The Financial Performance: Tesla Motors Company - Research Paper Example

Tesla Research Paper Company Background Tesla Motors Company has grown over the years to become one of the major motor companies in the world, trading as the Tesla Inc. on the market since its foundation. The company’s headquarters are at Palo Alto California. Its year of incorporation was in 2003. The company handles design, development processes, actual manufacture and distribution through selling of electric vehicles that have power train components. Through several years of experience in this, the company succeeded in developing systems used for electric power trains as well as their components. The company makes profits by selling of these components to other manufacturers that cannot produce manufacture them. Tesla stores and its galleries is one of the major ways through which the company markets its products. The company also makes use of the internet as one of the major display marketing option for online consumers. This enables the company to sell its products to consumers all over the world. With over 80 stores and galleries distributed all over, the world, specifically in Europe, Asia and North America, the company has managed to amass sales and remain ahead in the competition. This makes it always remain as a fierce competitor in the industry. The paper below discusses the financial performance of company, its value on the market using both intrinsic and market values, the ROIC, WACC and other aspects that relate to the growth and development of the company. The Value of the Firm Using both Intrinsic and Market Values Intrinsic value relates to the value that an asset is actually worth besides the market value. The intrinsic value relates to the real value, whereby if a disposal of the asset were to occur at that time, the company would manage to retrieve that value from its sale. What value will the buyer find the asset worth? Market values have many influences that may affect the price. These range from the aspects of inflation, recession, and speculations that surround the market activities. An intrinsic value considers the call and put options. Intrinsic value considers the value of an asset in and of itself without consideration of other external factors. Value investors consider this value of an asset in most occasions because it gives nearly the true value of the asset, thereby making investors more confident in buying the asset. These investors, when seeking a company to invest in, consider this value to give them a better understanding of the asset or company in relation to its true value. Intrinsic value determines the value of the stock in itself. This occurs through a number of ways. Some of the most useful ways is to determine how the stock generates cash. One of the models used in determining the intrinsic value of the company is the dividend discount model. The dividend discount model (DDM) applies the cash as king in determining the intrinsic value of the company. The formula for this lies is in determining the value of stock that equals the dividend expected in one period, and divided by the required rate of return. This is as below: In this relation, Div is equal to dividends expected in one period while r is equal to the required rate or return. In addition, the application of the Gordon Growth Model provides important information for decision-making. The model aims at determining the value of stock with consideration of the growth of the dividends. The formula is as below: Value of stock = DPS/Re-G Where DPS relates to the expected dividends one year from the year at present, R refers to the required rate of return for all the equity investors and the G is the annual growth in dividends in relation to perpetuity This reflects that the company is in position to pay shareholders and the ability to generate cash flows. Another model that applies in this is the Residual Income Model, which considers the expression Bo= Current Per-Share Book Value, Bn = relates to expected per-share book value of equality at n, ROEn is expected EPS and the r represents the required rate of return. Market Value Market value is simpler to determine. The value of Tesla using the market value is worth 259.28 per share as per the market today. Market value is determined in relation to the securities, as well as the trading market. This is concerning purchases and selling. The price or worth that the investors believe the company is comes through multiplication of the number of shares that are outstanding and the current market of the share price. The market value differs with the book value, and it requires the consideration of market value in relation to the book value in order to determine if the company is undervalued or overvalued. This works in favor for the investors understanding the market value of the company. The Stock Price for the Last 3 Years Considering the statistics for the past three years helps the investors in making the right decisions over the purchase of the company, or in securing shares in the company. The historical consideration of these stock prices helps in making forecasts for the future of the company and their business. Based on the details provided by the financial statements of the company, the company had the following prices for their stocks over the three-year period (TSLA Historical Prices, n.d). The historical prices represented below in a table show the prices per month for 2011, 2012, and 2013 considering the average prices of each month. Date closing prices adjusted to cater for dividends Date closing prices adjusted to cater for dividends Date closing prices adjusted to cater for dividends 2/12/2013 150.43 3/12/2012 33.87 1/12/2011 28.56 1/11/2013 127.28 1/11/2012 33.82 1/11/2011 32.74 1/10/2013 159.94 1/10/2012 28.13 3/10/2011 29.37 3/9/2013 193.37 4/9/2012 29.28 1/9/2011 24.39 1/8/2013 169 1/8/2012 28.52 1/8/2011 24.74 1/7/2013 134.28 2/7/2012 27.42 1/7/2011 28.17 3/6/2013 107.36 1/6/2012 31.29 1/6/2011 29.13 1/5/2013 97.76 1/5/2012 29.5 2/5/2011 30.14 1/4/2013 53.99 2/4/2012 33.13 1/4/2011 27.6 1/3/2013 37.89 1/3/2012 37.24 1/3/2011 27.75 1/2/2013 34.83 1/2/2012 33.41 1/2/2011 23.89 2/1/2013 37.51 3/1/2012 29.07 3/1/2011 24.1 Is the Stock Price Over or Under Valued? In considering the overvaluation of a stock, or its undervaluation, analysts have to compare the stock of the company to other industry players such ascompetitors in the market. Consideration of its price to earnings ratio would make the investors understand the ratio that the price has, over the earnings that the company makes, in relation to the competitors. This enables investors understand if the stock is overvalued or undervalued. Overvaluation may originate from a number of factors including, an over buying spurt from the market inflation of prices due to market forces, and a fall in the company’s strength financially. Considering the company’s peers, an investor is in position to estimate a price and know if there is an overvaluation. The Price to Earnings Growth ratio is also applicable in determining the overvaluation of a stock. Price to earnings ratio = market value per share/earnings per share = 259.28/-0.12 = (2160.7) On the other hand, an undervalued stock is one that the market price is below the actual intrinsic value. The price of the stock on the market is valued below that of the real values of the asset with no influence on market forces. The use of undervaluation is normally good for the company to know the worth of their stocks, especially if the investors may acquire shares in a good company at a fairer price. ROIC The calculation of the Return on Invested Capital helps determine a company’s efficiency in distribution of capital to its activities, as well as ensure profitability in the investment of the company’s capital. This develops pictures on how the company is utilizing the capital at its disposal to generate returns. For determination of efficiency, the company is ROIC and the WACC are compared to identify the effective application of the capital. The equation for this is ROIC = (-74014-0)/667120 = -0.11 The company made no profits during the year and looking at its ROIC, the company is making negatives and is not producing good returns at the moment. EPS Earnings per Share refers to the company’s profits cover each outstanding share in relation to common stock. This value shows a company’s profitability. Using the share numbers at the end of the period makes EPS simpler to determine. Earnings Per Share is calculated through = (-74014-0)/613724 = -0.12 Growth Rate A number of items applicable to determining the growth of the company help in determining how well the company is growing or how grown it is. Determining the growth of the company helps create forecast of the company and give investors future prospects of the company. Using growth rate, making forecasts becomes easy and more accuracy is obtainable. A number of methods come handy in determining the growth rate with examples such as the Discounted Cash Flow (DCF) analysis. The growth rate is determined through the forecast period, revenue growth rate and average annual growth rate. These all help in displaying the growth rate of the company. In relation to Tesla, the growth rate is determined using the Average Annual Growth Rate and the revenue growth rate that consider growth on a regular basis in relation to years. The Average Annual Growth Rate (AAGR) is determined arithmetically through the determination of the arithmetic mean in relation to a series of growth rate. AAGR = (Growth Rate in period A + Growth Rate in Period B + Growth rate in Period C + Growth Rate in Period X)/ Number of Periods. 2011, 2012 and 2013 referring to 204242, 413256 and 2013496 respectively. In determining the growth rate, Growth rate from 2011 to 2012 is (413256-204242)/204242*100 = 102.3% Growth rate from 2012 to 2013 is (2013496-413256)/413256*100 = 387.23% Using these, the growth rate is then determined as per the formula above which is AAGR = (102.3%+387.23%)/2 = 489.53/2 = 244.77%. The growth rate of Tesla is in 244.77% and makes the company productive despite the huge debts leaving the company in losses. Most of the causes of the loss include the expenses incurred in research and development and selling in general and administrative costs. These make the company improve its future prospects especially the research and development expenses that will lead the company to improve in relation to the market and hence making more returns. The AACR is applicable I determining the trends in many financial aspects which includes revenues, expenses, cash flow aspects , profits that help educate the investors on the direction of the company based on the future prospects that it has. Besides the importance of the AAGR, the AAGR may prove misleading sometimes making it a non-reliable method of determining the growth of a company. In many incidences, Compound Annual Growth Rate (CAGR) is used to evaluate changes in financial trends. WACC (Shows calculation): Weighted Average Cost of Capital considers all capital sources that the company applies ranging from common stock, bonds applied, long term financing through debts and preferred stock. WACC is increased based on the increase of rate of return on equity. To find WACC, one uses the formula below: In these, Re refers to the cost of equity, Rd the cost of debt, E the market value of the firm’s equity, D market value of the firms debt, V=E + DE/V which equals the percentage of financing in equity terms D/V refers to the percentage of financing in debt Tc refers to corporate tax rate. E/V= total equity/total finance*100= 667120/2416930*100=27.6% D/V=total liabilities/total finance*100= 1749810/2416930*100= 72.4% Cost of debt Rd= interest expense/total liabilities*100= 32934/1749810*100= 1.9% Cost of equity Re=dividends per share for the next year/current market value of stock + growth rate of dividends =0/259.48+0 Tax rate= tax expense/total debts*100=2588/(7904+598974)*100= 2588/606878*100= 0.43 Therefore, WACC= 0.276*0+0.724*0.019*(1-0.004)=0.014*0.996= 0.014 Works cited "TSLA Historical Prices Tesla Motors, Inc. Stock - Yahoo! Finance." TSLA Historical Prices, Tesla Motors, Inc. Stock - Yahoo! Finance. N.p., n.d. Web. 9 Oct. 2014. http://finance.yahoo.com/q/hp?s=TSLA&a=00&b=01&c=2011&d=11&e=31&f=2013&g=m Read More