Often in the markets when the price of stock goes up – the price of bonds goes down and vice versa. Based upon teh article and what you
Companies have various different ways to finance their business. We know that we can obtain money through debt financing through the sale of bonds. We know we can obtain financing by selling equity in the company through the sale of stock. This is an article from the Wall Street Journal on how Tesla did both at the same time. Read the article and respond to the following questions. Do not forget to respond to at least two other classmates.
Questions:
1. Often in the markets when the price of stock goes up – the price of bonds goes down and vice versa. Based upon teh article and what you have learned in class, why do you think this was a good strategy?
2. Tesla has been on the brink of bankruptcy and is now at the height of prosperity. Through this time Tesla/Elon Musk have had a group of ardent followers and detractors. Why do you think there are people who are loyal/defenders of Musk and Tesla? Why have there been detractors/short sellers of Musk and Tesla?
-Instructions
Step 1 – Provide a well-thought out response to the Discussion Questions. Review the questions and provide a response to each part of the questions. If there is an article involved in the discussion – read the entire article before responding. Be thorough and express your ideas.
Step 2 – Respond to at least two other classmates responses on the Discussion Board. Make the responses meaningful. Answer such as, “I agree with you, Herbie!” are not enough! Be thorough and well-thought out. Read their entire response and then provide your thoughts whether you agree with the ideas they present or disagree with them. Provide a point or two for each response. You can disagree politely
Student 1:
By using both types of long-term financing, Tesla is guaranteed a return on its financing regardless of how the economy and the equities market is performing. During economic downturns, investors take refuge in bonds, driving up their cost. When the economy is improving, investors exit bonds and buy up equities. By using both form of long-term financing, Tesla ensures that it benefits under both scenarios and doesn’t put all its “eggs in one basket”.
Musk loyalists admire his determined, entrepreneurial spirit and his unbelievable work ethic. Despite having a board of directors and multiple levels of management, Tesla Motors is viewed as being Musk’s vision alone. His followers have a strong belief that he will succeed, no matter the obstacles.
The detractors and short sellers of Tesla are approaching the company as exactly what it was a few years ago, a small startup trying to break into the crowded automotive market. From this perspective, it’s easy to assume that Tesla was likely to fail and that the high stock price was due to pure speculation.
In hindsight, electric vehicles are the future of the automotive industry and Tesla is spearheading this new wave with both innovation and quality. The company’s capitalization is reaching new highs daily and it was just accepted into the S&P 500. Much like Tesla’s sister company, SpaceX, Tesla is going to the moon.
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Student 2:
1. In order to raise capital, Tesla increased the availability of its stock which surprisingly raised stock prices. Tesla’s convertible bonds allowed buyers the return on debt and the potential for greater equity. This strategic choice allowed Tesla’s stocks and bonds to simultaneously raise capital during a low quarter. With stock and bond financing, the article details how Tesla could bring in around $2.3 billion. With greater liquidity from debt financing, Tesla stockholders will grow more optimistic and eagerly seek convertible bonds to lessen their potential risk while increasing potential gain.
2. Tesla has maintained ardent followers because of Musk’s ambition and innovation. Although Tesla has fallen short with available capital and gone into debt, supporters see the potential in revolutionary designs through continued liquidity. Musk’s ability to buy more stock further strengthens stockholder optimism that the company will succeed despite momentary downturns. Even so, Musk himself admitted that the company nearly died of bankruptcy. Tesla’s cash flow problems have led many to short sell stock with the the prediction of further cash flow problems. With a debt of $10.3 billion as mentioned in the article, many have growth skeptical of the sustained prominence of the electric car company.
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