Question

Elon Musk’s Tesla Corp. (TSLA) has the following price per share, cash flows and, financial projections (these numbers are projections I threw together in about 15 minutes… so take them with a grain of salt).

1. Since May of 2019 Tesla stock has increased form approximately $185 a share to $815 a share! $815 a share is the current price of Tesla stock.
2. The company has 180,240,000 shares outstanding.
3. The company’s future expected cashflows are:

Year 1: $3,000,000,000

Year 2 $3,800,000,000

Year 3: $5,000,000,000

Year 4 onward: Constant growth of 5% per year.

Assume a fair discount rate of 12%. What is the company’s fair price per share?

(Enter you answer round to the nearest penny, with no dollar signs or punctuation)

Answer 1

Solution:-

The fair price per share is the sum of present values of cash flows for first 3 years and terminal value at the end of 3rd year since growth rate becomes constant 4th year onwards.

Terminal value at the end of 3rd year= Cash flow 3rd year*(1+growth rate)/(cost of equity-growth rate)= $5,000*(1+5%)/(12%-5%)= $75,000

Value of equity (in $ millions) = $3,000*(1/1.12) + $3,800*(1/1.12)2 + $5,000*(1/1.12)3 + $75,000*(1/1.12)3

Value of equity (in $ millions) = $3,000*0.893 + $3,800*0.797 + $5,000*0.712 + $75,000*0.712 = $62,667.6

No. of shares (in millions)= 180.24

Fair price per share= Value of equity in millions/No. of shares in millions = $62,667.6/180.24= $347.7