I would like to have someone look over my homework and make suggestions for improvement. The yellow highlighted parts are my answers. Thank you!

Tesla Balance sheet at

https://www.sec.gov/cgi-bin/viewer?action=view&cik=1318605&accession_number=0001564590-19-003165&xbrl_type=v#

Indicate the units ($/share, $ in (000) millions or billions - whatever, but be clear)

Notes and/or comments

Using the 10K (yr ending 2018) for TSLA, answer the next 2 questions.

What is the book value of debt[1]** For this problem, also assume that this is the market value of debt.(1 pt.)

$9,403,672,000 (9.404 B)

As of 12/31/18

What is the book value of equity[2] (1 pt.)

$4,923,243,000

(4.923 B)

As of 12/31/18

To estimate the cost of equity for TSLA, go to finance.yahoo.com and enter the ticker symbol for TSLA

What is the most recent stock price listed for TSLA (1 pt.)

$235.01 per share

8/9/2019

Now that you have identified the most recent price, I am going to ask you to use the price from July 23, 2019 for consistency and ease of grading. Please use $260.17 per share.

Stock price I want you to use for all further calculations

$260.17/share

7/23/19

What is the market value of equity, or market capitalization shown on Yahoo Finance? (1 pt.)

42.977 B

8/9/2019

How many shares of stock does TSLA have outstanding? (use 10K) (1 pt.)

172,603,000 shares

As of 12/31/18

What is the market capitalization based on the shares outstanding and the stock price of $260.17/share?[3] (2 pts)

44,906,122,510(44.906 B)

172,603,000 * 260.17 =44,906,122,510

What is the book value per share for TSLA? (2 pts)

28.52 ($/share)

4,923,243/172,603=28.52

What is the most recent dividend?[4] (1 pt.)

Zero

Tesla retains all earning and reinvests in the company, found via Tesla website(Tesla, 2019)

Can the dividend discount model be used for Tesla? Why or why not? No, because Tesla does not pay dividends and invests all retained earnings back into the company (Tesla, 2019).

What is the beta for TSLA? (1 pt.)

0.60

8/9/2019

Yield on the 13 week (3 month) Treasury bill

2.04%

See above

Historic market risk premium (use the value given here)

7%

Average MRP based on historic data

Using the historical market risk premium, what is the cost of equity for TSLA using CAPM? (2 pts)

6.24%

2.04%+0.60(7%) = 6.24%

The cost of debt is difficult to get for most firms having multiple bonds outstanding. For this problem, we are going to use a rough estimate of the cost of debt using the firm's interest expense and long term debt. To keep things consistent, I will provide the value to use. I took the average of the following: 2018 interest expense/2018 long term debt and (Q1 2019 interest expense *4 to annualize)/Q1 2019 long term debt (recall that this is the LT debt as of 3/31/19).

For 2018 use 7.05% and for 2019 use 6.70%, the average is 6.87%

Estimated cost of debt to use for WACC

6.87%

See above

Tax rate estimate: Tesla has had profitable quarters but has never had a profitable year. For this reason, we will assume a tax rate of zero for Tesla. Consider what this means for the "after tax" cost of debt when you calculate WACC.

1.Using the book value of debt and equity, estimate Tesla's weighted average cost of capital (WACC), show your work. Start by calculating the % weights for debt and equity. (2 pts)

WACC=(WeRe) + (WdRd)

We= E/V = 4,923,243/14,326,915 = 34%

Wd= D/V = 9,403,672/14,326,915 = 66%

Re (from table above) = 6.24%

Rd(from table above) = 6.87%

WACC = (.34x6.24) + (.66x6.87) = 6.65%

WACC = 6.65%

2.Recalculate the book value WACC, but now assume that Tesla is a profitable firm, with a tax rate of 22% (1 pt.)

WACC=(WeRe) + (WdRd (1-Tc))

We= E/V = 4,923,243/14,326,915 = 34%

Wd= D/V = 9,403,672/14,326,915 = 66%

Re (from table above) = 6.24%

Rd(from table above) = 6.87%

Tc= 22%

WACC = (.34x6.24) + (.66x6.87 (1-.22)) = 5.661%

WACC = 5.66%

3.Now, using the market values of debt and equity (double check the note about debt at the top of the table), estimate Tesla's weighted average cost of capital (WACC), show your work. Start by calculating the % weights for debt and equity and to make sure your values are in the same units (don't mix thousands of dollars and millions/billions). (2 pts)

WACC=(WeRe) + (WdRd)

We= E/V = 42.977/87.883 = 48.9%(in billions)

Wd= D/V = 44.906/87.883 = 51.1%

Re (from table above) = 6.24%

Rd(from table above) = 6.87%

WACC = (.489x6.24) + (.511x6.87) = 6.56%

WACC = 6.56%

4.Recalculate the market value WACC, but now assume that Tesla is a profitable firm, with a tax rate of 22%: (1 pt.)

WACC=(WeRe) + (WdRd (1-Tc))

We= E/V = 42.977/87.883 = 48.9%(in billions)

Wd= D/V = 44.906/87.883 = 51.1%

Re (from table above) = 6.24%

Rd(from table above) = 6.87%

Tc= 22%

WACC = (.489x6.24) + (.511x6.87 (1-.22)) = 5.79%

WACC = 5.79%

5.For Tesla, does it make a difference if the firm uses market weights or book weights in determining their WACC? (3 pts)

Yes, the values are only slightly different but can make a huge difference in the cost of capital when we are talking about billions of dollars.

6.Given the trends shown in the following chart of historic beta values for Tesla, how much confidence do you have in the estimate for Tesla's cost of capital? (3 pts)

Beta is a measurement of volatility or systematic risk.It appears that beta of Tesla is returning to a value closer to 1. This means that the systematic risk is similar to the average of the S&P 500 but relatively lower than market average at its value of 0.62.The cost of capital will increase for Tesla as long as beta continues to rise.