You have recently been hired by Layton Motors, Inc. (LMI), in its relatively new treasury management department. LMI was founded eight years ago by Rachel Layton. Rachel 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 recharge. The cars manufactured by LMI are midsized and carry a price that allows the company to compete with other mainstream auto manufacturers. The company is privately owned by Rachel and her family, and it had sales of $197 million last year.

LMI 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. LMI'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. Rachel 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 Rachel 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. Rachel wants you to use the pure play approach to estimate the cost of capital for LMI, and she has chosen Tesla Motors as a representative company. The following questions will lead you through the steps to calculate this estimate.

1. Find out the weights of debt and equity using book value: Most publicly traded corporations are required to submit quarterly (10Q) and annual reports (10K) to the SEC detailing the financial operations of the company over the past quarter or year, respectively. These corporate filings are available on the SEC website at www.sec.gov. Go to the SEC website, use the EDGAR Search Tools link under Filing tab, and search for SEC filings made by Tesla Motors (TSLA). Find the most recent 10Q (quarterly report), and download the form or use the interaction tool. Look on the balance sheet to find the book value of debt and the book value of equity. For the purposes of calculating cost of capital, you should exclude current liabilities and only include long term capital.

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