Investment Analysis and Recommendation Paper
You will prepare an executive summary of Tesla Motors Inc., complete with current stock prices and a recommendation on investing in Tesla. Your paper will contain topics unique to the company chosen, but will incorporate the themes covered each week.
A. Using income statements and balance sheets for your company AND at least one of its main competitor’s, respond to the following:
Calculate the DuPont identity for both companies for the past three years.
Discuss any differences and/or trends that emerge.
B. This section of the Investment Analysis and Recommendation Paper requires you to establish an estimated growth rate in earnings and dividends for your company. Note, in the dividend growth model, “g” is the growth rate for earnings AND dividends. You might want to check historical growth rates for the company (in terms of earnings and dividends). Also, many people rely on analyst forecasts. Be sure to justify your growth rate selection and explain how you arrived at the number. Assume your company is a constant growth stock. Use your estimated growth rate to solve for the required rate of return using the dividend discount model. After completing your calculations, respond to the following:
Does the number you arrived at seem logical or feasible?
Did you face any problems or issues using the dividend growth model? Does your company pay a dividend?
Is it reasonable to assume constant growth for your company?
The Investment Analysis and Recommendation Paper will comprise a minimum of 8-10 pages in APA style format. Three to five diagrams and presentation slides may be included, but they will be additional to the required length of the paper.
C. Identify potential real options that might arrive in this firm’s business.
Are these options industry specific or company specific?
How would these options affect their capital budgeting process?
Justify your answers.
D. find an estimate of beta for your company. You might consider examining/using an industry average beta, especially if the reported beta you find seems unrealistic or inappropriate. Note: You should probably check your beta across a few different sources, because sometimes they vary. Find the current interest rate (yield) for 3-month Treasury bills. Determine an appropriate market risk premium. Be sure to consider the size of your firm when estimating an appropriate premium.
After making your calculations:
Using all this information, what is the expected return for your company using CAPM?
In Week 3, you estimated a required rate of return using the dividend discount model. How does your CAPM number compare?
E. Calculate the weights (proportions) of debt and equity for your company. For equity you can use the market value of stock (number of shares times the current stock price). For debt, you can use the book value of long-term debt (from the balance sheet). While market values of debt are “better,” they are rather difficult to obtain. Estimate the required rate of return on debt for your company. The following are three possible approaches: a) You can use the credit rating provided by Standard & Poor’s or Moody’s. Use the ratings to find current yields above risk-free rates. b) Go to FINRA Market Data. This will give the yield to maturity for EACH bond. You need one measure of the cost of debt, so you will have to figure out an appropriate way to handle multiple debt issues. c) If your company does not have publicly traded debt (and/or both the previous two approaches did not work), you will need to read the footnotes to the annual report. You may be able to get their estimated borrowing rate. After gathering the information:
Estimate your company’s weighted average cost of capital. You can use the income statement information to estimate the tax rate.
If your company uses this in the capital budgeting process (i.e., as the discount rate in NPV and IRR), what assumptions are they making?
Does your company face any particular difficulties in using this rate? For example, does your company have different divisions or units that might have differing levels of risk?
F. consisting of the capital structure choices, as well as an executive summary of your research.
You will examine the mix of debt and equity that your firm uses. After finding this information:
Compare this to an industry average or a main competitor. What are the differences?
Based on what you know about your selected company, do these differences seem appropriate?
Relate your company’s capital structure choices to the appropriate capital structure theory(ies).
Also, as a component of your executive summary, obtain the current stock price for your company and use it as an additional calculation. Based upon all of your research, would you recommend investing in this company? Justify your answer.