User Account

All Pages

Find the cost of equity for tsla

Assignment Help Finance Basics
Reference no: EM132412321

CASE 1. COST OF CAPITAL FOR SWAN MOTORS You have recently been hired by Swan Motors, Inc. (SMI), in its relatively new treasury management department. SMI was founded eight years ago by Joe Swan. Joe 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 before requiring a charge. The cars manufactured by SMI are midsized and carry a price that allows the company to compete with other mainstream auto manufacturers. The company is privately owned by Joe and his family, and it had sales of $97 million last year.

SMI primarily sells to customers who buy the cars online, although it does have a limited number of company-owned dealerships. The customer selects any customization and makes a deposit of 20 percent of the purchase price. After the order is taken, the car is made to order, typically within 45 days. SMI's growth to date has come from its profits. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Joe has just read about capital budgeting techniques and has come to you for help. For starters, the company has never attempted to determine its cost of capital, and Joe would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. Joe wants you to use the pure play approach to estimate the cost of capital for SMI, and he has chosen Tesla Motors as a representative company. The following questions will lead you through the steps to calculate this estimate.

Suppose you find the following information about Tesla Motors.

Market price = $254.61

Market capitalization = $40.96 billion

Book value per share = $17.89

Shares outstanding = 160.87 million

Most recent dividend = $0

Beta = 1.19 3-month Treasury bill rate = .46%

Use the information on the bond that has a maturity of 2021 below. Book value of the bond: $1,200 million

Coupon Maturity Price Yield

TSLA-01 1.50 06/01/2018 190.851 -41.209

TSLA-02 0.250 03/01/2019 98.20 1.121

TSLA-03 1.25 03/01/2021 94.080 2.789

Case 1: QUESTIONS

1. Find the cost of equity for TSLA.

2. Find the cost of debt for TSLA.

3. Calculate the weighted average cost of capital for TSLA. Calculate this using book value weights and market value weights, assuming TSLA has a 21 percent tax rate. Which number is more relevant?

4. You used TSLA as a pure play company (i.e., a company that focuses only on a particular product or activity) to estimate the cost of capital for SMI. Are there any potential problems with this approach in this situation?

Reference no: EM132412321

Questions Cloud

What is the expected return from investment : a. If 'Premier Goods' is selling for $29.45 per share, what is the expected return from this investment?
MHH124598 Advanced Wastewater Treatment Assignment : MHH124598 Advanced Wastewater Treatment Assignment Help and Solution, National University of Science and Technology - Assessment Writing Service
Write a brief on the effects the legislation will have : Write a 700- to 1,050-word policy brief on the effects the legislation will have on your selected facility or service and on the state's population.
What is the cost of borrowing : The 20-year Treasury rate is 3.55 percent, and a firm's credit rating is BB. Suppose management of the firm decides to raise $20 million by selling 20-year bond
Find the cost of equity for tsla : Calculate the weighted average cost of capital for TSLA. Calculate this using book value weights and market value weights, assuming TSLA has a 21 percent tax
Find weighted average cost of capital : Find weighted average cost of capital if cost of internal equity is 10% and before-tax cost of debt is 7%. Corporate tax rate is 38%. Use the same proportions
What is the purpose and affiliation of the organization : These days, many people use the internet for their sources of information on drugs. However, many internet sites don't always have the most objective or valid.
What is the current balance of payments : What is the total amount of foreign reserve of this country? Please attach the BOP and highlight all potential numbers. Need some help! Thanks
What is the fair price for paddy : The appropriate discount rate for Paddy is 10%. Based on your forecasts, what is the "fair" price for Paddy?

Reviews

Write a Review

Finance Basics Questions & Answers

  Determining the company stock

Schiller Corporation will pay a $2.70 per share dividend next year. The company pledges to increase its dividend by 5.5 percent per year, indefinitely. If you require a return of 12 percent on your investment, how much will you pay for the company..

  Differenciate mandatory and discretionary capital investment

How can poor capital budgeting decisions produce negative effects to the firm?

  How are organizational information systems

How are organizational information systems related to company strategy? How does strategy affect the information systems a company develops and uses?

  Consider the lpp

Consider the LPP max z=2x1+x2 such that: 3x1+x2 0 x2>0 a)Transform the LPP in canonical form b) Represent the canonical form in matrix form.

  What is the lowest rate of return the entrepreneur

Given this loan, what is the lowest rate of return the entrepreneur should be willing to accept on purchase of the business? Why?

  Prepare three income statements

The inventory balance as of the beginning of the year was $35,000 (500 units @ $70 each). During the year ended December 31, the company sold 6,000 units for $150 per unit. Expenses other than cost of goods sold totaled $125,000. The effective inc..

  Weights for the weighted average cost of capital

The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company's capital stru..

  Complete repayment of the loan with interest

PV of multiple cash flows: Jack Stuart has loaned money to his brother at an interest rate of 5.75 percent. He expects to receive $625, $650, $700, and $800 at the end of the next four years as complete repayment of the loan with interest. How muc..

  Cautious with use of financial leverage

How might a company limit itself by being too cautious with use of financial leverage?

  Compare the causes of the credit crisis

Explain how the credit crisis in the 2008-2009 period affected some savings institutions. - Compare the causes of the credit crisis to the causes of the SI crisis in the late 1980s.

  Sirius xm flexible budgeting

Set up the flexible budget at three levels for the income statement. Companies prepare budgets based on absorption and/or variable costing.

  Preparing a flexible budget

The Cabazos Company is in the process of preparing a flexible budget to determine why operating profit fell below the budgeted amount. Complete the following flexible budget and list the reasons for the variance between budgeted and actual profit.

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd