Finance Chapter 13 Homework Using The Industry Average Beta The Cost

CHAPTER 13

COST OF CAPITAL FOR SWAN MOTORS

NOTE: The example below shows the results during November 2015. 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 www.sec.gov and found Tesla’s Form 10-Q, dated September 30, 2015. Tesla’s Form 10-Q

showed the following:

The book value of equity is $1,315 million on the balance sheet. However, for a more current book

value, we multiplied the number of shares outstanding by the book value per share on Yahoo!

Finance. For the book value of debt, we used the following note in the 10-Q:

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.

3. Below are the top 10 competitors in the automobile industry by market capitalization at the time:

Company

Beta

Ford

.97

General Motors

1.44

Honda

.74

Toyota

.54

Fiat Chrysler

.49

Volkswagen

1.97

DaimlerChrysler

1.55

Using the industry average beta, the cost of equity is:

RE = Rf + [E(RM) – Rf]

RE = .0006 + 1.10(.07)

RE = 7.76%

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 on 06/01/2018. Because the convertible feature is so deep

in the money, the bond is priced near the conversion value, resulting in a very large negative yield to

maturity. We have chosen to ignore this bond in our analysis.

If you click on the link for each bond, the website provides information concerning the bond, including

the face amount of the issue. So, the weighted average cost of debt for Tesla using both the book value

and the market value is:

5. Using book value weights, the total value of Tesla is:

V = $2,300,000,000 + $1,322,662,000

V = $3,622,662,000

So, the WACC based on book value weights is:

Using the market value weights, the total value of Tesla is:

V = $2,146,217,400 + $30,160,328,000

V = $32,306,545,400

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 could