FIN/SLP Module 4 - SLP LEVERAGE, CAPITAL STRUCTURE, AND DIVIDEND POLICY Review the 1) dividends for the past three years and 2) capital structure of the company you have been researching for your SLP

FIN501 SLP 3

Trident University International

FIN 501 Strategic Corporate Finance

April 14, 2024

Tesla's credit rating was enhanced to investment grade by Moody's and S&P Global, with Moody's giving it a score of Baa3 and S&P Global raising Tesla's credit rating to BBB. Tesla's increased production, strong cash flow potential, and dominance in the electric vehicle market are demonstrated by these enhancements (Bloomberg, 2023).
The cost of equity for Tesla is estimated using the Capital Asset Pricing Model (CAPM). This model brings together three factors: the risk-free rate, stock's beta, and equity risk premium (ERP). For Tesla, we get a cost of equity at 9.62%. This calculation is based on the standard deviation of Tesla's stock returns and the risk-free rate of return, along with a market risk premium (GuruFocus, n.d.).
Tesla's capital structure is made up of equity and debt. The calculation for weighted average cost of capital (WACC) shows that about 98.72% comes from equity, while only 1.28% is gathered through debts in its capital structure. This breakdown shows the financing sources that Tesla uses to support its operations, where there is more focus on equity funding than debt funding.

Find out the proportions of equity and debt in Tesla's capital:
- Equity proportion (E/V) = 98.72%
- Debt proportion (D/V) = 1.28%
Calculate WACC:
- With a corporate tax rate of 35%, the formula for WACC is:

WACC = (E/V) * RE + (D/V) * RD * (1 - Tax Rate)

We'll use the previously provided cost of equity (9.62%) and the assumed cost of debt (3.5%).

Plugging in the values:

WACC = (98.72% * 9.62%) + (1.28% * 3.5%) * (1 - 0.35)

WACC = (0.9872 * 9.62%) + (0.0128 * 3.5%) * 0.65

WACC = 9.47%

References

Bloomberg. (2023, March 20). Tesla finally exits junk-rated world after Moody's upgrade. Retrieved from https://www.bloomberg.com/news/articles/2023-03-20/tesla-finally-exits-junk-rated-world-after-moody-s-upgrade

GuruFocus. (n.d.). Tesla (NAS: TSLA) WACC %. Retrieved April 5, 2024, from https://www.gurufocus.com/term/wacc/TSLA/WACC-Percentage/Tesla