In the second quarter of 2013, Tesla Motors, Inc. (symbol: TSLA) raised $1 billion in funds by issuing common stock (about 3.4 million shares) and senior convertible bonds. Of this $1 billion, $600M came from the convertible bond issuance. The prospectus supplement that contains details about the convertible bond issuance can be found using the following link from the SEC website (focus on the section below the red-texted Tesla logo and above the table of contents):

http://1.usa.gov/11DpDL0

The prospectus supplement that contains details about the convertible bond issuance can be found using the following link from the SEC website (focus on the section below the red-texted Tesla logo and above the table of contents):

a) Explain the primary reason why Tesla raised this cash.

b) The prospectus supplement states that conversion is only allowed under certain circumstances. In your own words, summarize these circumstances and why you think these rules are in place.

c) Explain why a company like Tesla would be interested in issuing convertible bonds as opposed to straight bonds.

d) Each convertible note is priced at $1,000, has a face value of $1,000 and a 5-year maturity, and pays a coupon of 0.75 percent every half-year. Assume that if Tesla were to issue straight debt, it would have an expected return of 4 percent per year (2 percent per half-year). What is the value of the option to convert for each convertible bond?

e) Suppose that it is December 1, 2015 and you own one Tesla convertible bond. You are considering two choices: convert the bond now or never convert the bond and receive the interest and principal payments until maturity. Assume that there are no rules in place that prevent you from converting the bond. The Tesla closing stock price on December 1, 2015 can be found online. Explain why you would or would not convert the bond. Keep in mind that you need to recalculate the value of the straight bond since there are now only five more coupons (plus the face value at maturity).

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