This discussion addresses the following Module Outcomes:
Evaluate expected portfolio returns on shareholder value. (CO4)
Evaluate systemic risk by applying a Beta coefficient. (CO4)
Evaluate firm and project value using a weighted average cost of capital (WACC). (CO2, CO3, CO4)
Proterra was founded by Dale Hill in 2004 with a vision to design and manufacture world-leading, advanced technology heavy-duty vehicles powered solely by clean domestic fuels. After launching a first successful fleet of alternative fuel buses in the 1990s, Proterra focused on developing the ‘bus of tomorrow.’ Proterra Inc. also designs and manufactures heavy-duty vehicles including EcoRide, a battery electric and zero-emissions bus, and Proterra Catalyst, an electric transit vehicle. The company manufactures a TerraFlex Energy System that enables customers to select amount and type of energy storage to meet specific route requirements, plus TerraVolt fast-charge batteries, TerraVolt extended range batteries, an on-route charge station and in-depot charging services. It offers financing solutions, route simulation analysis, battery lifecycle management, and standard warranty services (Proterra, 2015). It serves customers throughout the United States. The company is privately owned, but is in the process of becoming a public corporation. With this expectation, the firm’s chief executive officer (CEO) has asked for determination of which of two companies appears to be a better peer to compare itself against, New Flyer Industries, Inc. (a Toronto-based firm), or Tesla. Tesla Motor Vehicles designs, develops, manufactures, and sells high-performance fully electric vehicles and stationary energy storage units similar to certain Proterra products. Tesla Motors has subsidiaries in North America, Europe and Asia, with the primary purpose of these subsidiaries being to market, manufacture, sell and/or service their vehicles (Tesla Motors, 2016). New Flyer was founded in 1930, and is now the largest transit bus and motorcoach manufacturer and parts distributor in North America with fabrication, manufacturing, distribution and service centers in Canada and the United States. It is North America’s heavy-duty transit bus leader and offers clean diesel, natural gas, diesel-electric hybrid, electric-trolley and battery-electric. Information regarding Tesla and New Flyer is given here, for your use in comparing these firms.
Tesla versus New Flyer
Significance
Measure
TSLA
NFI
Total Market Value of all outstanding shares.
Market capitalization
33.63B
1.831B
Number of outstanding shares currently held by all shareholders.
Outstanding shares of stock
147.28M
59.742M
A Beta coefficient indicates the systemic risk that an asset has relative to an average asset. A risk-free asset has a Beta of zero.
Beta
1.28
0.16
The return the firm must earn on its existing assets to maintain the value of its stock, and the required return on any investments by the firm that have essentially the same risks as existing operations.
WACC
9.03%
8.34
PE ratio divided by expected future earnings growth (after multiplying the growth rate by 100).
PEG Ratio
18.47
0.5
A measure of profit per dollar of assets.
ROA
-7.04%
6.26%
A measure of how the stockholders fared during the year.
ROE
-113.20%
13.21%
A measure of how much investors are willing to pay per dollar of current earnings. Higher PEs are often taken to mean the firm has significant prospects for future growth.
P/E Ratio
-29.17
25.3
Ratio of Net income to sales.
Profit Margin
-23.91%
-3.83%
Discussion Prompt:
In this discussion, assume that you are the finance manager for Proterra and you have been asked to provide an analysis of the following issues, as the firm develops benchmarks for its cost of capital (WACC) estimates. The firm’s CEO has instructed you to use the pure play approach to estimate its WACC cost of capital, and has chosen Tesla Motors (ticker symbol TSLA) and New Flyer (ticker symbol NYI.TO) as possible representative peers (Korosec, 2015). You will deliver your analysis in the form of a memo, or formal communication addressed to the firm’s CEO. In this discussion, you are to present this memo in which you:
Tasks:
Using the information provided here and speaking of Finance Director of Proterra, brief the firm’s CEO, analyzing:
Analyze the relative applicability or inapplicability of utilizing these firms as peers to evaluate Proterra’s likely cost of capital, given what you know about Proterra, Tesla and New Flyer, and the lessons of Capital Market History.
Analyze problems in using an SML approach in determining Proterra’s cost of capital.
Post two additional replies to classmates, offering critical analyses and comments relating to their determinations and evaluations of Proterra’s utilization of Tesla as a peer, and problems in the overall approach of evaluating cost of capital using a WACC. Please cite sources of additional research examine areas where you do and do not believe that your classmates’ statements make optimal use of assigned readings, or could otherwise include additional considerations.
