The Cost of Capital for Swam Motors, Inc. Revised You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded eight years ago by Joe Swan. Joe found a method to manufacture a cheap 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 customization 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. SMIs 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 budgeting techniques and has come to you for help. For starters, the company has never attempted 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 chosen Tesla Motors as a representative company. The following questions will work you through the steps to calculate this estimate.

Question:

To estimate the cost of equity for Tesla, go to finance.yahoo.com and enter the ticker symbol TSLA in Search Finance. Follow the various links to find answers to the following questions: What is the most recent stock price listed for Telsa? What is the market value of equity or market capitalization? What is the beta for Tesla? Click on More Key Statistics. How many shares of stock does Tesla have outstanding? Now go back to finance.yahoo.com home page and follow the Bonds link (on the left menu click on the Market Data and then scroll down to Bonds). What is the yield on 3-month Treasury Bills? What is the yield on the 10-year Treasury Bond? Using the CAPM, calculate the cost of equity for Tesla using a 7 percent market risk premium and using the yield 3-month Treasury Bills and the yield on the 10-year Treasury Bonds as proxies for the risk-free rate. Does it matter if you use the yield on 3-month Treasury Bills or the yield on 10-year Treasury Bonds in this case? As the company is an ongoing enterprise expected to continue for years to come, which would be more appropriate using the yield on 3-month Treasury Bills or the yield on 10-year Treasury Bonds?