Present your findings from your week 3 and week 5 papers. This should be at least a 10 minute video with a PowerPoint that shows, defines and gives examples of the equations you used, but also what yo

7

Stocks, Bonds, and Investments

Amrutha Boinapally

Trine University

Douglas Bond

11/20/2023

Stocks, Bonds, and Investments

A. Stocks

Tesla's stock price directly impacts its overall company valuation on the market.

To estimate how Tesla's stock price may perform in the future, we can use the future value of stock price formula:

P(future) = P(present) x (1 + Growth Rate) n

Assuming 10% annual stock price growth and $200 stock price today, the FV in 5 years would be:

$200 x (1 + 0.10)5 = $200 x 1.510 = $302

Impact of Market on Red Cross Donations

While the Red Cross does not issue publicly traded stock like Tesla, it relies heavily on donations from individual donors and corporate and foundation sponsors. Research has shown that many donors base their giving decisions each year on the performance of the stock market and the broader economy. In periods of economic expansion and bull markets, donations to nonprofits tend to rise as household incomes and disposable budgets grow.

To forecast how donations may trend over time, we can use the future value of donations formula:

Donations(future) = Donations(present) x (1 + GDP Growth Rate) n

Future Value of Donations Formula: Donations(future) = Donations(present) x (1 + GDP Growth Rate) n

4. Assuming 3% annual GDP growth and $100M in donations today, the FV in 5 years would be:

$100M x (1 + 0.03)5 = $100M x 1.153 = $126M

B. Bonds

Tesla continues to deliver strong profits for all its stakeholders. It is good. It is also generating positive cash flow. It means major credit rating agencies have gradually upgraded the company's debt rating over time. This improving creditworthiness allows Tesla to issue corporate bonds at lower and lower interest rates. Given Tesla's capital-intensive needs. For example, regularly expanding vehicle production capacity through new Gigafactories, lower-cost bond borrowing is important for financing these critical growth-enabling projects.

To determine the current value of a future bond payment, we can use the present value of bond payments formula:

PV = Payment / (1 + Interest Rate)-n

For example, if Tesla were to issue a 5-year $1,000 bond paying a 5% annual coupon, the present value today would be:

$50 / (1.05)-5 = $50 / 0.817 = $61

Red Cross Tax-Exempt Bond Issuance

Its status as a nonprofit organization is a vital factor for the company. It means Red Cross can issue tax-exempt municipal bonds. It allows infrastructure projects like constructing new blood donation centers to be funded. It is at an even lower rate than corporate debt due to the bonds' tax benefits attracting demand from individual investors. Issuing these types of bonds expands the Red Cross's means to undertake more initiatives, furthering its humanitarian mission.

C. Investments

While Tesla is still growing rapidly and directing most cash flows back into initiatives, it does generate returns by parking portions of its substantial reserves in low-risk holdings such as money market funds. The income produced helps support operational expenses and ensures flexibility for strategic moves. This approach can be modeled using the future value of investments formula:

Investment(future) = Investment(present) x (1 + Rate of Return) n

For example, say Tesla invests $1 billion from its reserves at an expected annual return of 5%. After five years, the future value would be:

$1 billion x (1 + 0.05)5 = $1 billion x 1.276 = $1.276 billion

Red Cross Endowment Sustainability

Unlike Tesla, the Red Cross relies heavily on investment earnings because its nonprofit status restricts revenue sources. It maintains sizable endowments that are professionally managed to balance growth objectives with protecting against downside risks over long time horizons. It allows a defined layer of permanent funding each fiscal year, no matter economic fluctuations. Endowment spending is also tuned to inflation to maintain real value. By diversifying across asset classes, maintaining sufficiently large endowment sizes, and focusing on long-term rates of return, the Red Cross ensures investment earnings can be depended on to continuously support wide-ranging relief activities even during unstable periods.

Overall Market Impact

The overall performance and stability of the stock market, as well as the strength of the broader economy, have meaningful impacts on both Tesla's and the Red Cross's various capital sources and financial capacities. However, the degree and nature of the impact differ for each organization.

For Tesla as a publicly traded company, changes in the stock market, like a sustained bull or bear cycles, directly influence its day-to-day valuation and access to equity capital markets in the near term. Declining share prices impose direct constraints until sentiment recovers.

Meanwhile, donors' reactions to the economic environment indirectly affect the Red Cross as a nonprofit. Recessions or downturns may temporarily dampen individuals' inclination and ability to donate until growth resumes (Pesce, 2021). However, the Red Cross is not instantly rewarded or punished strictly by share price movements like a public corporation. Therefore, Tesla faces more direct and immediate consequences of volatility in the financial markets, whereas the Red Cross encounters more gradual, donor-based effects from broad economic trends (Merkx, 2022). Both benefit during periods of prosperity but are also impacted by uncertainty and weakness.

References

Merkx, K. (2022). Fostering Red Cross youth innovation: A Human Centred Design curriculum with an emphasis on problem framing.

Matousek, M. (2022, January 31). Tesla just reported over $5 billion in net income for 2021 — its most profitable year ever. Business Insider. https://www.businessinsider.com/tesla-q4-2021-earnings-revenue-profit-elon-musk-2022-1

Pesce, N. (2021, January 27). Tesla tops $10 billion in profit for first time after strong 2020 earnings. CNN Business. https://www.cnn.com/2021/01/27/business/tesla-earnings/index.html

Raice, S., & Fitzgerald, D. (2022, July 20). Tesla's Sales Surge, But Margins Narrow. The Wall Street Journal. https://www.wsj.com/articles/tesla-q2-earnings-11658265803

Tesla, Inc. (2022). Q3 2022 Update Letter. https://ir.tesla.com/static-files/8a49ec68-62cd-42c9-9174-48c3f4f825dc