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?

Answer 1

Operating Cash flow = Net income +Non cash Expenses-Increase in woking capital.

Operating cash flow is Nothing but the cash flow available to Equity share holders after payment of Bond Interest.

Value of the Equity = Present value of the Operating cash flows available to Equity share holders+ Terminal value of the Operating cash Flows

While calculating the value of equity, we should discount the cash flows at Cost of equity (Ke)

As per CAPM, Ke = Rf+ Beta +Market Risk Premium

=> Ke =0.5%+1.6*6% = 10.10%.

Terminal Value at the end of 5th year =

=>Terminal Value at the end of 5th year=

=>Terminal Value at the end of 5th year=$152,536,585,366

	A		B	A*B
Year	Cash flow		[email protected]%	Present value of the cash flow
1	2,400,000,000	OCF	0.9082652134	2,179,836,512
2	3,000,000,000	OCF	0.8249456979	2,474,837,094
3	3,700,000,000	OCF	0.7492694804	2,772,297,078
4	4,600,000,000	OCF	0.6805354046	3,130,462,861
5	5,900,000,000	OCF	0.6181066345	3,646,829,143
5	152,536,585,366	Terminal Value	0.6181066345	94,283,875,416
			Total Present value(C)	108,488,138,104
			Number of shares Outstanding(D)	932,000,000
			Intrinsic value per share(C/D)	$116.40

Intrinsic value of fair stock price = $116.40 Per share