CHAPTER 14
COST OF CAPITAL FOR SWAN MOTORS
NOTE: The example below shows the results during early 2017. 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
2. We need various pieces of information to estimate the cost of equity. We can use the dividend growth
Market price = $254.61
Market capitalization = $40.96 billion
Tesla has never paid a dividend so we cannot use the dividend growth model to estimate the cost of
RE = Rf + [E(RM) – Rf]
3. To get the yield to maturity on Tesla’s bonds, we went to finra-markets.morningstar.com. We
gathered the following information:
CHAPTER 14 C-2
Ignoring the convertible bond due in 2018, the weighted average cost of debt for Tesla using both the
book value and the market value is:
Maturity Year
Book value
(millions)
Percent
of total
Market value
(millions)
Percent
of total
Yield to
Maturity
Book
values
Market
values
2019 $835 0.41 819.97 0.42 1.121% 0.46% 0.47%
It is irrelevant whether we use book or market values to calculate the cost of debt for Tesla since they
are the basically the same.
4. Using book value weights, the total value of Tesla is:
So, the WACC based on book value weights is:
WACC = RE(E/V) + RD(D/V)(1 – TC)
Using the market value weights, the total value of Tesla is:
So, the WACC based on market value weights is:
WACC = RE(E/V) + RD(D/V)(1 – TC)
5. The biggest potential problem with SMI using Tesla’s cost of capital is that SMI is a mid-priced car,
while Tesla manufactures and sells at the high end of the automobile market, although Tesla began
CHAPTER 25 C-3