Please answer questions with explanation. Everything is cited below and no outside sources should be cited

Required: Write your answers in Standard English. Include any computations you make in completing your answers. Be specific. 1) Decompose Tesla's ROE for the annual periods 2012-2014. Note any trends you observe. 2) Tesla notes that Q1 automotive revenue includes $51 million from the sale of ZEV credits.* Assuming that 2012-2014 annual revenues are comprised of the same percentage of ZEV revenues as was the case in Q1 of 2015, re-compute Tesla's income after removing the effect of the ZEV sales and decompose ROE using the revised data. 3) Compare your new calculations to your ROE decomposition from question 1. 4) Comment on the quality of Tesla's earnings. 5) Given that Tesla has consistently generated losses, how has the company managed to survive? Read Tesla's Stockholder Letter for the first quarter of 2015. Tesla repeatedly refers to \"nonGAAP\" results. 6) What are the specific departures Tesla makes from GAAP in computing these numbers? 7) Why do you think the company keeps referring to \"non-GAAP\" measures? *Here's how ZEV (zero emission vehicle) credits work: Every major auto manufacturer in the U.S. is required to sell a given percentage of zero-emission vehicles (by 2025 it will reach 15%). Failure to meet this standard results in a fine. Manufacturers receive zero emission vehicle \"credits\" for each ZEV sold. ZEV sales were, however, only 1% of automotive sales in 2014. This means many manufacturers fall below the threshold. They can, however, buy \"credits\" from other companies in order to keep from paying the fines. Since Tesla only sells ZEVs it has \"extra\" credits that it can sell. Tesla Motors, Inc. Consolidated Statements of Operations (in thousands, except share and per share data) Year Ended December 31, 2014 2013 2012 Automotive sales $3,192,723 $1,997,786 $385,699 Development services 5,633 15,710 27,557 Total revenues 3,198,356 2,013,496 413,256 Automotive sales 2,310,011 1,543,878 371,658 Development services 6,674 13,356 11,531 Total cost of revenues 2,316,685 1,557,234 383,189 Gross profit 881,671 456,262 30,067 Research and development 464,700 231,976 273,978 Selling, general and administrative 603,660 285,569 150,372 Total operating expenses 1,068,360 517,545 424,350 Loss from operations (186,689) (61,283) (394,283) Interest income 1,126 189 288 Interest expense (100,886) (32,934) (254) Other income (expense), net 1,813 22,602 (1,828) Loss before income taxes (284,636) (71,426) (396,077) Provision for income taxes 9,404 2,588 136 Net loss $(294,040) $(74,014) $(396,213) Net loss per share of common stock, basic and diluted $(2.36) $(0.62) $(3.69) 124,539,343 $(0.32) 119,421,414 $(0.11) 107,349,188 Revenues Cost of revenues Operating expenses Weighted average shares used in computing net loss per share of common stock, basic and diluted Consolidated Balance Sheets (in thousands, except share and per share data) December 31, 2014 December 31, December 31, 2013 2012 Assets Current assets Cash and cash equivalents $1,905,713 $845,889 $201,890 Restricted cash and marketable securities 17,947 3,012 19,094 Accounts receivable 226,604 49,109 26,842 Inventory 953,675 340,355 268,504 Prepaid expenses and other current assets 94,718 27,574 8,438 Total current assets 3,198,657 1,265,939 524,768 Operating lease vehicles, net 766,744 382,425 10,071 Property, plant and equipment, net 1,829,267 738,494 552,229 Restricted cash 11,374 6,435 5,159 Other assets 43,209 23,637 21,963 Total assets $5,849,251 $2,416,930 $1,114,190 Accounts payable $777,946 $303,969 $303,382 Accrued liabilities 268,884 108,252 39,798 Deferred revenue 191,651 91,882 1,905 Capital lease obligations, current portion 9,532 7,722 4,365 Customer deposits 257,587 163,153 138,817 Convertible senior notes 601,566 182 50,841 Total current liabilities 2,107,166 675,160 Capital lease obligations, less current portion 12,267 12,855 539,108 Deferred revenue, less current portion 292,271 181,180 10,692 Convertible senior notes, less current portion 1,806,518 586,119 9,965 Liabilities and Stockholders' Equity Current liabilities Resale value guarantee 487,879 236,299 3,060 Other long-term liabilities 173,244 58,197 401,495 Total liabilities 4,879,345 1,749,810 25,170 Commitments and contingencies (Note 11) 989,490 Convertible senior notes (Notes 6) 58,196 Stockholders' equity: Preferred stock; $0.001 par value; 100,000,000 shares authorized; no shares issued and outstanding - Common stock; $0.001 par value; 2,000,000,000 shares authorized as of December 31, 2014 and 2013, respectively; 125,687,607 and 123,090,990 shares issued and outstanding as of December 31, 2014 and 2013, respectively as126 123 115 Additional paid-in capital 2,345,266 1,806,617 1,190,191 Accumulated deficit (1,433,682) (1,139,620) (1,065,606) Total stockholders' equity 911,710 667,120 124,700 Total liabilities and stockholders' equity $5,849,251 $2,416,930 $1,114,190 Consolidated Statements of Cash Flows (in thousands) Year Ended December 31, 2014 2013 2012 $(294,040) $(74,014) $(396,213) Depreciation and amortization 231,931 106,083 28,825 Stock-based compensation 156,496 80,737 50,145 Amortization of discount on convertible debt 69,734 9,143 - Inventory write-downs 15,609 8,918 Cash Flows From Operating Activities Net loss Adjustments to reconcile net loss to net cash provided by (used in) operating activities: 4,929 loan origination costs - 5,558 - Change in fair value of DOE warrant liability - (10,692) 1,854 Fixed asset disposal 14,178 1,796 154 Other non-cash operating activities 7,471 1,815 1,406 Foreign currency transaction (gain) loss (1,891) (13,498) 143 Accounts receivable (183,658) (21,705) (17,303) Inventories and operating lease vehicles (1,050,264) (460,561) (194,726) Prepaid expenses and other current assets (60,637) (17,533) 1,121 Other assets (4,493) (434) (482) Accounts payable 252,781 20,995 189,944 Accrued liabilities 162,075 66,418 9,603 Deferred revenue 209,681 268,098 (526) Customer deposits 106,230 24,354 47,056 Resale value guarantee 249,492 236,299 - Other long-term liabilities 61,968 33,027 Changes in operating assets and liabilities 10,255 Net cash provided by (used in) operating activities (57,337) 264,804 (263,815) (969,885) (264,224) (239,228) 14,752 8,620 Cash Flows From Investing Activities Purchases of property and equipment excluding capital leases Withdrawals out of our dedicated DOE account, net (Increase) decrease in other restricted cash (3,849) 55 (1,330) Purchases of short-term marketable securities (205,841) - (14,992) securities 189,131 - 40,000 Net cash used in investing activities (990,444) (249,417) (206,930) 2,300,000 660,000 - Maturities of short-term marketable Cash Flows From Financing Activities Proceeds from issuance of convertible debt Proceeds from issuance of common stock in public offering Proceeds from issuance of warrants 360,000 221,496 389,160 120,318 - 100,455 95,307 24,885 - 55,000 - (452,337) (12,710) Proceeds from exercise of stock options and other stock issuances Proceeds from issuance of common stock in private placement Principal payments on DOE loans Purchase of convertible note hedges (603,428) (177,540) (35,149) (16,901) (11,179) (8,425) Common stock and convertible debt issuance costs Principal payments on capital leases and other debt (2,832) Collateralized lease borrowing 3,271 Proceeds from DOE loans Net cash provided by financing activities 188,796 2,143,130 635,422 419,635 (35,525) (6,810) (2,266) 1,059,824 643,999 (53,376) period 845,889 201,890 255,266 Cash and cash equivalents at end of period $1,905,713 $845,889 $201,890 Effect of exchange rate changes on cash and cash equivalents Net increase (decrease) in cash and cash Equivalents Cash and cash equivalents at beginning of Tesla Motors - First Quarter 2015 Shareholder Letter Produced 11,160 vehicles, exceeding plan while improving efficiency Record quarterly deliveries of 10,045 vehicles Achieved gross margin target, despite strong dollar Launched All-Wheel Drive Model S 85D and 70D Introduced Tesla Energy products Model X on track for start of deliveries in late Q3 May 6, 2015 Dear Fellow Shareholders: In 2015, we have already expanded our product portfolio with exciting new products and features while continuing to execute on our long-term plans. We ramped the manufacturing and availability of AllWheel Drive Model S 85D, introduced 70D, and are building release candidate prototypes of Model X. Last week, we also launched our new Tesla Energy business, introducing a suite of energy storage products with a vision that we believe will help to eventually transform the global energy paradigm. Both our vehicle and Tesla Energy businesses will benefit from our Gigafactory project, which should start producing initial quantities of battery packs in 2016. We also significantly improved manufacturing efficiency and reduced per unit vehicle costs while achieving a higher average weekly production rate during Q1. These efforts, combined with a favorable product mix, helped us reach our Q1 non-GAAP automotive gross margin target, despite the significant negative impact of a strong dollar. We were also able to accelerate yearover-year revenue growth in Q1, while improving operational efficiency as reflected in lower than expected growth of operating expenses. Overall, these achievements represent a strong start to a very big year at Tesla. Expanding the Market for Model S We continue to see growing Model S demand. In Q1, both North American and European orders were much higher than Q1 last year, despite limited availability of 85D and before the announcement of 70D. While we still have work to do in China, we saw encouraging signs of a return to growth in orders there as well. Recently, order rates have accelerated even further with greater availability of 85D and the launch of 70D. This is especially encouraging as potential customers in many markets have yet to experience these products first hand. 70D has only been shown in North America, and our all-wheel drive cars will not be available in right hand drive markets until Q3. We remain confident in our ability to deliver approximately 55,000 Model S and Model X vehicles combined in 2015, as increased availability of all our Model S variants continue to drive demand. To sustainably scale for increased deliveries, our inventory of in-transit customer-configured cars must increase, and in Q1 we added 1,100 such vehicles to the pipeline. Our ability to continually innovate and reduce costs enabled us to recently launch the new Model S 70D. As a very compelling value in the premium sedan segment, the All-Wheel Drive 70D expands the market for Model S. 70D has 240 miles of EPA-rated range, superior all-weather performance, and a 0-60 mph time of 5.2 seconds. It also includes a comprehensive list of standard features such as Autopilot safety technology, access to our Supercharger network, and turn-by-turn navigation for $75,000, before tax credits and fuel cost savings. So far we are pleased with the increased demand that has been created by the 70D and the little effect it has had on the demand for our other Model S variants. Model S customers benefit from our free data connectivity and unique over-the-air software updates, which allow us to improve customer cars over time. In March, we introduced our second significant software update of Q1, enabling new active safety capabilities, adding intelligent range and charge management features, and boosting performance by increasing acceleration and top speed. Additional software updates are scheduled in Q2 that will include more Autopilot safety and convenience features for appropriately equipped cars. The expansion of our customer support network continues at a rapid pace. With 425 Supercharger locations and 100 service locations globally, driving a Model S is becoming more compelling every day. So far, our customers have Supercharged 111 million miles globally. Improving Production Capabilities In Q1, we manufactured 11,160 vehicles, 10% better than guidance, as we averaged more than 1,000 cars per production week. We successfully increased production on our new small drive unit line, which was critical to meeting the demand for our all-wheel drive cars. Our production launches of 85D and 70D proceeded more smoothly than our prior launches, highlighting the flexibility and increasing maturity of our manufacturing capabilities. With a more stable production cadence in Q1, we implemented efficiency improvements and reduced labor hours by more than 20% per car by the end of the quarter. During the quarter, we also made significant progress on the installation of a new body shop, paint shop and stamping presses that will establish extra capacity for both Model X and Model S. We are now building and testing release candidate Model X prototypes with increasing design maturity, and are pleased with the progress of this program. These developments, along with our maturing production capabilities, boost our confidence in the launch and production ramp of Model X, which is on track for start of deliveries in late Q3. In addition, steady construction progress continues at the Gigafactory, and together with Panasonic, we now expect to start complete battery manufacturing, from cells to modules to battery packs, in 2016. Tesla Energy In Q1, we made substantial progress on our 2nd generation Tesla Energy grid battery products. This led to our April 30th launch of the $250/kWh industrial Powerpack and the $350/kWh residential Powerwall, and these attractive prices include controls, cooling and DC/DC power electronics. The customer response to these products and the Tesla Energy vision broadly has been extremely positive. We are now preparing our supply chain and production teams to start volume builds on these new products in Q3. Production will begin at the Tesla Factory in Fremont, and in Q1 2016 will expand into the Gigafactory and accelerate significantly. The total addressable market size for Tesla Energy products is enormous and much easier to scale globally than vehicle sales. We are pursuing product certification in multiple markets simultaneously and plan to ramp deliveries in the US, EU and Australia in Q4. When combined with low cost renewable energy, Tesla Energy batteries provide an achievable pathway to a 100% zero carbon energy system. Q1 Results Starting this quarter, our income statement reflects the new classifications of revenues and costs of revenues to segregate our new vehicle business from our other business activities. \"Automotive\" revenue and related costs now reflect activities related to the sale or lease of new vehicles including regulatory credits, data connectivity and Supercharging. \"Services and other\" revenues and related costs include activities such as powertrain sales, service revenue, Tesla Energy and pre-owned Tesla vehicle sales. As usual, we have presented both GAAP and non-GAAP financial information in this letter. A full explanation of our non-GAAP information and reconciliation to GAAP are included in the tables and accompanying footnotes. Total non-GAAP revenue was $1.10 billion for the quarter, up 55% from a year ago, while GAAP revenue was $940 million. We achieved a Q1 total company gross margin of 28.2% on a non-GAAP basis and 27.7% on a GAAP basis. Automotive revenue was $1.06 billion on a non-GAAP basis, and is comprised of GAAP Automotive revenue of $893.3 million plus a net increase of $163.7 million in deferred revenue and other long-term liabilities as a result of lease accounting. 10,045 Model S vehicles were delivered in Q1, in line with our April announcement of approximately 10,030 deliveries. The average selling price of Model S increased slightly during the quarter, reflecting a full quarter of sales of P85D and the introduction of 85D. This mix improvement was partially offset by the effect of the strong dollar, which negatively impacted both our average selling price and thus revenue by slightly more than 3% from the prior quarter. As in previous quarters, we offered small discounts when selling vehicles used for either marketing or as service loaners. These discounts were consistent with last quarter. Q1 Automotive revenue included $66 million of total regulatory credit revenue, of which $51 million came from the sale of ZEV credits. In Q1, Tesla directly leased 592 cars to customers, which was worth $63 million of aggregate retail value. Q1 Automotive gross margin excluding ZEV credits was on plan at 26.0% on a non-GAAP basis, and 25.0% on a GAAP basis. The 330 basis points of sequential improvement in non-GAAP gross margin was driven by lower manufacturing costs and richer mix, offset partially by the strong dollar, expedited shipping costs related to port delays and an increase in warranty reserves of about $200 per car. Q1 Services and other revenue was $46.6 million, up 47% from a year ago. This includes $22 million of powertrain sales to Daimler and $20 million of service revenue. Q1 Services and other gross margin was negative 3.2%, as compared to 12.1% last quarter. This sequential reduction in gross margin was primarily driven by a planned price reduction for powertrain sales to Daimler. We improved our operational efficiency in Q1, achieving record deliveries and developing new products while managing to grow operating expenses at a slower rate than expected. Our operating expenses in Q1 were $324 million on a non-GAAP basis, up 9.1% from Q4, and $363 million on a GAAP basis. Our Q1 non-GAAP net loss was $45 million, or a loss of $0.36 per basic share based on 125.9 million basic shares, while our Q1 GAAP net loss was $154 million or a loss of $1.22 per basic share. Both figures include a $22 million loss, or $0.17 per basic share, related to mostly unrealized losses from revaluation of our foreign currency holdings due to the strong dollar. Cash and cash equivalents were $1.51 billion at the end of the quarter, down $396 million sequentially, as capital expenditures were $426 million in the quarter. Capital expenditures were primarily for the capacity expansion and tooling associated with Model X and all-wheel drive vehicles, as well as the Gigafactory. Our Q1 GAAP net cash outflow from operations was $132 million primarily due to the $78 million in cash inflows from vehicle sales to our bank leasing partners which we are required to classify as a financing activity, and a $63 million increase in inventory from customer-configured cars that were in transit for deliveries in Q2. During the quarter, we closed on a $100 million warehouse line in connection with our direct leasing program, and drew down $78 million of the line by quarter end. We anticipate closing on additional financing lines in the coming months. Gigafactory Construction Progress Outlook In Q2, we expect to produce about 12,500 vehicles, representing a 12% sequential increase. We plan to deliver 10,000 to 11,000 vehicles in Q2, and we are still on track to deliver approximately 55,000 Model S and X cars in 2015. As part of our strategy to optimize operational efficiency while scaling for higher deliveries, we are shipping cars using less expensive rail, rather than by truck, to more regions in the United States and Canada. Also, we are now producing cars based on a uniform regional production mix throughout the quarter. This enables a more stable cadence of deliveries and in turn improves customer satisfaction while reducing cost. Both of these actions should lead to an increase of in-transit customerconfigured finished goods inventory. In Q2, we expect to directly lease about the same percentage of cars that we did in Q1. As always, we will use lease accounting for these cars leased directly through Tesla even in our non-GAAP financial results, as such treatment is consistent with the cash collected on these transactions. We expect to sell about $15 million of our regulatory credits in Q2, including about $5 million of ZEV credit sales. We expect the Model S average transaction price to decline in Q2 as the dollar has strengthened by about 4% against the euro from the time we last adjusted Model S pricing. This will impact our Q2 gross margin by slightly more than 100 basis points. As a result, we expect non-GAAP automotive gross margin, excluding ZEV credits, to be just under 25% for the quarter at current exchange rates. We also expect some average price pressure from a less rich product mix, but our continuing efforts to improve efficiency and reduce manufacturing costs should offset this impact on gross margin. In response to the continued strength of the dollar, we have just announced a price increase of about 5% in most European markets. Since this price increase applies to new orders to be delivered in Q3 and beyond, it will not impact our Q2 results. We expect Services and other gross margin to be slightly better than breakeven in Q2, and continue to improve to about 5% by Q4. The improvement will come from cost reductions on Daimler powertrains as well as increased sales of Tesla Energy and pre-owned Model S vehicles. Our operating leverage is expected to improve this year, with revenue and gross profit both growing more quickly than operating expenses. Operating expenses should grow roughly 10% sequentially in Q2, and 45-50% for the full year as we invest in product development, including the Model 3, and expand our sales capability. We still plan to invest about $1.5 billion in capital expenditures this year as we expand production capacity, purchase Model X tooling, continue to build the Gigafactory, and expand our stores, service centers and the Supercharger network. 2015 is off to a strong start, and we are excited about the many opportunities ahead. We expect to continue to develop many more innovative and exciting products in the coming years