Question

You would like to evaluate TSLA's stock. You find out the following about TSLA needed to do so:

(1) Their CAPM beta is 1.6.

(2) The weighted-average YTM on TSLA's bonds is 4%.

(3) Tesla's effective tax-rate is 25%.

(4) TSLA's capital structure mix is 96% equity and only 4% debt. TSLA has 932 million shares outstanding.

(5) The risk-free rate is currently .5% and the market risk-premium is 6%.

(6) Below are TSLA's expected OCFs (operating cash flows) for the next 5 years:

Year 1: $2,400,000,000

Year 2: $3,000,000,000

Year 3: $3,700,000,000

Year 4: $4,600,000,000

Year 5: $5,900,000,000

After year 5, TSLA is expected to grow its OCFs at a very impressive 6% per annum, indefinitely.Tesla is currently trading at $425 a share.

What is TSLA's fair stock price per share, given the above assumptions? (HINT: See the final MGM valuation example in this week's lecture to help you for a template and explanation on how to do this)

Enter your answer rounded to the nearest cent, with no extra formatting. For example, $637.19 per share should be entered as 637.19

Answer 1

We = weight of equity = 96%

Wd = weight of debt = 4%

Beta = 1.6

rd = YTM on bonds = 4%

t = effective tax rate = 25%

Rf = risk free rate = 5%

Rm- Rf = 6%

re = cost of equity = Rf + Beta * (Rm-Rf)

= 5% + (1.6 * 6%)

= 5% + 7.2%

= 12.2%

WACC = [Wd * rd * (1-t)] + [We * re]

= [4% * 4% * (1-25%)] + [96% * 12.2%]

= 0.12% + 11.712%

r = 11.832%

g = growth rate = 6%

CF1 = Cash flow in Year 1: $2,400,000,000

CF2 = Cash flow in Year 2: $3,000,000,000

CF3 = Cash flow in Year 3: $3,700,000,000

CF4 = Cash flow in Year 4: $4,600,000,000

CF5 = Cash flow in Year 5: $5,900,000,000

CF6 = Cash flow in Year 6: CF5 * (1+g) = $5,900,000,000 * (1+6%) = $6,254,000,000

Horizon value at the end of year 5 = CF6 / (r - g)

= $6,254,000,000 / (11.832% - 6%)

= $107,235,940,000

Calculation of Present Value of OCF
Year	Cash flows	Discount Factor @11.832%	Discounted Cash flows
A	B	C=1/(1+11.832%)^A	D = B*C
1	2,400,000,000.00	1	2,400,000,000.00
2	3,000,000,000.00	0.894198441	2,682,595,321.55
3	3,700,000,000.00	0.799590851	2,958,486,148.79
4	4,600,000,000.00	0.714992892	3,288,967,303.38
5	5,900,000,000.00	0.639345529	3,772,138,621.35
5	107,235,940,000.00	0.639345529	68,560,818,791.66
Present Value of OCF	83,663,006,186.73

Fair stock price = Present Value of OCF / Shares Outstanding

= $83,663,006,186.73 / 932,000,000

= $89.767174

Therefore, fair stock price is $89.77