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 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 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. 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 lead you through the steps to calculate this estimate. QUESTIONS In your report, show your work carefully. You should provide a screenshot for each piece of information that you use to calculate the WACC.

1. To estimate the cost of equity for Tesla, go to finance.yahoo.com and enter the ticker symbol TSLA. Answer the following questions: 1) What is the most recent stock price listed for Tesla? What is the book value per share? 2) How many shares of stock does Tesla have outstanding? 3) What is the market value of equity, or market capitalization? 4) What is the most recent annual dividend? 5) What is the beta for Tesla? What does Teslas beta suggest on the risks of Teslas stocks? 6) Now go back to finance.yahoo.com and follow the Bonds link. What is the yield on three-month Treasury bills? 7) What is the market risk premium? 8) What is the cost of equity for Tesla using CAPM? 9) Can you use the dividend discount model to calculate Teslas cost of equity?

2. To find bond information for Tesla, go to http://finra- markets.morningstar.com/BondCenter/Default.jsp, enter Tesla as the company (do not use TSLA as a symbol in the search). Ignore the bonds that already matured and convertible bond. Answer the following questions: 1) What is the total amount of Teslas outstanding bond? 2) What is the market value of Teslas bonds? 3) What is Teslas cost of debt?

3. You now have all the necessary information to calculate the weighted average cost of capital (WACC) for Tesla. Calculate WACC using market value weights, assuming Tesla has a 21 percent marginal tax rate.

4. You used TSLA as a pure play company to estimate the cost of capital for SMI. Are there any potential problems with this approach in this situation?