Financial Management

You have recently been hired by Swan Motors that sells mid-priced cars, and have been tasked to
determine its cost of capital. Because the company is privately owned, you decided to use the pure play
approach. You have identified Tesla Motors as a representative company in this industry. The following
questions will lead you through the steps to calculate this estimate.
1. Most publicly traded corporations are required to submit quarterly (10Q) and annual reports (10K) to
the SEC detailing the financial operations of the company over the past quarter or year, respectively.
These corporate filings are available on the SEC Web site at www.sec.gov. Go to the SEC Web site;
follow the “Search for Company Filings” link and the “Companies & Other Filers” link; enter “Tesla
Motors”; and search for SEC filings made by Tesla Motors. Find the most recent 10Q or 10K, and
download the form. Look on the balance sheet to find the book value of debt and the book value of
equity.
2. To estimate the cost of equity for Tesla Motors, go to finance.yahoo.com and enter the ticker symbol
TSLA. Follow the links to answer the following questions: What is the most recent stock price listed
for Tesla Motors? What is the market value of equity, or market capitalization? How many shares of
stock does Tesla have outstanding? What is the most recent annual dividend? Can you use the
dividend discount model in this case? What is the beta? Now go back to finance.yahoo.com and
follow the “Bonds” link. What is the yield on three-month Treasury bills? Using the historical
market risk premium, what is the cost of equity for Tesla Motors using CAPM?
3. You now need to calculate the cost of debt for Tesla Motors. Go to finra-markets.morningstar.com,
enter TSLA to get company information, and click bond issues. Under bond issues, click for more
bond information to find the yield to maturity for each of Tesla’s bonds. What is the weighted
average cost of debt for Tesla Motors using the book value weights and using the market value
weights? Does it make a difference in this case if you use book value weights or market value
weights?
4. You now have all the necessary information to calculate the weighted average cost of capital for
Tesla Motors. Calculate this using book value weights and market value weights, assuming a 35
percent marginal tax rate. Which number is more relevant?
5. You used Tesla Motors as a pure play company to estimate the cost of capital for Swan Motors. Are
there any potential problems with this approach in this situation?

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