Assume that currently US Treasury Bonds have a yield of 2.1%.

a) From 2018 to 2022, the annual market returns were 8%, -3%, 15%, 6%, and 4%. During the same years Tesla’s annual stock returns were 16%, -9%, 20%, 11%, and 1%. What is the equity beta and expected equity return of Tesla using these five years of data? (Hint: first calculate the covariance between Tesla’s stock and the market to find Tesla’s equity beta.)

b) In mid-2022 Ford decides to expand their operations into electric vehicles. As a comparable company, the CEO of Ford has identified Tesla, which currently has a Debt- to-Equity Ratio of 2. Ford’s stock price is $40 per share, with 12 million shares outstanding. It also has $120 million in outstanding corporate debt, with an average credit rating of A- and a debt-beta of 0.05. Assume that Tesla’s cost of debt capital is 4.44% and that Tesla’s equity beta is similar to part (a). First, find the debt-beta and the asset-beta of Tesla. Then, determine the appropriate after- tax WACC for Ford’s expansion project if the company will be subject to a 25% corporate tax rate.