Company L is a privately held motor company. Person R, the owner of Company L invented the method of manufacturing battery for electric cars at a cheaper rate with a higher mileage. His company gained popularity and competed with other auto manufacturers. The previous year’s sales were $197,000,000. It has expanded its operations steadily whenever it had excess profits. However, the company did not employ capital budgeting techniques. Therefore, Person R has hired Person X to determine the cost of capital of Company L. As Company L is a private company, it is difficult to determine the cost of equity . Hence, Person R suggests the use of pure play approach to determine the cost of capital. He wants Person X to refer the financials of Company T to determine its cost of capital. Characters in the case: Company L: The character attempting to determine an appropriate cost of capital Person R: The founder of Company S Person X: The analyst hired by Company S Company T: A pure play company To determine: The cost of debt. Introduction: The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

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Chapter 12, Problem 3CC

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Case summary:

Company L is a privately held motor company. Person R, the owner of Company L invented the method of manufacturing battery for electric cars at a cheaper rate with a higher mileage. His company gained popularity and competed with other auto manufacturers. The previous year’s sales were $197,000,000. It has expanded its operations steadily whenever it had excess profits.

However, the company did not employ capital budgeting techniques. Therefore, Person R has hired Person X to determine the cost of capital of Company L. As Company L is a private company, it is difficult to determine the cost of equity. Hence, Person R suggests the use of pure play approach to determine the cost of capital. He wants Person X to refer the financials of Company T to determine its cost of capital.

Characters in the case:

Company L: The character attempting to determine an appropriate cost of capital

Person R: The founder of Company S

Person X: The analyst hired by Company S

Company T: A pure play company

To determine: The cost of debt.

Introduction:

The cost of debt refers to the return that the bondholders or lenders expect on their principal. In other words, it refers to the borrowing costs of the company.

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