In the report, it is intended to analyse the fiscal status of Tesla Inc. Tesla Inc is an electric vehicle manufacturing company established in February 2003 in America. It holds year-to-date 55% of the shares in the market. The assessment is done on the objective of the company and to maximise the wealth of the shareholder is critically evaluated. The evaluation would help in understanding the recent situation of the company share. The company raised fresh capital of $1.46 billion by selling 6.8 million new stocks in 2016. The discussion on the different source of finance is done to determine how the company would achieve its objective of increasing the production by $500000 per year until the end of 2018. Different consideration taken by Tesla Inc is discussed to determine the type of sources of finance chosen by the company. The report is highlighting the element of WACC used for calculation and evaluating the difficulties that arise to Tesla Inc for calculating WACC.
Shareholders are the key stakeholders of a company. They are the actual owners of the company. Due to this, one of the key objectives of a company like Tesla is to satisfy the shareholders by maximizing their wealth. However, if this particular objective of the companies is critically analyzed, it must be stated though shareholders’ wealth maximization is a key objective of the business it is not the only objective that a business should follow. Maximization of shareholders’ wealth is important for the business because it helps the company arranging funds for the business (Ayuso et al., 2014). If the shareholders remain satisfied with the performance of the company, they will be willing to invest more amount of money in that business only. It means to meet the financial needs to the business, maximization of shareholders’ wealth is very important.
However, in this context, it is important to be mentioned that in order to maximize the wealth of the shareholders, the management needs to put more effort that the standard requirements. This influences the managers to charge or expect more remuneration for working at the organization. This on the other hand tends to enhance the overall cost remuneration. In addition to this it can also be stated that sometimes the scope for maximizing shareholders’ wealth is limited because of several reasons like, maintaining the financial standards, true valuation and many others (Easton and Sommers, 2017). However, if the company can maximize the shareholders’ wealth legally and ethically, it can influence the sustainability positively. In this context, it is also important to be noted that maximization of shareholders’ wealth is not sufficient for the growth of the entire business. In order to achieve the ultimate aim of the business, the company like, Tesla needs to follow some other objectives of the business. These other objectives of the business are as follows:
Cost control – Along with shareholders’ wealth maximization, the company needs to achieve the objective of cost control. Focusing on this activity is important because it helps to develop or improve the income level of the business by controlling or reducing the total cost (Hess and Andiola, 2017). This particular objective indirectly helps to achieve the key objective of shareholders’ wealth maximization because controlling cost level net income of the business is enhanced.
Better inventory management – This is another objective that Tesla must follow while operating business in the market. Better inventory management helps in maintaining better sales flow in the business. If the sales flow is enhanced, the scope for enhancing the income will also increase. This will on the other hand help in maximizing the wealth of the shareholders. Hence, this particular objective also has direct impact on the key objective of the business (Ayuso et al., 2014).
Management’s remuneration – Providing a standard rate of remuneration is important to keep the managers or management satisfied with the business. If the management gets standard or expected level of remuneration they will be motivated for better performance. This is important for improving the performance standard of the business (Knack and Xu, 2017). Moreover, it can also be stated that better remuneration will influence the managers to concentrate on the fulfilment of shareholders’ need properly.
Therefore, from the above discussion, it can be stated that maximization of shareholders’ wealth is key objective of the business, but in order to achieve this particular objective properly the company needs to focus on the other objectives also.
The external source of finance that is used by the company is outside which includes the issuance of equity, adopting a partner from new business. In the external source of finance, the bonds are created for long-term obligation and commercial paper is utilised for retrieving debt for short-term (Knack and Xu, 2017, p.215). There are number of the financial institution that provides finance to the business of the organisation for its smooth functioning and managing the daily work. The various external source of finance are as under:
Trade credit- trade credit is the term used to take credit form the creditor or debtor. also allows the company in delaying the interest payment among business and the supplier. The credit is taken for the purpose of smooth trading and creating the healthy relationships with the supplier and creditor (Hoffman et al. 2015, p.671).
Loan- the loan is similar to the debenture, however, the interest to be paid by the borrower of loan is not too high, unlike debenture issuing. The different institution and banks provide the loan. Before issuing such type of finance the bank analyse the debt service of the company and then the loan is secured by the mortgaging of assets.
Issue of equity share – This is also an important long-term external source of funds that Tesla can use for meeting its financial requirements. The main positive side of this source is that the company can generate huge amount of funds through this source. However, the main issue with this source is that the source takes a long time for arranging money for the business.
Therefore, the above discussion is clearly indicating that there are several important and useful external sources of funds that the company may use. However, in this context it is important to note that these sources are not similar to each other.
Ayuso, S., Rodríguez, M.A., García-Castro, R. and Ariño, M.A., 2014. Maximizing stakeholders’ interests: An empirical analysis of the stakeholder approach to corporate governance. Business & society, 53(3), pp.414-439.
Denis, D., 2016. Corporate governance and the goal of the firm: in defense of shareholder wealth maximization. Financial Review, 51(4), pp.467-480.
Easton, P.D. and Sommers, G.A., 2017. Two Different Ways of Treating Corporate Cash in FCF Valuations—and the Importance of Getting the Cost of Capital Right. Journal of Applied Corporate Finance, 29(3), pp.71-79.
efinancemanagement.com , 2018.External source of finance. Available at https://efinancemanagement.com/sources-of-finance/external-source-of-finance-capital. [Accessed on 28th July 2018]
Hess, M.F. and Andiola, L.M., 2017. Fraud Risk Brainstorming at Tesla Motors. Issues in Accounting Education, 33(2), pp.19-34.
Hoffman, A.N., 2015. Tesla Motors, Inc. Strategic Management and business Policy, p.671.
Knack, S. and Xu, L.C., 2017. Unbundling institutions for external finance: Worldwide firm-level evidence. Journal of Corporate Finance, 44, pp.215-232.
Krabec, T. and Čižinská, R., 2017. Invested Capital, Its Importance, and Interpretability Within Income-Based Methods for Determining the Value of the Company. In New Trends in Finance and Accounting (pp. 783-789). Springer, Cham.
Krüger, P., Landier, A. and Thesmar, D., 2015. The WACC fallacy: The real effects of using a unique discount rate. The Journal of Finance, 70(3), pp.1253-1285.
tesla.com(2018)Mission, Available at: https://www.tesla.com/blog/mission-tesla
[Accessed on 28th July 2018]
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