Cost of Capital for Master Tools You have recently been hired by Master Tools (MT) in its relatively new treasury manage
Posted: Fri Jul 01, 2022 7:36 am
Cost of Capital for Master Tools
You have recently been hired by Master Tools (MT) in itsrelatively new treasury management department. MT was founded eightyears ago by Martha Masters. Martha found a method to streamlinethe manufacturing 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 lastyear.
MT primarily sells to do-it-yourself (DIY) customerswith personal projects, although it does sell through variousonline marketplaces. As a result, the company’s sales are pricesensitive. 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 thisestimate.
You now have all the necessary information to calculatethe weighted average cost of capital for SNA. Calculate the WACCusing book value weights and market value weights. SNA has a 21percent tax rate. Which number is more relevant?
You have recently been hired by Master Tools (MT) in itsrelatively new treasury management department. MT was founded eightyears ago by Martha Masters. Martha found a method to streamlinethe manufacturing 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 lastyear.
MT primarily sells to do-it-yourself (DIY) customerswith personal projects, although it does sell through variousonline marketplaces. As a result, the company’s sales are pricesensitive. 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 thisestimate.
You now have all the necessary information to calculatethe weighted average cost of capital for SNA. Calculate the WACCusing book value weights and market value weights. SNA has a 21percent tax rate. Which number is more relevant?