Cost of Capital for Master Tools You have recently been hired by Master Tools (MT) in its relatively new treasury manage

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Cost of Capital for Master ToolsYou have recently been hired by Master Tools (MT) in its relativelynew treasury management department. MT was founded eight years agoby Martha Masters. Martha found a method to streamline themanufacturing process, resulting in a cheaper tool. The toolsmanufactured by MT are designed for the mass market and soldprimarily through retail. The company is privately owned by Marthaand her family, and it had sales of $97 million last year.
MT primarily sells to do-it-yourself (DIY) customers withpersonal projects, although it does sell through various onlinemarketplaces. As a result, the company’s sales are price sensitive.When the company had sufficient capital, it would expandproduction. Relatively little formal analysis has been used in itscapital budgeting process. Martha has just read about capitalbudgeting 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 thecompany is privately owned, it is difficult to determine the costof equity for the company. Martha wants you to use the pure playapproach to estimate the cost of capital for MT, and she has chosenSnap-On Tools as a representative company. The following questionswill lead you through the steps to calculate this estimate.
To estimate the cost of equity for SNA, go tofinance.yahoo.com and enter the ticker symbol SNA. Follow the linksto answer the following questions: What is the most recent stockprice listed for SNA? What is the market value of equity, or marketcapitalization? How many shares of stock does SNA have outstanding?What is the forward annual dividend? Analysts have estimated a sixpercent growth rate for dividends. What is the cost of equity forSNA using the DDM? What is the beta for SNA? Now go back tofinance.yahoo.com and follow the “Bonds'' link. What is the yieldon three-month Treasury bills? Using the historical market riskpremium, what is the cost of equity for SNA using CAPM? What isyour final estimate for the cost of equity?