1. Fatima Shaikh
Qv3949
Corporate Finance
Fung
Tesla Individual Report
Abstract/Executive Summary
This report studies Tesla Motors, a high end electric car manufacturer. The report
examines financial ratios in comparison with General Motors and Toyota, contains a valuation
of Tesla with sensitivity analyses, and a policy analysis. Elon Musk is both CEO and chairman of
Tesla’s board of directors which causes corporate governance and agency problems. A main
finding of the report is that Tesla is a weak and volatile stock of beta value 1.74. The stock does
not pay dividends and Tesla should not start paying dividends because they are not in good
enough shape to do so. The author does not recommend buying the stock.
Business Analysis
Tesla Motors is one of the hottest car companies out there. They have created a new
niche of high-end electric cars with impressive styling. They design, develop, manufacture and
sell electric cars as well as electric vehicle powertrain systems and components. Its cars are sold
through Tesla stores, galleries and the Internet. They have an 80 store and gallery network
throughout North America, Europe, and Asia. Tesla was founded in 2003, and has its
headquarters in Palo Alto, California (Yahoo Finance). Tesla’s impressive styling is a value driver
for them, because they have acquired quite a reputation for it and also a magnetic force
because of it. Tesla’s CEO and chairman Elon Musk has a charismatic personality and is
intelligent which is a value driver for Telsa. Tesla’s aggressive financing with debt, which is also
high relative to its competitors (see financial analysis part of report) is a risk that Tesla is facing.
Another risk Tesla is facing is its volatile stock price. An additional risk is the fact that Tesla is
being litigated against by dealerships that are afraid of the fact that Tesla doesn’t use

2. dealerships. Another risk is that there needs to be more infrastructure to support electric cars
for charging, which may also deter individuals from buying the cars. Information asymmetry
doesn’t seem to be too much of a capital imperfection for Tesla as the brand is well known and
has ten analysts, but outside investors still do not have the same information as managers
about the growth opportunities of the firm. Tesla has a good current ratio which indicates that
they are not in financial distress. However, their debt/equity ratio is much higher than their
competitors, probably because Tesla is aggressively financing with debt. Tesla has less problems
with the capital imperfection of corporate control and governance than its competitor GM
(56.90% versus 71.20% respectively is institutionally owned). Because the M-M Theorem gets
us to the conclusion that corporate finance matters, we can use corporate finance techniques
on Tesla to come to these and other conclusions.
Financial Analysis
A lot of corporate finance looks at financial ratios and other kinds of financial data to
determine a company’s financial standing to the rest of the corporate environment. See below
to how Tesla stacks up to the competition.
Financial
Data/Ratio
TSLA
Tesla
GM
General
Motors
TM
Toyota
Motor
Overall
Market
Average
Interpretation
Firm Size $25.66 B $59.89 B $211.01B Tesla and its
competitors are
large cap or blue
chip companies
Forward P/E
(fye
December
31, 2016)
$49.15 $7.70 $11.38 13-15 Tesla’s P/E is
difficult to
interpret because
it is over 40.
P/B 28.13 1.68 1.51 1-1.25 Tesla’s
competitors have

3. low P/B’s unlike
Tesla-probably
because Tesla’s
competitors are
more mature
companies.
Beta 1.74 0.97 0.59 Toyota is the least
risky, then GM,
and Tesla has the
highest Beta.
Tesla is riskier
than the market.
Tesla’s
competitors are
less risky than the
market.
Total
Debt/Equity
272.90 130.03 112.39 Tesla has a lot of
debt compared to
it’s competitors.
Because Tesla’s
debt/equity ratio
is high, even
much higher than
its competitors,
this could mean
that Tesla has
been aggressively
financing its
growth with debt.

4. This can result in
volatile earnings
because of the
additional
interest expense.
ROA 2.82% 1.14% 3.66% 9-10% Significantly
lower than it
should be but
may be because
they have a lot of
assets—
competitors have
low ROAs as well.
ROE 37.25% 10.15% 13.64% 10-11% Tesla’s ROE is
much higher than
competitors and
is not in the range
for typical US
average. GM falls
in this range, and
Toyota is slightly
above this range.
Current
Ratio
2.35 1.27 1.06 1-1.25 is
healthy
Tesla has a good
current ratio-their
assets make up
for their
liabilities. They
are not in
financial distress.

5. Competitors are
also healthy.
Asset
Turnover
2.53 0.88 0.62 0.5-2; auto
industry
have low
figures
Tesla’s asset
turnover is
superior to it’s
competitors
Payout Ratio n/a 72% 27% 30-40% of
those who
pay
dividends
Tesla does not
pay out
dividends. GM
has a high payout
ratio, Toyota’s is
less than half of
GM’s.
Institutional
Ownership
56.90% 71.20% n/a GM has much
higher
institutional
ownership than
Tesla, and could
have more
corporate
governance and
control problems
than Tesla.
# of Analysts 8 5 4 The number of
analysts for Tesla
is good because it
combats
information
asymmetry.

6. R&D/Sales .38 0.05 0.94 Tesla falls in the
middle of
competitors in
terms of growth
potential.
Intangible
Assets
n/a 4,983 B n/a Only GM reports
intangibles. Lack
of intangibles for
Tesla means less
information
asymmetry for
them.
Firm Valuation+ Sensitivity Analyses
See attachedfile. SensitivityAnalyses are onsecondtabinlowerlefthand corner.
Assumptions
Effective Tax
Rate 35.00%
Sales Growth (e.g. Analyst's Forecast future 5-year Sales Growth) 47.90%
WACC 10.38%
Rm 10.00%
Rd 9.00%
Rf 4.00%
BETA (e.g. from Yahoo Finance, morningstar, etc.) 1.74
long Term Growth (>=2007) 3.00% (use 2% to 3% here)
Debt 598.97 (from B/S statement)
Book Equity 667.12 (from B/S statement)
Invested Capital (= NPPE + NWC) 1711.698 (see Class #4)

7. Reduction in Cost of Sales and Operating
Expenses
0.15
Reduction in Cap Exp (Efficiency Gain) 0.2 (0.4 to 1 here lower this value,
the more reduction in capital investments and higher investment efficiency
For the assumptions, I got the sales growth figure from analyst future 5 year forecast
from Yahoo Finance. For the assumption of beta, I also got this from Yahoo Finance. I got the
debt, book equity, and invested capital from Yahoo Finance. I calculated invested capital from
figures from the statistics on NPPE and NWC on Yahoo Finance. I assumed 0.2 for reduction in
Capital Expenditure or Efficiency Gain; this means the lower the value the more reduction in
capital expenditures and higher investment efficiency. I picked a low value because Tesla
doesn’t have much fixed assets; they are not expanding.
Sensitivity Analysis with alternative values of Sales Growth (Assume that Beta =
1.74 (constant) and holding other assumptions constant)
Sales Growth Firm Value (based on FCF)
80.00% $ 459.05
60.00% $ 176.00
base case 47.90% $ 91.28
20.00% $ 9.90
0.00% $ (6.51)
-20.00% $ (11.78)
-47.90% $ (13.67)
-60.00% $ (13.93)
-80.00% $ (14.18)
The lowestsalesgrowthfigure wherefirmvalue ispositiveunderthissensitivityanalysisis20%;0%
salesgrowthanda decrease insalesgrowthyieldnegative firmvalues.Itisimportant tonote that if
Tesladoesnotmake an increase insalesgrowththey will getanegative firmvalue.
Sensitivity Analysis with alternative values of Beta (Assume that Sales Growth =

8. 47.90% (constant) and holding other assumptions constant)
Beta Firm Value (based on FCF)
3 $ 43.96
2.9 $ 46.37
2.7 $ 51.68
2.5 $ 57.75
2.3 $ 64.74
2 $ 77.43
1.9 $ 82.39
base case 1.74 $ 91.28
1.5 $ 107.33
1.3 $ 123.99
1 $ 157.21
0.7 $ 206.47
0.5 $ 254.77
0.3 $ 325.15
0.1 $ 436.77
The lower the beta value the higher the firm value; meaning the less risky the beta value in
comparison to the rest of the market results in a higher the firm value. Lower beta also
means that cost of equity is lower and results in a large present value for the firm.
Sensitivity Analysis Example with alternative values of Reduction in Cap Exp
Cap Exp Reduction Firm Value (based on FCF)
1 $ (1,941.84)
0.8 $ (1,433.57)
0.6 $ (925.28)
0.4 $ (417.00)

9. base case 0.2 $ 91.28
The base case (with capital expenditure reduction equal to 0.2) is the only one in this sensitivity
analysis that gives a positive firm value. The 0.2 base case capital expenditure reduction
indicates an 80% reduction in capital expenditure. The base case was chosen to be 0.2 because
Tesla is not expanding its company with fixed assets that much. The results of the sensitivity
analysis are important because it shows Tesla’s firmvalue weakness and high uncertainty. If the
firm doesn’t have reduction in capital expenditures, the firm cannot deliver sustainable value.
Policy Analysis
As of now, Tesla does not offer dividends. Tesla should not begin offering dividends
because once you begin offering dividends the expectation is that you will not rescind them or
decrease them. If you do rescind them or make them less in amount, the stock market will react
negatively. Tesla shouldn’t consider giving dividends because they are not in a good enough
shape to do so.
Tesla has corporate governance problems because that CEO Elon Musk is also the
chairman of the board of directors for Tesla and also product architect. To solve this issue, Elon
Musk should choose to be either the CEO or the chairman of the board of directors; I would
recommend being the CEO because he is so active in the firm. By being both CEO and on the
board of directors, this causes agency problems because that a check and balance is violated.
Investors should monitor the firm because of this conflict.
There are financing theories that can help Tesla. However, static tradeoff is not one of
them because Tesla is not a big stable firm-they are a volatile firm. Tesla should consider the
pecking order theory of financing, because their stock price is unstable. Tesla should increase
their internal funding for the same reason. Because of the high uncertainty of Tesla, Tesla
should also issue hybrid securities to encourage investors to invest despite the uncertainty of
the stock.

10. Tesla has a weak and volatile stock with a beta value of 1.74. I would personally not buy
it because I prefer low beta values around 1 or under. The firm also has corporate governance
problems, which puts Tesla in a morally gray area, and puts a loophole for inefficient uses of
capital. I would not recommend this stock.
Conclusion
There are some important key findings of this study. Tesla is a weak and volatile stock.
Tesla has corporate governance problems because the CEO is also the chairman of the board of
directors. Tesla is also aggressively financing with debt, more so than their competitors. I would
not recommend this stock to investors because the stock is too volatile, as can be seen by its
1.74 beta value, accompanying Excel valuation, and sensitivity analysis. From the preparation of
this report, I learned about one of the hottest companies today, and also that the hottest
companies might not necessarily be doing well. I learned that it is important to objectively
evaluate a company with ratios, sensitivity analyses, the industry etc, not just invest simply
because of the reputation of the company.