978-1259289903 Chapter 12 Case

CHAPTER 12 C-1

CHAPTER 12

THE COST OF CAPITAL FOR SWAN

MOTORS

NOTE: The example below shows the results during May 2016. The actual answer to the case will

change based on current market conditions.

1. The book value of the company’s liabilities and equity can be found from a number of sources. We

went to http://www.sec.gov and found Tesla’s Form 10K, dated December 31, 2015. Tesla’s Form

10K showed the following:

2. We need various pieces of information to estimate the cost of equity. The following information is

necessary for our calculations. We gathered all the information from finance.yahoo.com. The screen

3-month Treasury bill rate = .24%

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CHAPTER 12 C-3

Using the CAPM to estimate the cost of equity with a market risk premium of 7 percent from the

textbook, we get:

3. Below are five top competitors in the auto industry by market capitalization (excluding Volkswagen,

which had no beta reported) in May 2016 were:

Company

Beta

Ford

1.31

GM

1.62

Honda

1.08

Toyota

.56

Nissan

.87

Industry Average

1.09

4. To get the yield to maturity on Tesla’s bonds, we went to http://finra-

markets.morningstar.com/BondCenter/. We gathered the following information:

Notice, the 2018 bond has a negative YTM. This bond is convertible and the conversion

requirements have been met, so it is likely these bonds will be converted soon. Because of these

facts, we will ignore the 2018 bond issue in our calculations. So, the weighted average cost of debt

for Tesla using both the book value and the market value is:

Total

CHAPTER 12 C-5

It is irrelevant whether we use book or market values to calculate the cost of debt for Tesla. The

weighted average cost of debt using book value weights is 4.03 percent, and using market value

weights we get 4.02 percent.

5. Using book value per share and the number of shares, the total book value of Tesla is:

V = $1,613,000,000 + $965,400,000

V = $2,578,000,000

So, the WACC based on book value weights is:

6. The biggest potential problem with SMI using Tesla’s cost of capital is that SMI does operates some

dealerships that generate the company’s sales. Tesla generates sales almost exclusively without