Tesla: Weighted Average Cost of Capital

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Tesla has surmounted several obstacles to becoming a pioneer in electric cars. Therefore, I chose Tesla Inc., an American company and manufacturer of electric vehicles and electrical energy storage solutions, for this post. Tesla aims to develop and scale up, beginning with partnerships and a minimum viable product. Tesla has demonstrated that a start-up can enter and disrupt one of the most established industries. The Weighted Average Cost of Capital (WACC) is the most widely used and acknowledged technique for discounting cash flows. It considers the temporal value and risk carried by the firm. It is necessary to first identify Tesla Motors’ capital structure to calculate the WACC. Equity and debt comprise the capital structure, and each has its own cost of equity or debt. The WACC would be the average of the expenses based on weightings if the costs and capital structure computations were combined. The difficulty in estimating a share price for Tesla is that, according to the forecasts, Tesla’s debt/equity ratio is constantly falling, which means that the WACC would need to be adjusted for the periods with the respective debt/equity ratio or estimated with an average target debt/equity ratio that reflects the debt structure for the forecasted periods. According to the findings of the Tesla annual report, the most recent Tesla OCF value in 2019 was 775 million, making it an ideal alternative to utilize as the beginning OCF value for the DCF model (Liu, 2021). Based on this, according to Liu (2021), the current value of Tesla’s weighted average cost of capital (WACC) is 13,85%. Investors are reconsidering the premise that justified Tesla’s exorbitant stock price. Tesla’s $1 trillion value made sense only if investors thought the electric vehicle business was on a collision course with the auto industry (Ewing, 2022). However, Tesla’s stock has dropped more than 40% since April 2022 – a far more significant drop than the whole market, wiping out more than $400 billion in stock market value (Ewing, 2022). And the fall has highlighted the vulnerabilities that the corporation confronts.

Trusted resources, including Bloomberg, The Economist, and Financial Times, highlight a few risks in the economic and political environments that could impact Tesla’s and the entire electric car industry’s WACC. The first risk pertains to losing influence in China, which is a crucial market for Tesla and the industry, due to strained US-China international relations. Firstly, for Chinese authorities, Tesla vehicles, which are loaded with cameras and sensors, would make ideal spies on wheels. For instance, its Shanghai factory produced over half of the 936,000 vehicles delivered in 2021 (Thornhill, 2022). So, losing a share in China’s electric vehicle market would cause its cost capital to fall. The Chinese government has grown more skeptical of Musk’s role in allowing Ukraine access to Starlink satellites run by his SpaceX firm during the conflict with Russia, as well as his ties to the US space military-industrial complex (Thornhill, 2022). Therefore, Chinese security officials are especially concerned about the in-car camera that watches the driver (Thornhill, 2022). The Chinese government has just prohibited the usage of Tesla vehicles in Beidaihe, a seaside resort where the Communist Party leadership meets a secret summer conclave (Thornhill, 2022). The second risk to WACC revolves around economic and environmental barriers to Tesla’s supply channels in China. A severe drought in Chengdu and Chongqing has affected China’s economic potential, causing power shortages and threatening “the supply of parts… to Tesla in Shanghai” (“A drought in China hits industry,” 2022, para. 1). The third prominent risk is presented by the possible economic costs of ethical scandals surrounding Tesla and affecting its partnerships. Specifically, Tesla’s controversial HRM practices leading to complaints from Black staff members have come to the attention of California’s equal employment authorities, causing a massive scandal (Nayak, 2022). Therefore, Tesla’s and the electric car industry’s cost of capital faces a few threats in the external environment, including losing business due to key partners’ political distrust, reputational losses, and external barriers to supply chains’ operations.