The Cost of Capital for Spectrum Corporation You have recently been hired by Spectrum Corporation in its treasury management department. Spectrum was founded ten years ago by Tom Sawyer and produces electrical equipment. The company is privately owned by Tom Sawyer and his family, and it had sales of $282.6 million last year. Spectrum primarily sells its products directly to its business customers throughout the country. Spectrums growth to date has come from its quality and price competitiveness. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Tom has just read about capital budgeting techniques and has come to you for help. For starters, the company has never attempted to determine its cost of capital, and Tom 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. Tom wants you to use a similar company to estimate the cost of capital (WACC) for Spectrum, and he has chosen Eaton Corporation (ticker: ETN), which has the product line somewhat similar to that of Spectrum, as a representative company. The following questions will lead you through the steps to calculate this estimate. 3. Find the list of competitors of Eaton Corporation in the same industry. You can try online sources, such as hoovers.com, for this purpose. Select only U.S.-based competing companies for this task. Suppose after the search, you identify three competitors: Emerson Electric Company (ticker: EMR), AMETEK, Inc. (ticker: AME), and Rockwell Automation, Inc. (ticker: ROK). a) Find the beta for each of these three competitors, and then calculate the industry average beta. b) Using the industry average beta, what is the cost of equity? c) Does it matter if you use the beta for Eaton Corporation or the beta for the industry in this case? The Cost of Capital for Spectrum Corporation You have recently been hired by Spectrum Corporation in its treasury management department. Spectrum was founded ten years ago by Tom Sawyer and produces electrical equipment. The company is privately owned by Tom Sawyer and his family, and it had sales of $282.6 million last year. Spectrum primarily sells its products directly to its business customers throughout the country. Spectrums growth to date has come from its quality and price competitiveness. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Tom has just read about capital budgeting techniques and has come to you for help. For starters, the company has never attempted to determine its cost of capital, and Tom 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. Tom wants you to use a similar company to estimate the cost of capital (WACC) for Spectrum, and he has chosen Eaton Corporation (ticker: ETN), which has the product line somewhat similar to that of Spectrum, as a representative company. The following questions will lead you through the steps to calculate this estimate. 3. Find the list of competitors of Eaton Corporation in the same industry. You can try online sources, such as hoovers.com, for this purpose. Select only U.S.-based competing companies for this task. Suppose after the search, you identify three competitors: Emerson Electric Company (ticker: EMR), AMETEK, Inc. (ticker: AME), and Rockwell Automation, Inc. (ticker: ROK). a) Find the beta for each of these three competitors, and then calculate the industry average beta. b) Using the industry average beta, what is the cost of equity? c) Does it matter if you use the beta for Eaton Corporation or the beta for the industry in this case
