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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

company’s 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.

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 SEC

website at www.sec. gov. Go to the SEC website, follow the “Company Filings” link,

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and search for SEC filings made by Snap-On (SNA). Find the most recent 10-Q and

10-K and download the forms. Look on the balance sheet to find the book value of

debt and the book value of equity.

A company’s book value of equity is equal to the stockholder’s equity which is calculated

as follows:

Total Assets = Total Liabilities + Stockholder’s Equity (book value of Equity)

Stockholder’s Equity (book value of Equity) = Total Assets – Total Liabilities

Based on Form 10-K report for the year ended January 1, 2022, the following are the

values for the equation.

Total Assets = $6,759.70 million; Total Liabilities = $2,555.90 million (Snap- On Inc. 10-

K, January 1, 2022, p.63)

Therefore, Book Value of Equity = Total Assets – Total Liabilities = $6,759.70 million -

$2,555.90 million = $4,203.80 million

Based on Form 10-K report for the year ended January 1, 2022, the Book Value of Debt

is $6,759.70 million (Snap- On Inc. 10-K, January 1, 2022, p.63)

Similarly, the book value of equity and debt from the latest 10-Q report dated July 2,

2022 are: Total Assets = $6,864.30 million; Total Liabilities = $2,517.50 million (Snap-

On Inc. 10-Q, July 2, 2022, p. 5 & 6)

Therefore, Book Value of Equity = Total Assets – Total Liabilities = $6,864.30 million -

$2,517.50 million = $4,346.80 million

Based on Form 10-Q report dated July 2, 2022, the Book Value of Debt is $6,864.30

million (Snap- On Inc. 10-Q, July 2, 2022, p. 5 & 6)

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2. To estimate the cost of equity for SNA, 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 SNA? What is the market value of

equity, or market capitalization? How many shares of stock does SNA have

outstanding? What is the forward annual dividend? Analysts have estimated a 6

percent growth rate for dividends. What is the cost of equity for SNA using the

DDM? What is the beta for SNA? Now go back to finance.yahoo.com and follow the

“Bonds” and “U.S. Treasury Bonds Rates” links. What is the yield on 3-month

Treasury bills? Using the historical market risk premium, what is the cost of equity

for SNA using the CAPM? What is your final estimate for the cost of equity?

The most recent stock price of Snap-On Inc. as on October 14th, 2022 is $209.60.

Market Capitalization = $11.165 Billion

No. of Outstanding shares = 225,103

Forward Annual Dividend = $5.68 (2.71%)

Snap-On Inc. Beta = 1.09

Cost of Equity based on DDM approach

Value of Stock = Expected Dividend per share / (Cost of Capital Equity – Dividend

Growth Rate)

$209.60 = $5.68 / (Cost of Equity Capital – 6%)

Cost of Equity Capital – 6% = $5.68 / $209.60

Cost of Equity Capital – 6% = 2.709924

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Cost of Equity Capital = 2.709924% + 6%

Cost of Equity Capital = 8.709924%

As per Finance.yahoo.com, the latest yield % on the 3-month Treasury Bill is 3.64% and

the historical market risk premium is 3.48%

Cost of Equity as per CAPM is:

RF + Beta * (RM – RF) = 3.64% + 1.09 (3.48%) = 0.0364 + 0.037932 = 7.4332%

The final estimate for the cost of equity is between the range of 7% to 9%.

3. Go to www.reuters.com 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? Does it matter if you use

the beta for SNA or the beta for the industry in this case?

The beta for top 8 competitors of Snap-On Inc. are:

Danaher Corporation- 0.87

Emerson Electric Co.- 1.39

Stanley Black and Decker Inc.- 1.27

Illinois Tool Works Inc.- 1.10

Newell Brands Inc.- 0.86

Dover Corp.- 1.34

Myers Industries Inc.- 1.40

Stoneridge Inc.- 1.23

Industry average beta = (0.87 + 1.39 + 1.27 + 1.10 + 0.86 + 1.34 + 1.40 + 1.23) / 8 = 9.46

/ 8 = 1.1825

Cost of Equity as per CAPM is:

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RF + Beta * (RM – RF) = 3.64% + 1.1825 (3.48%) = 0.0364 + 0.041151= 7.7551%

It does not matter which beta is used since all the competitors in the list are not the same

as Snap-On Inc. so the cost of equity has very less difference. When you compare Snap-

On Inc. beta of 1.09 is very close to the industry average beta of 1.1825, I think it is fine

to use Snap-On Inc.’s beta for the cost of equity calculations.

4. You now need to calculate the cost of debt for SNA. Go to finra-

markets.morningstar. com/BondCenter, enter SNA as the company, and find the

yield to maturity for each of SNA’s bonds. What is the weighted average cost of debt

for SNA using the book value weights and the market value weights? Does it make a

difference in this case if you use book value weights or market value weights?

Based on the website, Snap-On Inc. has the following 4 Bonds:

Issuer name Symbol Coupon Maturity YTM

Rate
Snap-On Inc. SNA4456756 3.250 03/01/2027 -16.52%
Snap-On Inc. SNA4601354 4.100 03/01/2048 3.37%
Snap-On Inc. SNA4981653 3.100 05/01/2050 2.17%

Yield to Maturity (YTM) for Bond 1: Coupon Rate: 3.25% with no. of remaining years

(2022-2027) is 5 years. Compounded semi-annually which is equal to 2*5 years = 10

YTM = PV of Bond / Face-value of Bond = $100

To calculate YTM, I used the RATE function in Excel:

=RATE(no. of period, coupon rate, PV of bond, [FV of bond])

=RATE(10, 3.25, -100, 0)

YTM for Bond 1= -16.52%

Similarly, YTM for the other three bonds will be:

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YTM for Bond 2= RATE(52, 4.100, -100, 0) = 3.37%

YTM for Bond 3= RATE(56, 3.100, -100, 0) = 2.17%

Book Value of Debt = Long Term Debt + Notes Payable + Current portion of Long term

Debt = $ 1,182.90 million + $17.4 million + $277.6 million = $1,477.9 million

Market Value of Debt = PV of all bond (Coupon + Principal amount to the maturity)

Bonds YTM Coupon No. of Coupon Payment = PV of Bond

Outstanding Rate period (Coupon Rate / 2) *

Value (FV) semi- Bonds Outstanding

annual Value
$300,000 -16.52% 3.250% 10 $4,875 -$951,193.86
$400,000 3.37% 4.100% 52 $8,200 -$450,306.08
$500,000 2.17% 3.100% 56 $5,425 -$500,000.00

PV= (YTM, no. of period, payment amount, FV)

PV of Bond 1 = (-0.0826%, 12, $4,875, $300,000) = -$951,193.86

PV of Bond 2 = (0.01685%, 52, $8,200, $400,000) = -$450,306.08

PV of Bond 3 = (0.01085%, 56, $5,425, $500,000) = -$500,000.00

In this case, there will be a difference if we used Book value weights vs Market value

weights.

5. You now have all the necessary information to calculate the weighted average cost of

capital for SNA. Calculate the weighted average cost of capital for using book value

weights and market value weights assuming 21 percent marginal tax rate. Which

cost of capital number is more relevant?

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The weighted average cost of Debt using Book value weights is:

Book Value of debt weights = [Interest Expense * (1 – Tax rate)] / Book value of Debt

= [$53.1 million * (1 – 21%)] / $1,477.9 million

= 2.84%

Market Value of Debt weights =

SNA (Snap- Bond Future Bond Coupon Coupon

On Inc.) Value Weights Rate Rate * Bond

Weights
Bond 1 $300,000 25.00% 3.250% 0.8125%
Bond 2 $400,000 33.33% 4.100% 1.36653%
Bond 3 $500,000 41.67% 3.100% 1.29177%
Total $1,200,000 100.00% 3.4708%

Market value of Debt weights = 3.4708% (1 – 21%) = 2.74%

Therefore, estimating the actual cost of debt through the market value of debt is more

relevant since it reflects the current value of the debt.

6. You used SNA 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? What

improvements might you suggest

Pure-play approaches determine the cost of capital for projects that differ from the

company's primary business. The SNA company manufactures tools and software for

professionals, while MT manufactures steel, so MT should evaluate the cost of capital for

SNA through the Pure Play cost of capital approach when considering un-levering and re-

levering betas for the tool manufacturing industry. Since the weightage of capital is

assigned to non-publicly traded companies, there may be difficulties in estimating the

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beta. Using this pure-play approach, the cost of capital will consider historical and future

costs.

References:

SNA-20220101. (n.d.). Retrieved October 17, 2022, from

https://www.sec.gov/Archives/edgar/data/91440/000009144022000005/sna-
20220101.htm

SNA-20220702. (n.d.). Retrieved October 17, 2022, from

https://www.sec.gov/Archives/edgar/data/91440/000009144022000026/sna-
20220702.htm

Yahoo! (2022, October 17). Snap-on incorporated (SNA) Exclusive Data & Insights.
Yahoo! Finance. Retrieved October 17, 2022, from
https://finance.yahoo.com/quote/SNA/company360?
p=SNA&ncid=dcm_306158744_490172245_127172993

S&P U.S. Equity Risk Premium index. S&P Dow Jones Indices. (n.d.).
Retrieved October 17, 2022, from
https://www.spglobal.com/spdji/en/indices/strategy/sp-us-equity-risk-premium-
index/#overview

3 month Treasury Bill Rate. (n.d.). Retrieved October 17, 2022, from
https://ycharts.com/indicators/3_month_t_bill

Bonds. Bonds - Search Results. (n.d.). Retrieved October 17, 2022, from https://finra-
markets.morningstar.com/BondCenter/Results.jsp

Thomson Reuters. (n.d.). SNA.N - snap-on incorporated | stock price & latest news.
Reuters. Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/SNA.N/

Thomson Reuters. (n.d.). Dhr.n - Danaher Corporation | Stock Price & Latest News.
Reuters. Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/DHR.N/

Thomson Reuters. (n.d.). EMR.N - Emerson Electric Co. | stock price & latest news.
Reuters. Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/EMR.N/

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Thomson Reuters. (n.d.). SWK.N - Stanley Black & Decker, Inc. | Stock Price
& Latest News. Reuters. Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/SWK.N/

Thomson Reuters. (n.d.). ITW.N - illinois tool works inc. | stock price & latest news.
Reuters. Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/ITW.N/

Thomson Reuters. (n.d.). NWL.O - Newell Brands Inc | Stock Price & Latest News.
Reuters. Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/NWL.O/

Thomson Reuters. (n.d.). Dov.n - Dover Corp | Stock Price & Latest News. Reuters.
Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/DOV.N/

Thomson Reuters. (n.d.). MYE.N - myers industries, inc. | stock price & latest news.
Reuters. Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/MYE.N/

Thomson Reuters. (n.d.). SRI.N - stoneridge, inc. | stock price & latest news.
Reuters. Retrieved October 17, 2022, from
https://www.reuters.com/markets/companies/SRI.N/

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