CHAPTER 13 CASE C-1
CHAPTER 13
COST OF CAPITAL FOR SWAN MOTORS
NOTE: The example below shows the results during November 2012. 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 10q, dated September 30, 2015. Tesla’s Form
10q showed the following:
CHAPTER 13 CASE C-2
The book value of equity is $1,315 million on the balance sheet. However, for a more current book
In the notes, the company issued $800 million of 2019 bond, the issued another $120 million. For the
2021 bond, the company initially issued $1.2 billion, the issued another $180 million. The total
2. We need various pieces of information to estimate the cost of equity. We can use the dividend growth
model or the CAPM, so we will attempt to use both. The following information is necessary for our
calculations. We gathered all the information from finance.yahoo.com. The screen shots below show
this information.
CHAPTER 13 CASE C-3
CHAPTER 13 CASE C-4
Tesla has never paid a dividend so we cannot use the dividend growth model to estimate the cost of
equity. We do have the information to estimate the cost of equity with the CAPM. Using the market
risk premium of 7 percent from the textbook, we get:
3. Below are the top 10 competitors in the automobile industry by market capitalization at the time:
Company Beta
Ford 0.97
General Motors 1.44
We should make an important note here: All of the competitors listed may not be direct
competitors. First, since Tesla manufactures only electric cars, it could be an entirely different
industry. Additionally, Tesla primarily sells only in the United States, so it is largely immune from
CHAPTER 13 CASE C-5
4. To get the yield to maturity on Tesla’s bonds, we went to finra-
markets.morningstar.com/BondCenter/. We gathered the following information:
Tesla has a convertible bond that matures 06/01/2018. Because the convertible feature is so deep in
If you click on the link for each bond, the website provides information concerning the bond,
Book value
(millions)
Percent
of total
Quoted
price
Market
value
(millions)
Percent
of total
Yield to
Maturity
Book
values
Market
values
It is irrelevant whether we use book or market values to calculate the cost of debt for Tesla. The
5. Using book value weights, the total value of Tesla is:
So, the WACC based on book value weights is:
Using the market value weights, the total value of Tesla is:
So, the WACC based on market value weights is:
CHAPTER 13 CASE C-6
The cost of capital for Tesla using book value weights and market value weights is dramatically
6. The biggest potential problem with SMI using Tesla’s cost of capital is that SMI operates stores that
generate the company’s sales. Tesla generates sales almost exclusively from its internet site. This