MBA Report: Financial Analysis of Tesla - Risks, Capital, Dividends

This report provides a comprehensive corporate finance analysis of Tesla, including its corporate history, ownership structure, sources of finance, corporate governance, and major risks. It estimates Tesla's cost of capital (WACC) and return on capital employed (ROCE), comparing these findings with similar companies like Audi AG. The analysis examines the impact of systematic and unsystematic risks on Tesla's returns, particularly focusing on the influence of factors like battery availability, investor trust, and CEO behavior. Furthermore, the report delves into Tesla's capital structure and dividend policies, comparing them with Audi AG to provide a comparative perspective on their financial strategies. The report concludes by discussing the challenges Tesla faces in achieving profitability and managing risks in a competitive market.

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Corporate Finance Analysis
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Corporate Finance Analysis 1
Contents
Introduction......................................................................................................................................2
Background..................................................................................................................................2
Ownership Structure....................................................................................................................3
Sources of Finance.......................................................................................................................3
Corporate Control and Governance Mechanism.........................................................................4
Risks, Cost of Capital and Return....................................................................................................4
Major Risks..................................................................................................................................4
Sources of Capital Employed and WACC...................................................................................5
Impact of Risks on Returns of Tesla............................................................................................6
Comparison..............................................................................................................................7
Capital Structure and Dividend Policy............................................................................................7
Capital Structure Policy of Tesla.................................................................................................7
Comparison between capital structure policy of Audi AG and policy of Tesla......................8
Dividend Policy of Tesla.............................................................................................................8
Comparison between dividend policy of Audi AG and dividend policy of Tesla...................9
References......................................................................................................................................10
Appendices....................................................................................................................................12

Corporate Finance Analysis 2
Introduction
Background
Tesla is an American automotive company based in California. Tesla is also known as Tesla
Motors Inc. It was incorporated in July 2003. The corporate objective of Tesla is to boost the
passion for electric motors in the public. This company produces designs and sells the higher-
performance, technically innovative electric motors as well as powertrain machinery. It sells
three models. These models are Model X SUV, Model S sedan and Model 3 Sedan. The Model
X SUV and Model S sedan are world best top-marketing electric cars. The Model 3 sedan was
launched in the year 2017. The corporation also provides services as well as leasing. The
completely electric cars and fuel-efficient cars are capable to travel about miles per charge. This
company is functioning on self-driving technique with certain existed on the present models. The
customers of America produce more than half of the sale of the company. The Chief Executive
Officer of the company is Elon Musk. Elon Musk has also established SpaceX and PayPal.
Tesla sells the motors vehicles to the people by the foreign networks of corporation-owned
places and galleries. Because of certain legal limits in some states, this company does not use a
dealership. This attitude of Tesla shows that resources of the vehicle’s price are non-negotiable.
Further, electricity is not only a factor that is concerned by the company for cars. Tesla is
establishing Tesla Semi, the electronic version of diesel-semi; make to haul the heavyweight
loads in the nation. It is said by Tesla that it would have the 500-mile battery ranges. Tesla aims
to utilise the trucks for the personal logistics, but J.B. Hunt, PepsiCo, UPS, Anheuser Busch and
FedEx have given an order for automobiles. The company makes a plan to start the
manufacturing of semis in the year 2019.
Tesla suppers the cost of production for the battery across the storage units, however, the fund
cost, for an example production related operation eats up lots of cash. There are some
corporations such as Ford, Toyota, Honda, Nissan and BMW, which are making an investment in
the development programmes planned to move larger parts, in certain matters all, of the fleets to
electrical powers in future. In the year 2019, Volvo is expected to switch to electrical motors.
The company has provided highly ranked vehicles so far, however, an automaker may call over

Corporate Finance Analysis 3
deeper means, wide-ranging supply chain, and international marketplaces in making and
marketing the vehicles.
Ownership Structure
Institutional investors acquired the net $4.5 million shares of the company in the quarter ended
March 2019, and currently have 52.59% of the whole float, the proportion that is distinctive for
the corporations in the sector of Motor Vehicles. Individual stakeholders have 33.45% shares.
The Mutual fund holders own 28.67% shares. Other institutional have 23.92% shares in Tesla.
The top three shareholders of the company are Elon Musk (CEO), Jeffrey Straubel (CTO) and
Deepak Ahuja (CFO). As per the latest SEC filing by the chief executive officer in February
2019, Elon Musk has 38.6 million shares of company secondarily by the trust. It makes him top
shareholder amongst all the individuals and institutions. On 21st March 2018, the shareholders of
the company sanctioned the stock option based on performance award for acquiring 20.3 million
shares for the CEO. In the year 2018, it is declared by Elon Musk that he acquired more $10
million shares. Elon Musk also planned to acquire more $20 million of the stock of the company
through the succeeding opening transaction window (Refer appendix 1).
Furthermore, as per the latest SEC filing by Jeffrey Straubel in November 2018, the chief
technology officer of the company has 306,398 shares of Tesla. It makes him the second-top
different shareholder. Moreover, as per the latest SEC filing by Ahuja in November 2018, it can
see that Ahuja has 25,015 company’s shares in direct and other 38,789 shares secondarily by the
family trust.
Sources of Finance
The sources of finance of Tesla include Sales, projects, and idle assets. By analysing the annual
report, it can say that the good portion of revenues is the outcome of the sales of the vehicles.
The sale is a good source of finance. Another financing source projects. The reason is that they
have a certain expertise in producing cars run utilising the electrical batteries. The projects would
possibly have the accounts related to business from the corporations desiring to discover the
electric from fuel and diesel of other energy sources. The idle assets are also a good source of
finance. Maybe the company has acquired certain lands that they are renting out. It may also
possible that this is renting the fleet of old motors, which have not to succeed to get adhesive

Corporate Finance Analysis 4
friction to certain corporations. The brainpower is also helpful. Imaginably Elon Musk has
considered a resources speaker. It is stated by filing with the Securities and Exchange
Commission that the company is looking for substitute financing resources. It is also added by
Tesla at the time of filing that it expects the present cash flow to be sufficient or adequate for
covering the expenditures for the upcoming period (Andersen, et. al, 2017).
Corporate Control and Governance Mechanism
Tesla that specializes in the issues related to corporate governance suggested the shareholders of
a company to shake up the board of company before this year, citing disconcerting issues of
interests and decision that made a query regarding the connections of director with Musk.
Tesla would bid farewell to long-time directors as well as decrease size of eleven board members
to seven members of the board as the automaker attendants in a new period of the corporate
governance. Further, the company helps the agency to understand information from the log of
motors however, the corporation clashed with the agency on the decisions made by Tesla to
discover data in relation to the crashes on the blog. NTSB may take twelve to twenty-four
months for releasing the report in relation to the investigation and agency does not like people
from outside to announce data that has not sanctioned by the agency. Now the company is not a
part of an investigation made by the agency however, this will continuously help the agency. It is
stated by NTSB that Tesla was voluntarily removed from the agency agreement (Hena, 2018).
Risks, Cost of Capital and Return
Major Risks
Systematic risks refer to the degree of uncertainty attracted with the organization at any stage of
life that can be management by the organization. Throughout its lifetime, all the organizations
face several risks that affect the entire industry and not just the company. These types of risks are
the systematic risks that collectively affect the functions of the entire in industry and not just one
organization. Such type of risks can be managed by the organization. The systematic risks are
unavoidable and unpredictable in the environment. Further, unsystematic risk refers to the risks
that are inherited to one organization only (Costa, et. al., 2018). This type of risk is also known
as residual risk that is attracted to one organization present in the industry. Strike of the factory
employees of the company Tesla can be understood as the unsystematic risk of the company.

Corporate Finance Analysis 5
Systematic risk of the company Tesla LLP is the lack of batteries present in the environment to
provide power to the electric cars present in the automobile industry. Lack of availability of
adequate risk in the environment can be seen as one of the biggest systematic risk for the
company Tesla (Grant 2016).
Along with this, the industry is also facing environmental issues that are reducing the efficiency
of the company in the external environment. Unsystematic risk for Tesla can be looked as lack of
trust of the investors on the activities of the company. The prospective people present in the
target environment do not wish to purchase the shares of the company due to high degree of
volatility in the internal business environment. Secondly, irrational behaviour of the CEO of the
company Elon Musk also created risk for the company in the industrial environment.
Irresponsible behaviour of Elon Musk on Twitter increased the doubt of people on the
functioning of the company (Bhavani 2018).
Sources of Capital Employed and WACC
Amounts weight Rates
Wt.
Rates
Debt 9,403,672 0.66 3.96% 2.60%
Preference
Capital 0 0 0.00% 0%
Equity Capital 4,923,243 0.34 2.00% 0.69%
Total 14326915
WACC 3.29%
The sources of capital employed include the sources that are used by the organization to initiate
business functions in the industrial environment. The above mentioned is the calculation of
weighted average cost of capital of the company Tesla. WACC refers to the rate that the
company is expected to pay on an average to all of its security holders. WACC is the cost of
capital of the company (Refer appendix 1). The company does not have any preferred stock so
the WACC include the calculation of debts and equity of the company. The cost of the capital of
the company Tesla is 3.29% which means that the company the earn minimum 3.29% profit in
the industry so as to provide value to its investors in the target market (SEC 2018).

Corporate Finance Analysis 6
EBIT/ CAPTAL EMPLOYED
EBIT -388,073
CAPITAL EMPLOYED 19747478
ROCE -2%
CALCULATION OF RETURN ON CAPITAL EMPLOYED
The analysis of return on capital employed states that the company had experienced losses in the
year 2017-2018 due to which the return on capital employed also appears negative. The
information about the operating profit of the company Tesla is taken from the annual report 2018
of the company. Further, the return of capital employed appears to be negative 2% that states that
the company is unable to generate profits from its capital employed. Due to the systematic and
unsystematic risks faced by Tesla in the industrial setting, the management is unable to convert
the productivity and attain profits out of the capital employed by them in the business functions
(Schlegel 2016).
Impact of Risks on Returns of Tesla
Yes, it should be noted that the risks identified above have a significant impact on the return on
capital employed of the company. Increasing risks in the environment reduces the operational
efficiency of the company to create returns out of the activities. Improve the profitability can
significantly improve the return in the environment. The systematic risks affects the profitability
of the company by increasing the cost of goods sold due to which the gross profit and net profit
of the organization subsequently reduces. Secondly, the unsystematic risk bounds the people
from investing the projects of the company due to which capital employed of the organization
also reduces. The company has deficit balance of working capital and operational profit as well
due to which the return on capital employed also becomes negative (Nian, Hari, and Yuan 2019).
Thus, it should be noted that there is no significance of calculating the return on capital
employed because the company is unable to attain return from its capital due to lack to efficient
profit and high degree of risks prevailing in the operations of Tesla. The company is currently
facing high degree of competition along with high investment in attaining technology due to
which their return has become deficit in the market. Another unsystematic risk that affects the
return on capital employed of the company is ineffective insurance strategy of the company. The
insurance policy of the company does not insure the company from suffering all the business

Corporate Finance Analysis 7
risks due to which their efficiency reduces in the target market. Lastly, the difference between
cost of capital and the ROCE is that ROCE evaluates the return on complete capital of the
company including debt and equity with cost of capital includes the opportunity cost of investing
in a project (Mehta, and Bhavani 2018).
Comparison
Comparing the financial analysis of Tesla with its competitor Audi, it should be noted that Audi
is working smoothly in the external environment. Although, Audi also suffer systematic risk in
the external environment but they manage the risk by increasing sales and selling of
unproductive assets in the industry. The company Audi generates higher return on investment in
the business industry than its costs that is invested to raise the capital needed for the investment.
Whereas, on the other hand, Tesla earns return that does not match to its cost of capital in the
business environment.
Capital Structure and Dividend Policy
Capital Structure Policy of Tesla
It is analysed by the capital structure and balance sheet of the Tesla that this company may be a
severe difficulty. In the year 2013, the stock share price of company report in the stratosphere
from the range of $20 to $30 in the last years to the higher of $190.90 that year. In the year 2015,
the price of the share had raised to $280.02 (Gilson and Abbott, 2018). Further, in April 2016,
the price of the share had balanced about $250. Furthermore, in the year 2017, the price of the
share has increased to approximately $340. Still, it is desired by the investors to get the
knowledge if this would rise higher. The reply can lie in the fundamental capital structure of the
stock. For funding the expansion of manufacturing facilities for the battery and car, it is not
expecting by the company to generate the profits until the year 2020 (Kim, 2018).
Moreover, for the investors searching the unshakable financial in the company, Tesla cannot be
the one and only. For the fuel of expansion, it is expected by the company to increase more $5
billion by the long-term debt or equity shares position in the upcoming five years. There are
already $4 billion long-term debts in the books, excepting the short-term debts, the corporation is
in the situation of negative cash flow as well as would be for the upcoming period. One and only

Corporate Finance Analysis 8
method of funding this position is over ever-enhancing shared-equity or long-term debt
increases. This situation may result into the dilution for the value of earnings per share for
stakeholders or may result into weighing down the corporation with debt to equity in the ratio,
which would continue to outperform the main competitors. The company’s capital structure
seems to be in the difficulty for the depositors. This should continue to increase the top-line
revenue expressively to be capable to render faith to the depositors, lenders as well as the
stakeholders, when at the same period enhancing the return on assets (ROA), return on equity
(ROE), and the profit margin (Mehta and Bhavani, 2018).
Comparison between capital structure policy of Audi AG and the policy of Tesla
While the capital structure policy of Tesla is compared with the capital structure policy of Audi,
in that case, this is established that there is a difference between the capital structure policies of
both the companies. Audi AG continued to determine the main model as well as technique
initiatives in the difficult market environment. It launched the e-Tron premium SUV, a first
electronic series-manufactured model of the brand. On 31st December 2018, the subscribed
capital of AUDI AG continued unchanged at 110,080,000 Euro and encompassed 43,000,000 no-
par deliverer stakes. All the shares state the notional shares of 2.56 Euro of the subscribed share
capital. Further, the short-term debt is considered as part of the debts of Audi AG, which requires
to be made payable in the upcoming 12 months. It renders the investors the ideas of how much
money the corporation requires to pay for a principal amount of the debts. In this way, the short-
term debt of the company for the quarter that ended in December 2018 was 98 million dollars.
The long-term debt, as well as the capital lease obligation, are the debt unpaid more than twelve
months in the upcoming period. It is analysed by the report that the long-term debts of Audit AG
for the ended quarter in the year 2018 was 363 Million dollars (Mocker and Fonstad, 2017).
Dividend Policy of Tesla
The dividend represents the sum of money paid to the stakeholders by the corporation from the
cash reserve and profit. While the executive of a company or the board of company think that
free cash is better off invested in company’s business, in place of allocated to the stakeholders,
they may take the decision to not to make the payment of dividends. Tesla has not declared the
dividend on the company’s common stock. The company wishes on retaining the earnings of the
upcoming period to the financial growth of the upcoming period and therefore, do not anticipate

Corporate Finance Analysis 9
paying any cash dividends in the near future. The initial public offering (IPO) of the company
was on 29th June 2010. The initial public offering (IPO) of the company was priced at seventeen
dollars per share (Cornell, 2016).
Comparison between dividend policy of Audi AG and dividend policy of Tesla
While the dividend policy of Tesla is compared with the dividend policy of Audi AG, then it is
found that there are differences between the dividend policies of both the companies. The
dividend policy is considered as equal as the financial strategy or approach of the company. By
considering the interest of all the shareholders, the company aims for constant dividend growth
so that the stakeholders may involve suitably in the success of a business. The projected dividend
amount consequently states the objectives of financial management, in particular, making sure
the strong financial base as part of the application of the financial approach. There is the control
as well as profit transferring agreement between AUDI AG and Volkswagen AG. This
controlling and profit transferring agreement administers the remuneration’s level by a manner of
compensatory payments to the outer stakeholders, making sure that they get the similar amounts
for a financial year as will be paid by the manner of the dividend on the ordinary shares of
Volkswagen. The compensatory sum for the financial year 2018 of EUR 4.80 per share was
solved at the Annual General Meeting of Volkswagen AG (Boudette and Musk, 2018)

Corporate Finance Analysis 10
References
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Financial Studies Journal.
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Capital Reflect Deviations in a Firm’s Sustainability Disclosures from its Sustainability
Activities?. Do Analysts’ Forecasts and the Cost of Capital Reflect Deviations in a Firm’s
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