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You have recently been hired by MasterTools (MT) in its relatively new treasury management department. MT was founded eight years ago by Martha Masters. Martha

You have recently been hired by MasterTools (MT) in its relatively new treasury management department. MT was founded eight years ago by Martha Masters. Martha found a method to streamline the manufacturing process, resulting in a cheapertool. The tools manufactured by MT are designed for the mass market and sold primarily through retail. The company is privately owned by Martha and her family, and it had sales of $97 million last year.

MT primarily sells to do-it-yourself (DIY) customers who use the tools for personal projects, although it does sell through various onlinemarketplaces. As a result, the company's sales are price sensitive. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgetingprocess. Martha has just read about capital budgetingtechniques and has come to you for help. For starters, the company has never attemptedto determine its cost of capital, and Martha would like you to performthe analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. Martha wants you to use the pure play approach to estimate the cost of capitalfor MT, and she has chosen XYZ Incorporated as a representative company. The following questionswill lead you through the steps to calculate this estimate

  1. To estimate the cost of equity for SNA, go to yahoo finance and enter the tickersymbol "SNA." Followt he links to answer the following questions: What is the most recentstock price listed for SNA? What is the market value of equity,or market capitalization? How many sharesof stock does SNA have outstanding? What is the forward annual dividend? Analysts have estimated a 6 percent growth rate for dividends. What is the cost of equity for SNA using the DDM? What is the beta for SNA? Now go back to yahoo finance and follow the "Bonds" link. What is the yield on three month Treasury bills? Using the historical market risk premium, what is the cost of equity for SNA using CAPM? What is your final estimate for the cost of equity?
  2. Go to reuters and find the list of competitors in the industry. Find the beta for 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 SNA or the beta for the industry in this case?
  3. You nowneed to calculate the cost of debt for SNA. Go to finra markets on morninstar, enter SNA as the company, and find the yield to maturity for each of SNA's bonds. What is the weighted average cost of debt for SNA using the book value weights and using 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 have all the necessaryinformation to calculatethe weighted average cost of capital for SNA. Calculate the WACC using book value weights and market value weights. SNA has a 21 percent tax rate. Which number is more relevant?
  5. You used SNA as a pure play company to estimate the costof capital for MT. Are there any potential problems with this approach in this situation? What improvements might you suggest?

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