This is an individual assignment that has you assess the capital structure of Tesla in August 2017. The analysis requires no calculations. Using the information given, you are to determine whether this information suggests that Tesla should have relatively (% of assets or % of capital) more or less debt in its financing mix than is the case for the average firm in the industry. Point to specifics that provide support for your recommendation. Industry Life Cycle & Company Growth While the auto industry was very much in the mature stage of the life cycle in 2017, Tesla was closer in character to that of a growth company. Tesla had rapid sales growth from 2014 through 2017, with average sales growth of 55% per year. This growth was somewhat hampered by manufacturing capacity and inefficient production processes. To alleviate this problem, Tesla was in the middle of an even more rapid capital investment phase, building new production plants in China and Europe, and expanding production capacity at its existing plant. Industry Dynamics and Competitive Positioning By the nature of its product, an expensive, discretionary item, the auto industry is highly cyclical. Historically, auto sales and profitability move with the business cycle, with auto firms typically doing well during economic expansions and poorly during recessions. The industry is characterized by high fixed operating costs, and relatively high use of debt by many firms in the industry. While competition is high in the auto industry, all participants try to differentiate their product from that of the competition in order to increase sales and profit margins. This is a characteristic of the industry structure commonly referred to as monopolistic competition (not monopoly). Teslas product is further differentiated from its competition. Unlike its competition, Tesla was in the process of building an entire ecosystem of charging stations, a repair network bringing the mechanic to the owner, and a home delivery system. If EVs were to take hold in a nation built around the combustion engine, then this would give Tesla an initial advantage against competition. In fact, industry analysts and auto engineers estimated at the time that Tesla had a ten year head start on the competition. Information/Signaling By virtue of their stage in the industry life cycle, and the nature of their product, the value of most automotive manufacturers is a function of assets in place, whereas Teslas value was much more a function of its growth opportunities. This makes Teslas value harder to determine than other firms in the industry, and places a greater importance on insider information. To underpin the problem with placing an intrinsic value on Tesla at this time, consider the following price targets: Analyst Firm Price Target for Tesla Stock Recommendation J.P. Morgan $185 Underweight / Sell Dougherty & Company $500 Overweight / Buy Morgan Stanley $333 Hold / Fairly Valued Income Taxes Until 2017, the top federal corporate income tax rate had been stable at 35%. With president Donald Trumps entry into the White House that same year, the top rate was reduced to 21%. All corporations in the U.S. were subject to the same income tax rates, though their operating profitability would largely determine the size of their tax bill. Credit Rating & Bankruptcy Risk Credit ratings reflect the likelihood of bankruptcy. These ratings range from best to worst as follows: AAA, AA, A, BBB, BB, B, CCC, CC, C, D (D = in default). With lower ratings comes higher interest rates on debt, reflecting lenders reluctance to lend to those deemed to pose a greater threat of nonpayment. Below are the credit ratings for Tesla and several of its competitors in 2017: Company Rating Outlook Tesla B Negative Ford BBB Negative GM BBB Positive Toyota AAA Stable Honda A Stable Daimler AG (Mercedes Benz) A Stable Financial Information TESLA 2017 2016 2015 2014 2013 2012 2011

Profitability (%)

Operating Margin -13.9 -9.9 -19.2 -6.9 -3.0 -95.4 -123.1

Net Margin -16.7 -9.6 -22.0 -9.2 -3.7 -95.9 -124.6

Return on Assets -7.6 -4.4 -12.7 -7.1 -4.2 -43.4 -46.3

Return on Equity -43.6 -23.1 -88.8 -37.2 -18.7 -227.2 -118.0

Return on Invested Capital -14.3 -8.7 -29.0 -14.6 -8.2 -76.8 -65.7

Liquidity Current Ratio 0.9 1.1 1.0 1.5 1.9 1.0 1.9

Coverage Times Interest Earned -2.7 -2.8 -4.8 -1.9 -2.4 -50.2 -48.9

Times Burden Covered -2.7 -2.8 -4.8 -1.9 -2.4 -50.2 -48.9

Leverage Total Debt/Total Assets (%) 42.3 37.9 36.1 42.4 25.1 41.9 39.3

All Data 2017 except for Sales Growth Net Sales Total Debt % Total Capital Cash and ST Invest (% of Assets) Free Cash Flow Total Dividends Pretax Income Sales Growth. Avg Annual Rate, 2014-2017 Bayerische Motoren Werke AG 98,282 59.5 4.6% -1,368 2,324 9,936 7.1 Daimler AG 164,154 66.6 8.3% -11,810 3,477 12,469 8.2 Ferrari NV 3,417 69.9 15.9% 474 120 744 7.4 Ford Motor Company 156,776 81.3 15.1% 11,047 2,584 8,159 2.9 General Motors Company 145,588 72.9 12.0% -10,305 2,215 11,863 -2.3 Honda Motor Co., Ltd. 15,361,146 46.1 11.7% 572,108 174,221 1,114,973 5.1 Hyundai Motor Company 96,376,079 51.0 16.5% 867,398 1,079,504 3,910,961 2.6 KIA CORPORATION 53,535,680 24.6 18.4% 904,709 441,024 1,140,053 4.4 Mazda Motor Corp. 3,474,024 29.4 22.6% 120,732 20,924 157,484 4.9 Mitsubishi Motors Corp 2,192,389 3.4 34.7% 47,373 17,938 103,049 1.0 Nissan Motor Co., Ltd. 11,951,169 58.9 6.4% -758,108 197,541 710,743 1.8 Renault SA 58,770 60.1 14.1% 2,101 916 3,415 12.7 SUBARU CORP 3,232,695 5.4 35.2% 216,401 110,326 297,340 4.1 Suzuki Motor Corp. 3,757,219 30.8 28.3% 239,317 25,146 384,033 7.9 Tesla Inc 11,759 74.1 12.3% -4,142 0 -2,209 55.8 Toyota Motor Corp. 29,384,077 50.2 11.4% 611,302 620,698 2,620,429 2.6 Volkswagen AG Pref 229,550 64.1 8.3% -14,237 1,327 10,191 4.3 Mean 12,948,987 49.9 16.2% 164,294 158,840 617,273 7.7 Media