CASE 2 Answer 1) The ratio of the book values of debt and equity of the company Tesla is listed as follows. DescriptionAmount in $ millionRatio Debt$26,842.000.78 Equity$7,467.000.22 Answer 2) Most recent stock price of the TSLA =427.64 Market value of equity =82.698 Billion Outstanding shares of TSLA =184.39 Million Most recent annual dividend =$- Since the company has never declared cash dividend, the dividend discount model cannot be used. Yield on 3 months treasury bill (Rf) =0.04% Beta0.48 Market Premium =5.6 Ke (CAPM) =Rm + (Rm - Rf)*Beta Ke (CAPM) =8.27% Answer 3) Yield to maturity of Tesla's Bonds = C =1.25% F =$100.00 P =$122.33 N =1.8845 YTM =2.45%
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Number of bonds =1200000000 Market value of bonds =$146.80Billions Marker Value Weights = DescriptionAmount in $ millionRatio Debt$146.800.64 Equity$82.700.36 Answer 4) Ke =8.27% Kd =2.45% Kd (After tax) =1.94% WACC (BV) =3.31% WACC (MV) =4% The book value weights are better. Answer 5) Pure play method deals with the determination of the cost of capital of a company, the shares ofwhicharenotpublicallylisted(Gὂtze,NorthcottandSchuster,2015).Thesaid determination is done with the aid of the information of the companies that are in single line of business (Brigham and Houston, 2012). Some of the potential issues that can arise in the pure play cost of capital estimation are that wrong choice of the industry, different capital structure models, different business models, and the fact that one company is in the market since long, and the company for which the calculation is to be made is relatively new. Thus, the above issues can lead to wrong estimation of the weighted average cost of capital.
References Bierman Jr, H., and Smidt, S. (2012)The capital budgeting decision: economic analysis of investment projects. 9thed. Oxon: Routledge. Brigham, E. F., and Houston, J. F. (2012)Fundamentals of Financial Management.Boston MA: Cengage Learning. Goyat, S., and Nain, A. (2016) Methods of Evaluating Investment Proposals.International Journal of Engineering and Management Research (IJEMR), 6(5), p. 279. Gὂtze, U., Northcott, D., and Schuster, P. (2015)Investment Appraisal: Methods and Models. 2nded. London: Springer.