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2015

FEP School of
Economics and
Management of Porto
Filipe S Couto;Pedro
Pilar;Guilherme
Baptista;Rui Tavares
Financial Management

VALUATION
ECONOMIC AND
FINANCIAL ANALYSIS
Filipe S Couto 201200211 | Guilherme Baptista 201201371
Pedro Pilar 201502398 | Rui Tavares 201205663

INDEX
1.

Abstract .................................................................................................... 3

2.

The Company .......................................................................................... 4

2.1.

History ............................................................................................................. 4

2.2.

Product Portfolio ............................................................................................. 4

2.3.

Mission and Vision ......................................................................................... 7

2.4.

Strategy .......................................................................................................... 7

2.5.

SWOT Analysis ................................................................................................ 9

2.6.

The Electric Vehicles Sector ........................................................................ 10

3.

Macroeconomic Overview .................................................................. 11

3.1.

Economy ...................................................................................................... 11

3.2.

Main Sectors of Economy ........................................................................... 12

4.

Indicators of Performance.................................................................... 14

4.1.

Market Performance ................................................................................... 14

4.2.

Dupont analysis............................................................................................ 14

5.

Tesla Valuation ...................................................................................... 17

5.1.

Cash Flow Analysis ...................................................................................... 17

5.1.1.

Previous Years Cash Flows ..................................................................................... 17

5.2.

Projection of Future Cash Flows .................................................................. 18

5.3.

Weighted Average Cost of Capital (WACC) ............................................. 20

5.3.1.
5.3.2.
5.3.3.

Transition Period Beta Estimation .......................................................................... 20


Transition Growth WACC estimation .................................................................... 21
WACC Stable Period ............................................................................................... 22

5.4.

Sensitivity Analysis ....................................................................................... 23

5.5.

Relative Valuation ....................................................................................... 24

5.6.

Bankruptcy Risk............................................................................................ 29

5.7.

Monte Carlo Simulation ............................................................................... 30

6.

References ............................................................................................. 33

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

Page 2

1. ABSTRACT
We, students of Master in Management, were asked in the Financial Management
course to do an evaluation of the company Tesla Motors as a mandatory requisite of
the course.
This work has the final goal of reaching to an estimate value of Tesla Motors in the near
future, a US car manufactory that is nowadays trending due their idea of revolutionizing
transportation, using only electric energy.
This assignment will be divided in two main parts. The first one will be focusing on the
actual and past situation of Tesla, talking a little bit about the company itself, history,
goals, plans, strategy, financial situation as well as a macroeconomic consideration
watching indicators like inflation, Gross Domestic Product (GDP), unemployment, etc.
This way we can have a better idea of the surroundings of the company to do an
improved forecasting of its future. The second part is directed to the future life of Tesla,
as we will preview, using some assumptions, the actual value of the company.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

Page 3

2. THE COMPANY
2.1.

History

Tesla Motors was founded in 2003 by a group of engineers in Silicon Valley who wanted
to prove that electric cars could be better than gasoline-powered cars.
With incredible power, and zero emissions, Teslas products would be cars without
compromise. Each new generation would be increasingly affordable, helping the
company work towards its mission: to accelerate the worlds transition to sustainable
transport.

2.2.

Product Portfolio

Teslas engineers first designed a powertrain for a sports car built around an AC
induction motor, patented in 1888 by Nikola Tesla, the inventor who inspired the
companys name. The resulting Tesla Roadster was launched in 2008. Accelerating from
0 to 60 mph in 3.7 seconds and achieving a range of 245 miles per charge of its lithium
ion battery, the Roadster set a new standard for electric mobility. Tesla would sell more
than 2,400 Roadsters, now on the road in more than 30 countries.

Tesla Roadster
In 2012, Tesla launched Model S, the worlds first premium electric sedan.
Built from the ground up to be 100 percent electric, Model S has redefined the very
concept of a four-door car.
With room for seven passengers, Model S provides the comfort and utility of a family
sedan while achieving the acceleration of a sports car: 0 to 60 mph in about five
seconds. Its flat battery pack is integrated into the chassis and sits below the occupant
cabin, lending the car a low center of gravity that enables outstanding road holding
and handling while driving 265 miles per charge.
Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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Model S was named Motor Trends 2013 Car of the Year and achieved a 5-star safety
rating from the U.S. National Highway Traffic Safety Administration.
In late 2014, Tesla CEO Elon Musk unveiled two dual motor all-wheel drive configurations
of Model S that further improve the vehicles handling and performance.
The 85D features a high efficiency motor at the front and rear, giving the car
unparalleled control of traction in all conditions. The P85D pairs a high efficiency front
motor with a performance rear motor for supercar acceleration, achieving a 0 to 60
mph time of 3.2 seconds the fastest four-door production car ever made.

Model S
Now with more than 50,000 vehicles on the road worldwide, Tesla is preparing to launch
Model X, a crossover vehicle that enters volume production in 2015. Featuring
exhilarating acceleration, falcon wing doors, and room for three rows of seating, Model
X defies categorization.

Model X

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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Tesla owners enjoy the benefit of charging at home so they never have to visit a gas
station or spend a cent on gasoline. For long distance journeys, Teslas Supercharger
network provides convenient and free access to high speed charging, replenishing half
a charge in as little as 20 minutes. Superchargers now connect popular routes in North
America, Europe, and Asia Pacific.
Teslas vehicles are produced at its factory in Fremont, California, previously home to
New United Motor Manufacturing Inc., a joint venture between Toyota and General
Motors. The Tesla Factory has returned thousands of jobs to the area and is capable of
producing 1,000 cars a week.
The company is expanding its manufacturing footprint into other areas, including in
Tilburg, the Netherlands, where it has an assembly facility, and Lathrop, California,
where it has a specialized production plant. To reduce the costs of lithium ion battery
packs, Tesla and key strategic partners including Panasonic have begun construction
of a gigafactory in Nevada that will facilitate the production of a mass-market
affordable vehicle, Model 3. By 2020, the gigafactory will produce more lithium ion cells
than all of the worlds combined output in 2013. The gigafactory will also produce
battery packs intended for use in stationary storage, helping to improve robustness of
the electrical grid, reduce energy costs for businesses and residences, and provide a
backup supply of power.
Tesla is not just an automaker, but also a technology and design company with a focus
on energy innovation.
Gigafactory in Nevada

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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2.3.

Mission and Vision

Tesla Motors company mission statement is to Move from a mine-and-burn


hydrocarbon economy towards a sustainable, solar electric economy.
Create the most compelling car company of the 21th century by driving the Worlds
transition to electric vehicles.

2.4.

Strategy

Electric vehicles are not a recent concept and most top automakers have in their
portfolio.
In 2014 the best selling EV was Nissans Leaf, the automaker sold more than 60.000 units,
more than twice the number units sold of Teslas Model S.

One of the biggest challenges the industry face EV refers to range anxiety, so this
important issue has become part of the brand strategy.
No driver will want to purchase a vehicle that runs out of energy too early, with
nowhere to recharge the battery.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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So Tesla addressed this issue by offering a driving range in excess of 250 miles.
Now, that's more than twice the range offered by the nearest competitor, according to
data compiled by Cheat Sheet. In addition, 250 miles is a pretty decent range for
driving in city.
Other point strategy is the Superchargers. The Superchargers are free connectors that
Tesla has placed near strategic locations such as restaurants, shopping centers, and WiFi hotspots as part of its Destination Charging program.
Tesla has 498 stations with 2,804 Superchargers.
The company is planning to install these Superchargers at several other locations in the
next couple of years.

Teslas distribution strategy is very different from that of other automobile manufacturers
including Ford, Fiat Chrysler, and General Motors. Unlike legacy automakers, Tesla does
not have a dealer network.
According to Tesla CEO Elon Musk, existing franchise dealers have a fundamental
conflict of interest between selling gasoline cars, which constitute the vast majority of
their business, and selling the new technology of electric cars.
In light of this difference, Tesla is pursuing a differentiated selling strategy for its cars. It
lets buyers book a car online, without having to visit any of the dealers. Tesla also offers
a test drive to its potential customers and this also acts as a customer contact point for
Tesla. Tesla has 17 stores worldwide (ACWI) to sell its cars. These stores help Tesla
interact with potential customers.
Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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In terms of the Teslas sales and distribution strategy, this uses the online sales model
coupled with company-owned stores to sell its cars. A totally company-owned
distribution model is something totally new and is fraught with several challenges and
maybe problems.
The biggest challenge for a company in setting up its own distribution network is
capital, or rather the lack of it. It takes a substantial amount of money to set up a
distribution channel. For this very reason, vehicle manufacturers including Ford and
General Motors team up with third parties to sell their vehicles.
According to Tesla, the product specialists at its stores are not on commission. This
means that they differ from the ordinary auto salesman, whose sole aim is to sell the
vehicle.
Tesla is indeed a different company with a different strategy. To put it in CEO Elon
Musks words, Our technology is different, our car is different, and, as a result, our stores
are intentionally different. Moreover, selling more vehicles online reduces the
companys selling costs. The physical stores serve only as showrooms for Tesla vehicles.
In fact, in several states Tesla is not even allowed to sell vehicles through its stores. Tesla
is facing lawsuits challenging its distribution strategy.

2.5.

SWOT Analysis

Strengths
Top sell in the high performance fully electric car market
The first to develop entirely electronic sports car
One of the only manufacturers of advanced electric
components
More innovative designs

powertrain

Weakness

No strong position in market value for cars


Production cost is higher than their competitors
Limited revenues which leads to lack of profitability
Only makes electric cars
Unable to peak production on time

Opportunities

Emerging markets and expansion abroad in India and Singapore


People are more concerned with the environmental issues
Alternate use of battery technology such as absorbing powers from solar panels

Threats

More competition over environment friendly cars


Expensive than the combustion engine cars
Regulations against the manufacturing of certain models

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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2.6.

The Electric Vehicles Sector

The recent ZSW report that found that the world electric car market was up to 307,000
at the end of 2014. Other stats noted there included:

China saw 54,000 electric cars registered in 2014, a growth of 120%;


The US grew 69% to hit 290,000 total electric cars, about 39% of all electric cars
on the road;
Japan grew 45% to hit 110,000 total electric cars;
The overall global electric car market saw a growth of 76%.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

Page 10

3. MACROECONOMIC OVERVIEW
3.1.

Economy

The United States is the most powerful economy in the world.


Following the financial crisis of 2009, the country experienced its worst recession since
the 1930s. Thanks to the Governments large-scale budget and monetary stimulus plan,
the economy has been recovering. The GDP growth rate in 2014 was 2.2%. Despite this
positive result, the economy has experienced a high level of seasonal fluctuation: it
declined by 2.9% in the first quarter of 2014, but rebounded in the second and third
quarters, rising at a rate of 4.6% and 3.9% respectively. In 2015, growth could reach 3.4%
thanks to low interest rates, vigorous job creation and a low level of household debt.
In 2013, President Barack Obama tries to revive the economy, thus transferring
resources to the most vulnerable sectors in order to ensure economic growth in these
areas. He also launched a plan to reduce the public deficit, but an aging population
will increase spending on health.
It was implemented a new financial regulatory legislation, which imposed numerous
fines to banks in 2014 and became the financial regulation and supervision on the part
of the government's priority markets. On the other hand, measures were adopted in
September 2014 to combat tax evasion by US companies. These measures should be
able to recover $ 20 billion in tax revenues over ten years.
Internationally, the United States faces conflicts in Ukraine and the Middle East and the
economic slowdown of its main partners. The rise of the dollar penalizes exports in 2014
and the global financial crisis caused a significant increase in unemployment, which
however declined to 6.1% in 2014. Calculating the discouraged workers who left the
labor market, and those who are forced to accept part-time jobs, the real
unemployment rate is 11.5%, against 10.8% before the crisis. However, wages do not rise
sufficiently and inequality has increased since the 1980s, currently reaching its highest
point.
In 2014, the number of US citizens owners of a real estate reached its lowest level since
1995. This increase in household purchasing power is significant, since their spending
accounts for 70% of national economic activity.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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Main Indicators
GDP (billions USD)
GDP (Constant Prices, Annual %
Change)

2011

2012

2013

2014

2015 (e)

15,517.93 16,163.15 16,768.05 17,416.25e 18,286.69


1.6

2.3

2.2

2.2e

3.1

49,746

51,450

53e

54,678e

57,045

General Government Balance (in %


of GDP)

-7.8

-6.3

-4.8

-4.0e

-3.3

General Government Gross Debt (in


% of GDP)

99.0

102.5

104.2

105.6e

105.1

Inflation Rate (%)

3.1

2.1

1.5

2.0e

2.1

Unemployment Rate (% of the Labor


Force)

8.9

8.1

7.4

6.3

5.9

Current Account (billions USD)

-459.35

-460.75

-400.26

-430.94e

-483.58

Current Account (in % of GDP)

-3.0

-2.9

-2.4

-2.5e

-2.6

GDP per Capita (USD)

Source: IMF - World Economic Outlook Database - 2014

3.2.

MAIN SECTORS OF ECONOMY

No doubt that the American agricultural sector is the most important in the world; it is
characterized by high productivity and the use of very modern technologies.
The United States is one of the leading producers of corn, soybeans, beef and cotton.
Only California produces more than 12% of total agricultural production of the country,
but statistically, agriculture represents no more than 1% of US GDP and employs 1.6% of
the working population.
The
United
States
is
one
of
the
most
industrialized
countries.
The industrial sector represents 21% of GDP, where the most important sectors are the
manufacture of electrical and electronic machinery, chemicals, industrial machinery
and also the agri-food and automotive sectors.
The country is also the world leader in the aerospace and pharmaceutical industries
and the abundance of natural resources turned the US into a leading manufacturer of
various minerals and allows you to maintain a diversified production.
The United States is also the largest producer of liquefied natural gas, aluminium,
electricity and nuclear power, and the world's third largest oil producer.
The American economy is essentially based on services. The tertiary sector accounts for
more than three-fourths of the GDP and employs 81% of the country's workforce.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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Breakdown of Economic Activity By Sector

Agriculture Industry Services

Employment By Sector (in % of Total Employment)

1.6

16.7

81.2

Value Added (in % of GDP)

1.4

20.5

78.1

Value Added (Annual % Change)

12.1

1.8

1.7

Source: World Bank - 2014.


Monetary indicators

2008 2009 2010 2011 2012

US Dollar (USD) - average annual exchange rate compared


1,46 1,39 1,32 1,39 1,29
to 1 EUR
Fonte: CIA - The world factbook

Foreign Trade Indicators

2010

2011

2012

2013

2014

Imports of Goods (million USD)

1,969,184 2,265,894 2,335,537 2,331,367

Exports of Goods (million USD)

1,278,263 1,480,432 1,545,710 1,578,972

Imports of Services (million USD)

374,894

400,561

416,813

427,260

Exports of Services (million USD)

540,587

597,925

630,284

662,111

Imports of Goods and Services (Annual


% Change)

12.7

5.5

2.3

1.1

Exports of Goods and Services (Annual


% Change)

11.9

6.9

3.3

3.0

Imports of Goods and Services (in % of


GDP)

15.8

17.3

17.1

16.5

Exports of Goods and Services (in % of


GDP)

12.4

13.6

13.6

13.5

Trade Balance (million USD)


Foreign Trade (in % of GDP)

-648,678 -740,644 -741,172 -702,587


28.2

30.9

30.7

30.0

-741,462
-

Source: WTO - World Trade Organization; World Bank


Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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4. INDICATORS OF PERFORMANCE
4.1.

Market Performance

From the 3 graphics below we can obviously see that after 2012, that is when TESLA
really started to operate and sell cars, the investors expectation started to increase.
Therefore, even with a slightly increase in the number of shares, the price overcome
that growth and market capitalization went up really quickly.

Share Price at 31st


December
250,00

Number of Shares
140,00

30 000,00

120,00

25 000,00

200,00

100,00

150,00

80,00

100,00
50,00
-

Market Capitalization

20 000,00
15 000,00

60,00

10 000,00

40,00

5 000,00

20,00
-

4.2.

Dupont analysis

Focusing on the past TESLAs performance, we decided to use the Dupont Analysis as a
guide for our reasoning. First of all we want to explain the assumptions we took in some
of on our calculations: in the ROA (return on assets) which normally is Net Income /
Equity in the dupont analysis, we did EBIT / Equity because EBIT is the remuneration of
the shareholders and debtholders where Net Income is just the remuneration of
shareholders. That is why the ROE is not equal to ROA*Financial Leverage; another
assumption was that on the calculation of the Break Even Point, we considered the
SG&A (Sales, General and Administrative expenses) which include R&D (Research and
Development) as the companys fix cost; the third and last assumption was that we
used COGS (cost of goods sold) instead of acquisitions in order to calculate the
average payment period.
After explaining this, is important to evidence that the DuPont analysis reaches 3 areas
that may explain the ROE:
The operational efficiency of the company (profitability);
The degree of efficiency in the use of company assets (productivity);
Financial leverage (capital structure).

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

Page 14

The two best and better connected ratios with the concept of profitability are the Gross
Margin and the breakeven point.
For the first one, when calculated in percentage we notice that the percentage
increases every year, maybe that happen due to the economies of scale effect after
the increase of general sales/revenues.

Gross Margin %
30%
20%
10%
0%
2012

2013

2014

For the Break-even point, it is interesting to relate it with sales, in order to know if we
reached the break point or not. By looking at the following graphic, we can definitely
see that there a tendency of increase of both variables because TESLA was investing a
lot and although their margin increased a lot, their fix cost increase more than that
previous growth leading to negative EBITs (operational profits) in all the analysis years.

7000
6000
5000
4000

break even point

3000

sales

2000
1000
0
2010

2011

2012

2013

2014

In the productivity area, is important to focus on the cash cycle and its components.
We should go through the average holding period, the average payment period and
the average collection period. However, as the company was not in a stable period,
having tremendous high growth rates all these ratios are not meaningful because they
variate a lot and go up and down every year almost. It is not possible to infer any
Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

Page 15

conclusions from this area. Even so, TESLA must take into consideration that they must
control this area otherwise they will have problems with their working capital. They need
to extent they payment periods and decrease they collection with clients by
negotiating with suppliers and clients, respectively.
On the leverage/liquidity area, it is important to say that TESLA is a company in a good
situation because it has mostly equity capital and not debt capital to fund their
activities. Most of the liabilities are due to taxes because TESLA had losses in the
previous years and that has a distortion effect in the analysis. Therefore, they have also
good performance on liquidity because they need a lot of cash to invest in R&D in
order to develop their product. For example, the cash ratio is always higher than 1 and
sometimes really a lot above that limit.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

Page 16

5. TESLA VALUATION
5.1.

Cash Flow Analysis

After the previous examination of the companys background and recent financial
ratios we are now entering into the main objective of this assignment, which is the cash
flow analysis. Cash flow is very important and it is the main source to elucidate about
the value of the company and its liquidity.
When we were evaluating this company we had to take in consideration so many
aspects and inputs that we will explain later. First we started by calculating the previous
years cash flows and only then we forecasted the following years with assumptions
made by us.
5.1.1.

Previous Years Cash Flows

We decided it was better to analyse the years 2010, 2011, 2012, 2013 and 2014 for us to
have a pretty large sample of the company recent past.
For the calculus of the Free Cash Flow to the Firm (FCFF) the formula used was:
FCFF=EBIT*(1-T)- Working Capital Net Capex
The EBIT was found by subtracting to the Revenues the Costs of goods sold including
depreciations and amortizations and the Selling, general and administrative expenses
which is composed mainly by research and development. The EBIT could have been
calculated just by subtracting the cost of sales to the revenues but in this case we
found our way just more correct because this company invests a lot in R&D.
Then we needed the variation of the working capital, so we calculated the variations in
the receivables and in the payables and also the variation in inventories. The first year,
in this case 2010 is orphan of that because for the variations we need the values for n-1.
For the Net Capex we reached the variation in fixed assets between n and n-1, just to
know the investments of the company and then summed the amount of amortizations
and depreciations.

2010
EBIT
-Taxes on EBIT
+ Working Capital
- Inventory
- Accounts Receivable
+ Accounts Payable
+Depreciation Costs
-CAPEX
FCFF

-146,84
0,0001%
10,62
-

2011
-251,49
0,0002%
-19,46
4,90
2,83
27,19
16,92
198,19
-413,30

2012
-394,28
0,00003%
-11,52
218,42
17,30
247,24
28,83
269,05
-622,98

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

2013
-63,63
4,0704%
93,54
71,86
22,27
0,59
106,08
586,53
-635,03

2014
-211,93
-11,5132%
316,83
613,32
177,49
473,98
231,93
1 586,08
-1 907,31

Page 17

As we can see by the table above Tesla is still not generating profit and that is
explained by the great amount of R&D included in the EBIT calculation and then by the
large volume of CAPEX.
We are looking to a company in an early stage of its life and thats proved by the large
variations in the inventories, accounts receivable and accounts payable.
Another thing that pops to the eye is the tax rates that is explain because of the losses
of the company and the tax shields. In the last year of 2014 the company paid
negative taxes, in other terms received money instead of paying. That is explained
once more by tax shields due to their losses and then the green energy credits that the
government grants.

5.2.

Projection of Future Cash Flows

2015
2016
2017
2018
EBIT
308,11
1 042,43
2 379,68
4 814,03
-Taxes on EBIT
0%
35%
35%
35%
+ Working Capital
216,08
-475,58
-196,59
-372,86
- Inventory
465,25
564,87
782,81
1 009,76
- Accounts Receivable
108,02
181,17
279,25
430,43
+ Accounts Payable
357,20
1 221,61
1 258,65
1 813,06
+Depreciation Costs
234,00
384,24
555,21
751,91
-CAPEX
1 903,30
2 283,96
2 740,75
3 288,90
FCFF
-1 577,26
-746,56
-442,15
964,99
In this section we will explain our assumptions in the calculation of the future cash
of Tesla for the next 5 years.

2019
8 520,31
35%
-724,22
1 453,55
663,47
2 841,24
980,24
3 946,67
3 295,99
flows

In order to estimate the EBIT, we had forecasted the difference between estimations of
the revenues to the cost of goods sold, the depreciations and amortizations, and finally
the selling general and administrative costs. We think that the future revenues will
continue to increase in a fast pace in Tesla, the company is still in an developing stage
of its life and it is in a sector with very high potential (electric cars sector) which is very
hot topic but has a low penetration in the market. Other major factor is the recovery of
the strongest economies and the awareness of the consumers for environmental issues.
But for us to have a more numerical prediction we decided to use the production
capacity of the future Gigafactory (500 000 cars per year), that is being build, as a
reference for the grow rate of the revenues. For common sense we assumed that only
75% (375 000) of the cars that will be produced by the Gigafactory will be sold and
because Tesla is delivering right now 55.000 cars the rate of grow for the revenues has
to be 46,8% each year to reach the 375 000 number at 2020.
The cost of sales was estimated using the ratio Cost of Sales/Revenues, we started at a
value similar to the last years and decrease it a little year by year trying to emulate the
scale economies caused by producing a lot more unities.
Also by the same principle (economies of scale) the selling general and administrative
expenses, which are sort of fixed costs, have a decreasing rate of grow because the
fixed costs of a company should not rise at the same proportion of its sales, the
economy of scale enables the company to diminish the cost per unit because the
same
fixed
costs
are
being
divided
by
more
units.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

Page 18

Growth in revenues

47%

47%

47%

47%

47%

Revenues

4 697,60

6 896,08

10 123,44

14 861,21

21 816,26

Cost of sales

2 959,49

4 137,65

5 770,36

7 876,44

10 908,13

63%

60%

57%

53%

50%

1 430,00

1 716,00

1 973,40

2 170,74

2 387,81

30%

20%

15%

10%

10%

Cost of Sales/Revenues
SG&A Expenses
SG&A Expenses

For the tax rate we assumed that in 2015 even though Tesla has positive EBIT would pay
0% due to the shields allowed by having losses in the last three years, in the following
years as the companys EBIT continues to be positive the company will pay 35%.

EBIT
-Taxes on EBIT

2015
308,11
0%

2016
1 042,43
35%

2017
2 379,68
35%

2018
4 814,03
35%

2019
8 520,31
35%

In order to reach the CAPEX for the transition period between 2015 and 2019 we
applied a rate of grow of 20% that seemed acceptable to us and compatible with the
reports and previews we saw about Teslas investments such as the factory, their new
model 3 and new projects that can appear. In a company so focused in innovation
and technology the CAPEX has to be high and to grow from year to year because
thats what keeps the company moving and improving.
With no reasons otherwise our decision was to keep the amortization rate constant and
equal to the year of 2014. In our way of viewing things this is not such an important
driver for the future of the company.
Fixed Assets

4 269,30

6 169,01

8 354,55

10 891,54

13 857,97

CAPEX

1 903,30

2 283,96

2 740,75

3 288,90

3 946,67

234,00

384,24

555,21

751,91

980,24

9%

9%

9%

9%

9%

1 669,30

1 899,72

2 185,53

2 536,99

2 966,44

Depreciations and
Amortizations
Amortizate rate
Net Capex

The process of reaching the variation of the working capital was somehow more
complex because we introduced some variables in order to not come up with made
up
numbers.
The average holding period in our model is constant around the value of 2014, the
average collection period is growing at a rate of 5% a year to simulate the more trust
put in the consumers and average payment period is growing at 10% a year to
symbolize
the
rise
of
Teslas
negotiation
power
with
suppliers.
The accounts receivable was the result from the Revenues plus the ACP/365 and the
accounts payable was the result from the Cost of Sales plus the APP/365.
In the same logic the Inventories were calculated by multiplying the Cost of Sales for
the
AHP/365.
We noted that our working capital becomes negative as a result of our cash cycle, the
ACP grows a lot less than the APP for the reasons mentioned above so its normal that
the working capital variation and absolute values being negative.
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Working Capital
Inventory
AHP
AHP/365
Accounts Receivable
ACP
ACP/365
Accounts Payable
APP
APP/365
Working Capital
inventories
accounts receivable
accounts payable
Working Capital

2015
1 418,93
175,00
0,48
334,62
26,00
0,07
1 135,15
140,00
0,38
618,41
465,25
108,02
357,20
216,08

5.3.

2016
1 983,80
175,00
0,48
515,79
27,30
0,07
2 356,76
154,00
0,42
142,83
564,87
181,17
1 221,61
-475,58

2017
2 766,61
175,00
0,48
795,04
28,67
0,08
3 615,41
169,40
0,46
-53,76
782,81
279,25
1 258,65
-196,59

2018
3 776,38
175,00
0,48
1 225,47
30,10
0,08
5 428,47
186,34
0,51
-426,62
1 009,76
430,43
1 813,06
-372,86

2019
5 229,92
175,00
0,48
1 888,94
31,60
0,09
8 269,70
204,97
0,56
-1 150,84
1 453,55
663,47
2 841,24
-724,22

Weighted Average Cost of Capital (WACC)


5.3.1.

Transition Period Beta Estimation

For the beta estimation we calculated the D/E ratio using the value of the Debt
subtracted by the value of the Cash and Short-term investments. We know the right
thing to do was to use the market value of debt but with the impossibility of getting it
we used as a proxy the book value of debt.
The next step in the formula was to use the beta unlevered of the sector, in this case we
tried with the beta unlevered of the sector Auto & Truck (the sector in which Tesla is
included according to their annual report) but due to the Teslas low value of Debt,
more less 2% of its equity, the levered beta result was too low and consequently the
final cost of debt (kd) was higher than the cost of equity (ke). So we decided to use the
beta levered of the sector instead of the unlevered, this way in our opinion the analysis
becomes more realistic and correct. After that we incorporated the tax rate of 0%
considering that in the end of 2014 the company was not profitable.
With all that done we finally get the value of the Beta Levered

Number of shares
Price per Share
Market Capitalization
Debt
D/E
E/(D+E)
D/(D+E)
Beta Unlevered Auto & Trucks
D/E
Tax Rate
Beta Levered - Bottom Up

2014
124,54
222,41
27 698,94
562,13
2,03%
98%
1,99%
1,09
2,03%
0%
1,112120762

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5.3.2.

Transition Growth WACC estimation

In order to get the WACC, the weighted average capital cost, of the company for the
transition period we need to utilize the CAPM model (Capital asset pricing model) so
we can reach the cost of equity (ke) then risk free asset and rating to reach the cost of
debt
(kd).
In the CAPM model for the risk free asset we used the United States bond 30 years
because it is the longest available and the USA are, by far, Teslas biggest market. The
risk premium was the one for the United States for the same reason and the beta
levered was the one calculated earlier.
For the rating we used the same risk free asset, the US bonds 30 years and then we
based our analysis in an unsolicited valuation made by S&P which gave Tesla a Brating grade and this grade corresponds nowadays to a 5% default spread.
With cost of equity and cost of debt calculated we finally reached the WACC for the
transition growth period.
CAPM

Rf - US Bonds 30y
Risk Premium
Beta
Ke

2,75%
5,75%
1,112120762
9,14%

Rating
Rf - US Bonds 10y
Rating
Default Spread
Kd

2,75%
B5%
7,75%

WACC

9,12%

With the WACC already calculated we can now proceed to the calculation of the
Discounted Free Cash Flows

EBIT*(1-T)
Depreciations
Amortizations
CAPEX
Working Capital
FCFF
Kwacc
Discounted FCFF

and

2015
308,11
234,00

2016
677,58
384,24

2017
1 546,79
555,21

2018
3 129,12
751,91

2019
5 538,20
980,24

1 903,30
216,08
-1 577,26
9,12%
-1 445,48

2 283,96
-475,58
-746,56
9,12%
-627,02

2 740,75
-196,59
-442,15
9,12%
-340,32

3 288,90
-372,86
964,99
9,12%
680,70

3 946,67
-724,22
3 295,99
9,12%
2 130,71

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5.3.3.

WACC Stable Period

For the estimation of the WACC for the stable period we need to come up with the g,
the stable period growth rate and then recalculate the cost of debt and equity for the
long term.
To reach the g we used the formula Average ROA of the sector * EBIT Reinvestment
Rate, first with the reinvestment rate of the sector Auto & Truck and then with Teslas
historic reinvestment rate and with both of them the G was too high. We learned in
classes that if for a stable period the g is higher than the economy expected rate of
grow, in the long term the company would become larger than the economy,
therefore we decided to use as suggestion of the professor the g of 3%.
Once more we used the CAPM model with the risk free asset being the Us Bonds 30
years and the risk premium of the United States. The difference was the the beta that
was now 1 because we assumed that in the long term the companys risk meets the
market
risk.
Using the same cost of debt calculated before we were no able to get the WACC for
the stable period.
Average ROA of the Sector (TTM)
EBIT Reinvestment Rate - Auto and Truck
Reinvestment rate - EBIT
Growth Rate

7,5%
352,32%
40,49%
3%

CAPM
Rf us bonds 10y
beta

2,75%
1

risk premium

5,75%

Ke

8,50%

Kd

7,75%

WACC

8,49%

Using the recently calculated G and WACC we are now able to calculate the FCFFn+1,
which
in
this
case
is
for
2020
and
the
Terminal
Value.
With the Terminal value we can now calculate its actual value, using the WACC of the
growth period.
Enterprise Value is now calculated by summing to the discounted value of the free
cash flows the terminal value.
To reach the firm value we have do deduct to the enterprise value the amount of nonoperating assets, which in Teslas case is the cash and other short term investments.
The Equity Value is nothing more than the firm value less the value of debt of the
company.
Dividing the equity value for the number of shares the company possesses gives us the
future value per share.

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Terminal Value
Actual Value of Terminal value
Enterprise Value
Firm Value
Equity Value
Share Value

61 892,75
40 010,93
40 409,52
40 236,36
38 386,36
308,23

5.4.

Sensitivity Analysis

The sensitivity analysis is very important for a company to observe the changes that a
variation on the growth rate or on the weight average cost of capital might create on
the share values and in the enterprise value.
Share Value
WACC'

6,49%

6,99%

7,49%

7,99%

8,49%

8,99%

9,49%

9,99%

10,49%

2,00%

375,62

336,67

304,82

278,29

256,05

236,61

219,94

205,36

192,50

2,25%

399,54

356,02

320,80

291,72

267,52

246,50

228,58

212,97

199,26

2,50%

426,46

377,52

338,39

306,38

279,96

257,16

237,83

221,09

206,43

2,75%

456,99

401,56

357,82

322,44

293,47

268,67

247,77

229,76

214,08

3%

491,88

428,61

379,43

340,10

308,23

281,14

258,48

239,06

222,23

3,25%

532,16

459,27

403,58

359,63

324,38

294,70

270,04

249,04

230,94

3,50%

579,18

494,33

430,75

381,33

342,16

309,50

282,57

259,80

240,28

3,75%

634,77

534,80

461,56

405,59

361,82

325,70

296,19

271,41

250,31

4,00%

701,53

582,04

496,78

432,90

383,67

343,53

311,05

284,00

261,12

As we can observe the Tesla is sensitive to these changes, by keeping the actual
growth rate of 3% and increasing the WACC on 0.5% the price of the share will
decrease to 281.14, in another way a decrease in the WACC will provide an increase of
the share value being it of 340.1 per share.
By making the same analysis, it means by doing a variation of the growth rate in the
same proportion as before we made in the WACC and by maintaining constant the
WACC we can see the same variation as before. For example WACC of 8.49% and
growth rate of 2.75% it will imply a decrease of the share value, it actually makes sense
because if the company starts to grow a lower rate the share price that people are
willing to pay will be also lower. Otherwise we can see the inverse situation when the
growth rate increases, the share value will also rise.

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By looking at these variations, we can conclude that the both variations (growth rate or
WACC) have the same influence (increase or decrease) in the share value, but the
variation of WACC has more impact in the share value rather than the growth rate.
As we can see in the table above, the worst scenario that the company could have to
face is when the WACC is of 10.49% and the growth rate of 2% - the share value would
be 192.5. In the best scenario, when the WACC will be 6.49% and growth rate 4%, the
share value would be 701.53.

5.5.

Relative Valuation

The relative valuation, also known as multiple valuation, is another method to estimate
a companys value besides the discounted cash flow. It is probably the most used
method because it is basically the comparison between a company and its peers of
some financial ratios. So, it is very simple to apply. In this method the way of valuating a
company bases on the idea that an assets value is calculated from the pricing of
similar/comparable assets. This can be expanded to companies, emerging the relative
valuation. It assumes there is stability and that the stock exchange markets are efficient,
so that they reflect on the assets their intrinsic value. In other words, it admits that
market, on average, correctly value those similar/comparable assets.
In the case of TESLA, first we started to think which its main competitors are. We needed
to choose companies from the same sector and with a similar size. For the first criteria is
easy to pass because there are many companies in the automotive industry but for the
second one it is difficult because most of the car manufactures are mature companies,
with gigantic number and TESLA can be seen as a startup in this specific industry. The
problem gets even bigger if we think about the product itself because most of the
comparable companies also produce non electrical cars and this may distort the
analysis. Even so, we choose: General Motors, Toyota, BMW, Ford Motors, Kandi
Technologies Group and Volkswagen. From these 6 competitors, just Kandi is an only
electrical car producer. That is the reason why we choose it besides all the other 5 well
known car manufactures. The size of these companies may be not the most similar to
TESLAS but if we had followed this criteria in a very strict way, we would not have found
any company.
The next step was to use standardized variables that make values comparable. In order
to do so, we choose the following ones: PER (Price Earnings Ratio), PBV(Price Book
Value), EV/EBIT (Enterprise Value / Earnings Before Interest and Taxes) and the Tobin-q.
To calculate the ratios, we immersed into the internet to find some initial indicators: total
debt, market capitalization (calculated by number of shares outstanding* Share price
on the 31/12/2014), EBIT, Net Income, and the total equity book value.

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Company

Total Debt

Market Cap

N of Shares Out.

EBIT

Net Income

Share Price 2014

Equity BV

4880

27699

124,54

-212

-294

222,41

912

GM

141650

56205

1610

4 649

3949

34,91

35457

Toyota

258008

197004

1570

23 894

17703

125,48

139989

BMW

142025

54222

602

10 879

7016

90,07

45123

Ford Motors

183380

60450

3900

5 139

3187

15,50

24805

111

658

46,95

18 166

547

14,01

212

261020

12707

295,08

11 921

10985

43,06

105483

TESLA

Kandi
Volkswagen

After having this data we begun to calculate the ratios by the following way:

PER=Price/(Earnings per Share)


PBV=(Market Capitalization)/(Book value of Equity)
EV/EBIT is the ratio itself
Tobin-q=(Market Value of Equity+Market Value of Debt)/(Book Value of
Equity+Book Value ofDebt)

Note: in the Tobin-q, we used the Book Value of Debt as a proxy of the Market Value of
Debt
Company

PER

PBV

EV/EBIT

Tobin-q

General Motors

14,23

1,59

42,56

1,12

Toyota

11,13

1,41

19,04

1,14

7,73

1,20

18,04

1,05

18,97

2,44

47,45

1,17

Kandi Technologies Group

1,20

3,11

0,04

2,38

Volkswagen

1,16

0,12

22,96

0,75

Average

9,07

1,64

25,02

1,27

Median

9,43

1,50

21,00

1,13

-94,20

30,38

-154

5,62

BMW
Ford Motors

TESLA

After calculating these ratios to all the 6 peers (we even did it for TESLA just to have an
idea of the results), we calculated the TESLAs share value according to not only, the
average but also the median of the 6 peers. Although we calculated for both (we did it
just to see if there was any big difference), for us using the median is a better procedure
because it reduces the effect of possible outliers.
TESLA's share value according to:

PER

PBV

EV/EBIT

Tobin-q

Average

-21,41

12,03

81,75

19,79

Median

-22,26

10,95

74,92

13,38

Analysing the results, for the PER the conclusions are not applicable because TESLA's
Net Income is negative and this distorts the result. A similar problem also shows up with
the EV/EBIT ratio that is also not applicable because TESLA's EBIT is also negative and this
may distort the final result. For the PBV and Tobin-q, the analysis is not useful for a
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Page 25

correct reasoning because the other companies are very stable and mature when
compared with TESLA which is in an early stage of its life with high growth rates. Besides,
competitor companies have not a very useful similar size, in order to make a reliable
comparison between them and TESLA. Even so, there is not any company like TESLA
with a similar size and characteristics beyond Kandi but that one is not so innovative.
After all, we can see that TESLA (having on the 31/12/2014 a share price of 222,41
dollars),has a much higher share price, so we could say that TESLA is over valuated. But
this may be explained by the start-up, fancy and trendy status of its electric car
product and also the recent past high growth rates.
In one hand, we could have stopped at this stage of analysis but we would need to
take into account that we are assuming, for the PER multiple, for example, the variables
that affect it such as: pay-out ratio, expected growth and risk or cost of equity; are
constant. On the other hand, we can adjust for differences and try to use some
components of each multiple to explain some of the differences in the multiples. For
each multiple we needed to get some data of the components on internet. After
having that we estimated a regression (using the Eviews8 computer program) for each
multiple, in order to try to explain the differences:
Company
GM

14,23

0,46

Risk or Cost of Equity /


(KE) (-)
1,44

Toyota

11,13

0,27

0,54

0,09

7,73

0,38

1,26

0,10

18,97

0,60

0,97

0,08

Kandi

1,20

0,00

1,81

0,18

Volkswagen

1,16

0,22

1,96

0,13

BMW
Ford Motors

PER

Payout
(+)

Ratio

Exp Growth (+)


0,16

For the PER, although we were expecting the R-squared on relative valuation
regressions to almost never be higher than 70% and it is common to see them drop to
30 or 35%, it was interesting that it was around 95% and this gives us the notion that the
coefficients are meaningful. As expected, the pay-out ratio and the expected growth
rate have a plus (+) signal and also the risk has a minus (-) signal. As the final results of
the coefficients are so high, they may explain the differences in the multiples but the
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Page 26

expected growth rate is the one that may explain the most because it has the highest
coefficient.
Company

PBV

General
Motors
Toyota

1,59

Payout Ratio
(+)
0,46

1,41

0,27

BMW

1,20

Ford Motors

Risk or Cost of
Equity / (KE) (-)
1,44

Exp Growth (+)

ROE (+)

0,16

0,07

0,54

0,09

0,09

0,38

1,26

0,10

0,13

2,44

0,60

0,97

0,08

0,05

Kandi

3,11

0,00

1,81

0,18

0,83

Volkswagen

0,12

0,22

1,96

0,13

0,86

For the PBV, we got a R-squared around 25%, as expected. So we cannot be sure
whether the coefficients are meaningful or not. As expected, the pay-out ratio, the
expected growth rate and ROE have a plus (+) signal and also the risk has a minus (-)
signal. Of all coefficients, the expected growth rate may be again the one that
explains the most differences because it has the highest coefficient.
Company
General
Motors
Toyota

42,56

Exp
Growth (+)
0,16

19,04

0,09

BMW

18,04

Ford Motors
Kandi
Volkswagen

EV/EBIT

Capex needs (-)


in million dolars
11867,00

Capital
(+/-) D/E

Structure
2,52

Risk or Cost of Equity /


(KE) (-)
1,44

21788,00

1,31

0,54

0,10

6110,00

2,62

1,26

47,45

0,08

7463,00

3,03

0,97

0,04

0,18

69,00

0,17

1,81

22,96

0,13

13916,00

20,54

1,96

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For the EV/EBIT, we got a R-squared around 18% that is even lower than the last one but
t is still as what we were expecting. So we cannot be 100% sure whether the coefficients
are meaningful or not. As expected, the capital structure and the expected growth
rate have a plus (+) signal and also the risk and capex needs have a minus (-) signal. Of
all coefficients, the expected growth rate may be again the one that explains the most
differences because it has the highest coefficient. However, we can infer that the
capital structure of a company ( Debt/Equity ratio) in inversely related to the EV/EBIT.
So, maybe the company is behind the optimal capital structure mix point and possibly if
with leverage more the company, it well get more profitable with a better WACC.
Company

Tobin-q

General
Motors
Toyota

1,12

Expected
Growth Rate (+)
0,16

Capital Structure
(+/-) D/E
2,52

Risk or Cost of Equity /


(KE) (-)
1,44

ROA (+)

1,14

0,09

1,31

0,54

0,04

BMW

1,05

0,10

2,62

1,26

0,04

Ford Motors

1,17

0,08

3,03

0,97

0,01

Kandi

2,38

0,18

0,17

1,81

0,71

Volkswagen

0,75

0,13

20,54

1,96

0,04

For the Tobin-q ratio, we got a very interesting R-squared a little bit above the 99%,
which could lead us to good expectations on the predictive power of the regression.
But, very surprisingly, the expected growth rate component got a negative coefficient
in the estimation which contradicts all the previous estimations that set up that
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Page 28

0,02

component as being to most correlated one. Even so, it is not a strong negative
component as is almost reaches zero. There is not any other component that stands out
from all the other ones from its final result.
To summarize, probably the expected growth rate is the component from all the
multiples that better explains the differences between the multiples.

5.6.

Bankruptcy Risk

Companies are in bankruptcy risk when they will not be able to meet their debt
obligations. This risk describes the probability that a company will become insolvent due
to its incapacity to service its debt. To analyse the position of the company, we had to
use the Altman Z-score test. This test is based on five financial ratios:

T1 = Net current assets / Total Assets


T2 = Cumulative retained Earnings/Total Assets
T3 = EBIT/Total Assets
T4 = Market capitalization/Total Liabilities
T5 = Sales /Total Assets

When we obtained values for these ratios is necessary to multiply them by the
respective coefficients, as shown in the following formula:

Z-Score=1.2*T1+1.4*T2+3.3*T3+0.6*T4+0.999*T5
Substituting the letters for values we obtain the z-score value for the company.

2010

2011

2012

2013

2014

Current Assets

235,89

372,84

524,77

1270

3200

Current Liabilities

-85,57

-191,34

-539,11

-675,16

-2110

Total Assets

386,08

713,45

1110

2420

5850

0,47

0,31

-0,02

0,29

0,22

-414,98

-669,39

-1007,00

-1140,00

-1430,00

-1,50

-1,31

-1,27

-0,66

-0,34

- 146,84

-251,49

-394,28

- 63,63

- 211,93

-1,26

-1,16

-1,17

-0,09

-0,12

2
527,45
179,03

2
867,14
489,4

3
635,94
989,49

17
963,16
1750

27
698,94
4880

8,47

3,52

2,20

6,16

3,41

116,74

204,24

413,26

2010

3200

0,30

0,29

0,37

0,83

0,55

6,48

1,63

0,12

6,54

3,71

T1 = Net current assets / Total


Assets
Retained Earnings

T2 = Cumulative retained
Earnings/Total Assets
EBIT

T3 = EBIT/Total Assets
Market Capitalization
Total Liabilities

T4 = Market
capitalization/Total Liabilities
Sales

T5 = Sales /Total Assets

Z-Score Compass

Looking at the next table, it is possible to see that Tesla is on the Safe Zone because its
Z-Score is equal to 3.71.
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Page 29

Z > 2.99

Safe Zones

1.81 < Z < 2.99

Grey Zones

Z < 1.81

Distress Zones

If we pay attention to the previous values of Tesla Z-score, we can conclude that Tesla
had passed through the three zones, but in 2014, was in the Safe Zone. So, we can
conclude that Tesla isnt likely to go bankrupt within the next two years.

5.7.

Monte Carlo Simulation

Monte Carlo Simulation is used frequently in different fields as in finance, insurance,


project management, and so on. It is a method that simulates different variables that
creates uncertainty by creating interactions in the Enterprise Value and in the Share
Value. The Monte Carlo simulation was performed through the Crystal Ball application
for Excel. The variables that we have used to test were the FCFF for each year, growth
rate, WACC and
WACC; because we think that these are the changes in these
values can affect directly the enterprise value and the share value. In our nine tested
parameters we have assumed that they will follow a normal distribution. So that in the
next charts we will present the distributions that we got.
FCFF

The FCFFs coefficient, mean and standard deviation for each year were obtained
through the Monte Carlo simulation and can be observed in the excel attach to
valuation.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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Perpetual Growth Rate

WACC

WACC

Mean: 3%; Standard


deviation: 0,3%

Mean: 9,12%; Standard


Deviation: 0,91%

Mean: 8,84%; Standard


Deviation: 0,85%

Based on this nine assumptions, Crystal Ball performed one million trials, in order to
provide the best approximation to the real probability distribution that the value of the
company and shares.

Using this assumptions and with a certainly level of 95 %, we arrive to the conclusion
that Tesla value varies from 28 114,61 to 62 004,98 and the value with more probability
of happening is 41 588,24 which is very close to our estimation (40 409,52).

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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Using the same assumptions and certainly level, we conclude that Teslas Share Value
varies from 209,50 to 481,63 and the value with more probability of happening is 317,68
which is once again very closer from our calculations 308,22.
With the values that we got for the mean values of the share price and for the
enterprise value we can observe that they are very similar to the values that we got
during our valuation, so we can assume with some certainty that our analysis is reliable.

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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6. REFERENCES

Brando, Elsio; Finanas, 6 Edio, 2012

http://ir.teslamotors.com/

http://people.stern.nyu.edu/adamodar/

http://www.bloomberg.com/

http://finance.yahoo.com/

http://evobsession.com/

http://www.marketwatch.com/

http://www.reuters.com/

Filipe S Couto | Guilherme Baptista | Pedro Pilar | Rui Tavares

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