Case 3 Cost of Capital

[Chapter 12]

The Cost of Capital for Master Tools

You have recently been hired by Master Tools (MT) in its relatively new treasury management department. MT was founded eight years ago by Martha Masters. Martha found a method to streamline the manufacturing process, resulting in a cheaper tool. The tools manufactured by MT are designed for the mass market and sold primarily through retail. The company is privately owned by Martha and her family, and it had sales of $97 million last year.

MT primarily sells to do-it-yourself (DIY) customers who use the tools for personal projects, although it does sell through various online marketplaces. As a result, the companys sales are price sensitive. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Martha 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 Martha 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.

Martha wants you to use the pure play approach to estimate the cost of capital for MT, and she has chosen Snap-On Incorporated as a representative company. The following questions will lead you through the steps to calculate this estimate.

Assignment Directions

Write a case analysis of 1,000 1,500 words (4 to 5 pages), content (title page and reference page not included) in proper APA format, covering the following requirements:

1. Most publicly traded corporations are required to submit 10-Q (quarterly) and 10-K (annual) reports to the SEC detailing their financial operations over the previous quarter or year, respectively. These corporate filings are available on the . Go to the SEC website and enter SNA for Snap-On in the Search for Company Filings link. Find the most recent 10-Q or 10-K and download the form. Look on the balance sheet to find the book value of debt and the book value of equity. If you look further down the report, you should find a section titled either Long-Term Debt or Long-Term Debt and Interest Rate Risk Management that will list a breakdown of Snap-Ons long-term debt. Discuss and analyze the items that you would find under long-term debt.
2. To estimate the cost of equity for Snap-On, go to finance.yahoo.com and enter the ticker symbol SNA. Follow the various links to find answers to the following questions: What is the most recent stock price listed for Snap-On? What is the market value of equity, or market capitalization? How many shares of stock does Snap-On have outstanding? What is the beta for Snap-On? Now go back to finance.yahoo.com and follow the Bonds link. What is the yield on three-month Treasury bills? Using a 7 percent market risk premium, what is the cost of equity for Snap-On using the CAPM? Discuss and analyze your answer.
3. Go to and find the list of competitors in the industry. Find the beta for each of these competitors, and then calculate the industry average beta. Using the industry average beta, what is the cost of equity? Discuss and analyze whether you use the beta for Snap-On or the beta for the industry in this case?
4. You now need to calculate the cost of debt for Snap-On. Go to , enter Snap-On as the company, and find the yield to maturity for each of Snap-Ons bonds. What is the weighted average cost of debt for Snap-On using the book value weights and the market value weights? Discuss and analyze if it makes a difference in this case if you use book value weights or market value weights?
5. You now have all the necessary information to calculate the weighted average cost of capital for Snap-On. Calculate the weighted average cost of capital for Snap-On using book value weights and market value weights, assuming Snap-On has a 21 percent tax rate. Discuss and analyze which cost of capital number is more relevant and why?
6. You used Snap-On as a representative company to estimate the cost of capital for MT. What are some of the potential problems with this approach in this situation? Discuss and analyze what improvements you might suggest.

Submission Guidelines

• Prepare this Assignment according to the APA guidelines, including a title page, an introduction, and a conclusion. An abstract is not required. Use in-text citations and include a References section. A template is included in the Resources and Supports.
• Calculate all financial data in an Excel worksheet (preferred) and submit with the assignment. If calculations are shown in Word, please show step by step. Place in Appendix (page after References) and refer to the information in the content of the paper. Please label/organize the calculations in detail.
• In your report, make certain that you include at least three (3) credible outside references from search engines or scholarly sources from the APUS Online Library.
• Note that your attached paper will automatically be submitted to Turnitin, and an Originality Report should be sent back to the classroom within around 15 minutes. The Originality report does not actually recommend changes. It does point out where you may need to add a citation or quotation marks (if not already cited). Once you use it a few times, you will appreciate this tool, as it will assist you in improving quality and content, as well as avoiding plagiarism. Your goal is to keep direct quotations to a minimum and to make sure that you do not just cut and paste material. Ensure that all your references are cited. Students should strive for a TII report with a similarity index of less than 20%.
• In the Assignment dropbox, please attach your paper as a file; do not copy & paste. Submit your assignment by 11:59 pm ET, Day 7 (Sunday).

Your paper will be evaluated according to the Writing Assignment Grading Rubric shown below. To maximize your grade, be sure to use the proper organization (intro, body, conclusion) and follow APA style. Your paper should have a title page and reference page, but you do not need an abstract for this assignment. See the PowerPoint presentation attached for APA assistance.

This paper will be graded according to the FINC Graduate Grading Paper Rubric