Question

Whenever a stock price changes, one of two things is probably happening investors are updating their expectations about Tesla's future cash flows, or investors are updating their beliefs about the appropriate "discount rate to apply to those estimated future cash flows. What discount rate are Tesla's investors using for their cash flows? In this question, we are going to calculate one possible estimate for this discount rate, which is known as the weighted Average Cost of Capital for WACC) The WACC for a given firm combines the cost of funding" associated with both debt and equity into a single formula Roughly speaking, WACC is calculated as: (fraction of firm's financing from debt) cost of that debt as a %) + (fraction of firm's financing from equity) cost of that equity as a % More precisely, we define WACC using the following equation and variables, along with sugestions for how to calculate them for Tesla WACC = "1-T + were wThe fraction of a firm's financing from debt. It is calculated as D/V. or Debt/Value, where "Debt" is the total dollar amount of firm debt and "Value" is the firm's "Debt" plus the firm's "Equity For Tesla, just use the current year (CY) "Long Term Debt" number from their balance sheet for "Debt" see the "Tesla Financials (Yahoo)" sheet in this file). To calculate "Equity, we will calculate the market value of equity by multiplying Tesla's stock price by the number of Tesla shares outstanding. Tesla shares outstanding can be found at http://finance.yahoo.com/q/ks?s=TSLA+Key+Statistics. For simplicity just use Tesla's trading price from 11/1/2019, which you pulled to answer question 5. When calculating these figures, remember that all of Tesla's financial statement numbers (specifically the debt numbers) are reported in thousands, while Tesla's shares outstanding is reported "as is" (e. the actual number of shares re=The cost of debt, or the interest rate the firm pays on its debt. For Tesla, use the "Interest/Avg LT Debt" calculation for the current year that is completed for you on the "Tesla financials (Yahool" sheet. Remember to input this percentage number as a decimal in your calculations! T=The corporation's tax rate on income. Since interest expense is tax deductible, the effective cost of debt is lower. The interest expense paid by the firm multiplied by Te is called the interest tax shield, since interest is the amount by which a company's tax bill is reduced by paying interest For Tesla, just use the new corporate tax rate of 21% (or 21) for Te w. The fraction of a firm's financing from equity. It is calculated as E/V. or Equity/Value, where "Equity is the total dollar amount of firm equity and value is the firm's "Debt" plus the firm's "Equity See the note above for "w" for how to calculate Tesla's "Debt" and "Equity r. The cost of equity, or the required rate of return for equity holders of Tesla. For this part, we are going to calculater, using what is known as the Capital Asset Pricing Model or CAPM. This is going to take us a few more steps. The CAPM equation is defined as follows: You can estimate the risk free rate (rf) as the interest rate on long-term (10-year) treasury securities (go to http://www.treasury.gov/resource center/data chart center/interest rates/Pages/TextView.aspx?data=yield and use the percentage rate for 10-year securities on the most recent day). Make sure you use this number, presented as a percentage, as a decimal in your formula (so you'd put in "3.20 from the website as 0.0320. The measure of how closely a company's returns covary with the market's returns, or Beta (8), can be found on the same page from Yahho finance where you pulled oustanding shares (http://finance.yahoo.com/q/ks?s=TSLA+Key+Statistics) To calculate the expected return on the market (r) use a five year compound growth rate calculation. This looks similar to the calculation to solve for "r" in Chapter 3: growth rate = (FV/PV]^(1/n)-1. To get at the values for FV and PV, we are going to approximate total market prices using past prices on the S&P 500 Index ſticker is "GSPC on Yahoo). Click the "historical prices on the right, pull up the monthly prices, then write down the Adjusted Close Price for October 31, 2019 [your "FV" in the compound growth rate formula), the Adjusted Close Price for October 31, 2014 [your "PV), and use 5 for "n" in the formula. FILL in ALL the pieces of the WACC formula (INCLUDE ALL CALCULATIONS) and the calcuated WACC itself for Tesla in the yellow cells below. Debt Shares Outstanding Share price on 11.1.19 Equity Value wid) r(d) we) Beta S&P 500 on 10.31.19 S&P 500 on 10.31.14 r(m) r(e) Tax rate Tesla WACC

Answer 1

WACC of Tesla as required and instructed is calculated on Excel Spreadsheet and appropriate comments are also made on the right of each cell based on the instructions given in the question. The picture of the spreadsheet is attached here as answer and working.

Fill in all the pieces of WACC Formula (include all calculations) and the calculated WACC for Tesla in yellow cells below COMMENTS 9,403,672,000 As per Tesla Financials (Yahoo) in this file X 1000- since debt is shown in thousands Debt 180,240,000 180.24M as per Yahoo finance link for key statistics of Tesla given in question Shares Outstanding 313.31 Adjusted Close as on 11.1.19 from Yahoo finance. Historical Data of Tesla Share Price On 11.1.19 56,470,994,400 Shares Outstanding X Adj Closing Price of Tesla above Equity 65,874,666,400 Total of Debt + Equity Value 0.14 Debt/Value w(d) 7.03% As per Tesla Financials (Yahoo) in this file Current Year's Int/Avg LT Debt r(d) 0.86 Equity Value w(e) 0.0176 Current yield rate is 1.76 as of 25 Nov 19 for 10 year Treasury Bonds r(f) 0.59 3Y Monthly as per Yahoo finance Tesla Key Statistics Beta 3,037.56 This is FV in compound growth formula - Adj close of s&P 500 on 10.31.19 from Yahoo Finance S&P 500 10.31.19 2,018.05 This is PV in compound growth formula - Adj close of S&P 500 on 10.31.14 from Yahoo Finance S&P 500 10.31.14 0.0852 Rm growth rate [FV/PV]^[1/n]-1 r(m) Here n 5 and FV & PV are taken above 0.0575 Cost of Equity r(f)Beta [r(m) - r(f) r(e) 21% As directed in question to be taken as new corporate rate of 21% Tax Rate (Tc) 0.0572 w(d) X r(d) X (1 - Tc) +w(e) X r(e) Tesla WACC