta. Using average beta, what is the cost of equity? Does it matter if you use the beta for Tesla or the beta for the industry in this case 4. You now need to calculate the cost of debt for Tesla. Go to finra-markets.morningstar .com/BondCenter/Results.jsp, enter Tesla as the company, and find the yield to maturity for each of Tesla's bonds. What is the weighted average cost of debt for Tesla using the book value weights and the market value weights? Does it make a difference in this case if you use book value weights or market value weights? 5. You now have all the necessary information to calculate the weighted average cost of capital for Tesla. Calculate the weighted average cost of capital for SMI using book value weights and market value weights assuming SMI has a 35 percent marginal tax rate. cost of capital number is more relevant? 6. You used Tesla as a representative company to estimate the cost of capital for SMI Wt are some of the potential problems with this approach in this situation? What impro ments might you suggest