Tesla Report - Grade: A PDF

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Summary

Project for Advance corporate Finance with WACC...

Description

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Project 2 Background Tesla Inc. was founded in 2003 and specializes designing and manufacturing electric vehicles and energy storage products. Tesla Inc. operates two divisions, Automotive and Energy Generation and Storage. The automotive division focuses on a wide range of vehicles, their electric vehicle components, and systems for other manufacturers. Where as the Energy Generation and Storage division is focused on solar energy systems for both, residential and commercial customers. The CEO of Tesla Inc. is its co-founder Elon Musk, who also serves as product architect. The company’s headquarters are located in Palo Alto, California.

Descriptive Statistics Using past 5 years data retrieved from www.yahoo.com, we calculated the averages for past 60 months for both Tesla stock and S&P 500 index. We used these data to calculate the average returns in order to compare Tesla’s performance to the industry average. We can see Tesla’s stock is outperforming industry average. Averages

TSLA

SPY

Arithmetic Average Return

5.33%

1.21%

Geometric Average Return

4.20%

1.17%

Standard Deviation

16.55%

2.84%

Annualized Arithmetic Return

64.02%

14.56%

Annualized Geometric Return

63.78%

15.04%

Annualized Standard Deviation

57.34%

10%

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Estimating Tesla’s WACC

Beta To find the Beta of Tesla equity we calculated the slope of characteristic line using Tesla stock monthly returns and S&P 500 monthly returns, what represent market returns. We got Beta of 0.6695 and we adjusted this beta using given equation: Bloomberg Adjusted Beta = Raw Beta *(0.66) +0.33 Then we got Bloomberg Adjusted Beta of 0.7917.

Market Risk Premium For our risk free rate,we used return on Treasury Securities with 30 days, 90 days, 5 years and 30 years maturity dates. Given the equation MRP = Rm - Rf , we had to decide what rate will we use for a Market Rate. We decided to use the rate of return on S&P 500 index that was equivalent to 16.68% , which we accesed on Yahoo Finance. We decided for this rate because S&P 500 represents market where Tesla’s stock is traded.

Re and Market Value of Equity To find the Market value of Equity we had to multiply the current stock price of Tesla by the number of shares outstanding. We obtained these data from FINRA’s website and used data up to date of November 17, 2017 ($315.05 stock price; 166.71 million of shares outstanding totaling almost $52,522 million). To calculate the cost of equity we used different combinations of beta/Bloomberg adjusted beta and rates of return on treasury securities with different maturities as a risk free rate.

Estimating Tesla’s WACC

Rd and Market Value of Debt To calculate the market value of debt we had to multiply the number of bonds outstanding times the last traded price. After obtaining that value for all the four bonds we added them together and got $410,266,375 which is our market value of debt.

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Considering all four bonds issued by Tesla Inc. had negative yields, to calculate the cost of debt we used the yield on bonds in the same rating class. Since all of the bonds were rated by S&P as a B- bonds, we looked for the yield that a B- bond would have. As a result we obtained 7.29%. We used the proportions of the bonds and multiplied them by the yield of risk rating group of particular bond. Therefore, no matter the proportions, the average yield on bonds, which we used as our cost of debt, was equal to the yield of B- bonds, that is 7.29%.

WACC We calculated 6 different WACCs for Tesla Inc. using 6 different cost of equities based on return that we found earlier. With the six calculations we came up with we decided to use the 13.74% WACC because it reflects the company of Tesla best using the Bloomberg Adjusted Beta on a yield of 30 year Treasuries. Beta

Rf

Re

WACC

0.6995

1.08%

11.99%

11.95%

0.6995

2.07%

12.29%

12.25%

0.6995

2.81%

12.51%

12.47%

0.7917

1.27%

13.47%

13.42%

0.7917

2.07%

13.64%

13.59%

0.7917

2.81%

13.79%

13.74%

Recapitalization

Effect on Beta After we doubled the debt in Tesla’s capital structure we needed to calculate new levered beta. We used following equation, to find the Beta of unlevered firm. B unlevered = Bequity/[1 + (1 − T c) * Doriginal/Eoriginal] Then we used the beta we got to calculate the Beta of levered firm using new capital structure. B levered = Bunlevered * [1 + (1 − T c) * Dnew/Enew]

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So, with doubling the debt it change the beta slightly. We got new Beta of 0.705 and new Bloomberg adjusted Beta of 0.795. The change on Beta is caused by increased debt-to-equity ratio. After doubling the debt, the ratio doubles and therefore influences new Beta. In other words, since we increased the debt in firm’s structure, the risk specific for the firm increases as well. Effects on Equity Estimates When we doubled the debt we had to lever Beta and therefore Beta of the company increased. The increased Beta caused the increase on Cost of Equity slightly compared to the Cost of Equity before Recapitalization. The Cost of Equity changed, but the Market Value of equity did not change.

Effects on WACC After doubling the amount of debt to lever the firm, we notice a small change of less than a quarter of a percent on capital structure. This change influenced WACC because the increased proportion of debt increased the impact of cost of debt on overall cost of capital. Moreover, after leveraging the firm Beta increased, which caused the increase on cost of equity and this also contributed on the increase of the WACC. Overall, the WACC of the firm increased after recapitalization slightly. Below are the Betas, Cost of Equity, Risk Free, the calculated WACCs. With recalculating we would still choose 13.78% WACC because of the Bloomberg Adjusted Beta and the yield on the 30 year Treasuries.

Beta

Rf

Re

WACC

0.7048

1.08%

12.07%

11.99%

0.7048

2.07%

12.37%

12.36%

0.7048

2.81%

12.59%

12.57%

0.7951

1.27%

13.52%

13.48%

0.7951

2.07%

13.69%

13.64%

0.7951

2.81%

13.84%

13.78%

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