Quiz 11 – The Last One
Cost of Capital for Layton Motors
You have recently been hired by Layton Motors. Layton was founded by Rachel Layton. Layton 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. The cars manufactured by Layton are midsized and carry a price that allows the company to compete with mainstream auto manufacturers. The company is privately owned, and it had sales of $197 million last year.
Relatively little formal analysis has been used in its capital budgeting process. For starters, Rachel has never attempted to determine its cost of capital, and Rachel would like you to perform the analysis. Rachel wants you to use the pure play approach to estimate the cost of capital for Layton, and she has chosen Tesla Motors as a representative company.
Questions
- Go to the SEC website, sec.gov, and search for Tesla filings (10-K and 10-Q). Find the most recent 10-K and look at the balance sheet to find the book value of debt and the book value of equity.
- To estimate the cost of equity for TSLA, go to finance.yahoo.com and look up the ticker TSLA.
- What is the most recent stock price for TSLA?
- What is the market value of equity, or market capitalization?
- How many share of stock does TSLA have outstanding?
- What is the most recent dividend?
- Can you use the dividend discount model is this case?
- What is the beta for TSLA?
- What is the current 13-week T-bill rate?
- Using the historical market risk premium of 7%, what is the cost of equity for TSLA using the CAPM?
- Calculate the cost of debt for TSLA using the finramarkets.morningstar.com/BondCenter website. Just use the bonds where the issuer is TESLA INC.
- What is the weighted average cost of debt for TSLA using the book value weights and the market value weights?
- Does it make a difference in this case?
- Which one should you use?
- Calculate the WACC for TSLA, assuming a 21% marginal tax rate. Should you use book value weights or market value weights?
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