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

1. First we need to find the Cost of Equity of TSLA

Given :

Beta of TSLA stock =1.6

Risk Free rate =0.5%

Market Risk premium =Rmp=6%

Assume cost of Equity =k

As per CAPM , k=Rf+Rmp*Beta

k=0.5%+6%*1.6=10.10%

So cost of Equity =10.10%

Now we shall use cost of Equity as the discounting

factor for the Levered cash flows given to find

the Value of Equity .

	Levered Cash flows in $ Million	Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
a	OCF with 6% growth from Year 6		2,400.00	3,000.00	3,700.00	4,600.00	5,900.00	6,254.00
b	Terminal Value of OCF at the end of Yr 5=6254/(10.10%-6%)=						152,536.59
c	OCF +Terminal value of OCF =a+b		2,400.00	3,000.00	3,700.00	4,600.00	158,436.59
d	PV factor @10.10% =1/1.1010^n		0.9083	0.8249	0.7493	0.6805	0.6181
e	PV of OCF +OCF terminal Value =c*d=		2,179.92	2,474.70	2,772.41	3,130.30	97,929.65
f	Equity Value of TSLA=Sum of PV of OCF& Term Value=	108,486.98
g	No of common stock outstanding in million	932
h	TSLA Fair stock value=f/g=	116.40