Case summary:
Company S is a privately held motor company. Person J, the owner of Company S 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 $97,000,000. It has expanded its operations steadily whenever it had excess profits.
However, the company did not employ capital budgeting techniques. Therefore, Person J has hired Person X to determine the cost of capital of Company S. As Company S is a private company, it is difficult to determine the
Characters in the case:
- Company S: The character attempting to determine an appropriate cost of capital
- Person J: 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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Fundamentals of Corporate Finance
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