Sample Answer
Risk and Return Analysis
Assessment of the riskiness of Tesla’s stock
Tesla’s stock is significantly risky owing to the fact that it has a high beta. Tesla’s beta is 1.47, indicating the stock’s significant volatility level; an increase in the capital market would result in a more considerable increase in Tesla’s stock. Thus, in the event of a boom in the economy, returns from Tesla’s share would be higher than that of peer companies, given they exhibit a lower beta. For instance, Toyota’s beta is at 0.83. In the event of a decline in the capital market, Tesla’s stock would decrease more. Thus, in case of a recession, investors risk considerable loss from investing in this stock. Therefore, investors need to rigorously analyze the economy before investing in this stock.
The trend in Tesla’ stock price
Tesla’s stock price has been unstable for the past four years. The stock price was relatively high in 2014 and 2015; it dipped in 2016 and was highest in 2017 (Macrotrends n.d). Then again, the stock price exhibited a decline in 2018. This drop corresponded to a decrease in the value of its bonds. Tesla’s cost of equity is 2.3%, which is significantly lower in comparison to that of the industry and would result in a favorable capital structure.
Evaluation of Tesla’s default risk and cost of capital
Given that Tesla’s stock price is unstable and unpredictable, default risk will be assessed using the credit rating approach. Tesla’s borrowing mostly composes of the issuance of junk bonds. The value of Tesla’s uninsured bonds declined significantly over the past seven months in spite of an increase in the coupon rate (Reuters, n.d). This decline can be attributed to the firm’s unstable and unpredictable annual revenues, thus reducing its attractiveness to investors. As a result, Tesla’s cost of debt is significantly higher than the cost of equity and is rated at 5.905%. Using the Weighted Average Cost of Capital (WACC) formulae, Tesla’s cost of capital is 3.21%. Unfortunately, Tesla’s rate of return on capital invested is less than that of its cost of capital. Hence, the value of the firm will erode if the WACC and cost of capital do not change over time. An increase in the rate of return would preserve the value of the firm. Nonetheless, predicting firm profitability is cumbersome due to its varying financial performance in the past fiscal years. In fact, investors questioned Tesla’s creditworthiness, given it was repaying the coupon interest using finances from the issuance of stock.
Evaluation of Tesla’s market risk
Tesla’s market risk premium is 5.5%, which is quite low in the sector. The market risk premium indicates the value of a firm’s stock in the market and its attractiveness. Tesla’s total value in the capital market is $ 36,439.57, which is lower than that of its competitors; for instance, Honda has a market capitalization of $ 44,548.33. However, Tesla intends to increase its market capitalization in the future. On the same note, Tesla’s debt-to-equity ratio is 2.5, indicating that Tesla is financed by debt two and half times more than equity (Gurufocus, n.d.). It is for this reason that Tesla has been issuing bonds for the funding of its operations. Tesla faces the business risk of a decrease in the prices of its products in case of an increase in the number of competitors in the industry. In fact, some competitor firms have declared their interest in the production of electric cars.
References
Gurufocus (n.d) Tesla Inc (NAS: TSLA) Debt-to-Equity: 2.50 (As of Mar. 2019). Retrieved from https://www.gurufocus.com/term/deb2equity/TSLA/Debt-to-Equity/Tesla%2BInc
Macrotrends (n.d) Tesla – 9 Year Stock Price History | TSLA. Retrieved from https://www.macrotrends.net/stocks/charts/TSLA/tesla/stock-price-history
Reuters (n.d). UPDATE 1-Tesla’s junk bond slammed on car deliveries miss; CDS cost surges. Retrieved from https://www.reuters.com/article/tesla-bonds/update-1-teslas-junk-bond-slammed-on-car-deliveries-miss-cds-cost-surges-idUSL1N21M0EP
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Question
Risk and Return Analysis
You are to complete the Live Case Study at the end of Chapter 4. You will be completing the Live Case Studies for the remainder of the term by researching the company that you have selected. In answering the questions in Live Case Study, you are to answer the questions as laid out in the Framework for Analysis such as 1,2,3,4,5,…..Also, you the sub-sections need to be bulleted. If there is an item that is not applicable, you are to clearly state that. After you have submitted your weekly study, I will grade it and make comments that you need to incorporate in your Case Study.

Risk and Return Analysis
As a general rule of thumb, each “Framework for Analysis” section must be a titled section in your paper referenced in the Table of Contents. Each question asked in these sections must be answered under those sections. The results of this Live Case Study will be included in your final course project due on or before Class Day 1 of week 10. I will provide the general structure on how I will want to see the final report laid out.
When you are working on your case study, I am expecting that you will be inserting financial statements and other tables to support your research. These are readily available in Yahoo Finance or the company’s web site under Investor Relations, where you will find financial statements.
Textbook:
Applied corporate finance / Aswath Damodaran. – Fourth edition. ISBN 978-1-118-80893-1
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