Tesla, Inc. designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage systems in the United States, China, and internationally. The company operates in two segments, Automotive, and Energy Generation and Storage. The company’s market cap is $021 Trillion. The interest expenses for the most recent year is $748 millions. It has future maturities of the book value of debt as of December 31, 2020 were as follows ( in millions): YearTotal Debt20211,81820221,93520232,40620241,85120251,9792026580The maturities of operating lease liabilities are as follows (in millions)YearTotal Debt20213662022327202327920242452025204Thereafter425The current portion of lease is $286 million. The unlevered beta for other automobile firms is 1.00. The average Debt/Equity ratio for Tesla is 187%. The current bond rating for the firm is BB which corresponds to a default spread of 2.77%. The ten-year US treasury bond rate is 1.56% and the marginal tax rate is 27%. The market risk premium is 5%.( Source: tsla-10k_20201231.htm (sec.gov))Estimate the current (Market Value) cost of capital for the firm.

Tesla is the highest valued automobile comany in the world.Tesla is not really into carmaking but…

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Economics: Private and Public Choice (MindTap Course List)

16th Edition

ISBN:9781305506725

Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Publisher:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson

Chapter21: Costs And The Supply Of Goods

Section: Chapter Questions

Problem 17CQ

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Tesla, Inc. designs, develops, manufactures, leases, and sells electric vehicles, and energy generation and storage systems in the United States, China, and internationally. The company operates in two segments, Automotive, and Energy Generation and Storage. The company’s market cap is $021 Trillion. The interest expenses for the most recent year is $748 millions. It has future maturities of the book value of debt as of December 31, 2020 were as follows ( in millions):

Year	Total Debt
2021	1,818
2022	1,935
2023	2,406
2024	1,851
2025	1,979
2026	580

The maturities of operating lease liabilities are as follows (in millions)

Year	Total Debt
2021	366
2022	327
2023	279
2024	245
2025	204
Thereafter	425

The current portion of lease is $286 million. The unlevered beta for other automobile firms is 1.00. The average Debt/Equity ratio for Tesla is 187%. The current bond rating for the firm is BB which corresponds to a default spread of 2.77%. The ten-year US treasury bond rate is 1.56% and the marginal tax rate is 27%. The market risk premium is 5%.

( Source: tsla-10k_20201231.htm (sec.gov))

Estimate the current (Market Value) cost of capital for the firm.

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