You have recently been hired by Hasher Motors in its Finance department. Hasher Motors was founded eight years ago by Asher. Asher Smith found a method to manufacture a cheaper battery that will hold a larger charge, giving a car powered by the battery a range of 700 miles before requiring a charge. The cars manufactured by Hasher Motors are mid-sized and carry a price that allows the company to compete with other mainstream auto manufacturers. The company is privately owned by Asher Smith and his family, and it had sales of $97 million in 2020.

Hasher Motors primarily sells to customers who buy the cars online, although it does have a limited number of company-owned dealerships. 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. Hasher Motors growth to date has come from its profit. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process.

Asher Smith 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 Asher Smith, 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. Asher Smith, therefore, wants you to use pure play approach to estimate the cost of capital to Hasher Motors, and he has chosen Tesla Motors as a representative company.

• The most recent stock price is: $609.89
• The market value of equity or market capitalization is: $587.525 Billion
• Shares outstanding:
• Beta for Tesla: 2.00
• Dividend: N/A
• Yield on 3 months treasury bills: 0.018 (yahoo finance)

Calculate the cost of Equity by using the CAPM model

• Treasury bill yield or risk free rate is 0.018
• Stock beta is 2.00
• Market risk premium is 0.07 or 7%

Cost of equity (Rs) = Rf + B (Rm-Rf)

= 0.018 + 2.00(0.07)

= 0.018 + 0.14

= 0.158 or 15.8%

Therefore the cost of equity of the firm is 15.8%

1. Determine the weighted average cost of debt for Tesla using the book value weights and market value weights assuming Tesla is in the tax brackets of 28%.