Individual Assignment

Tentative due date: $11$:$00$ p$.$m$.$ April $14,2024$

Requirement: Answer all questions on next page.

Description:

Assume that you are living in $2016$ and analyze Tesla$$s financial performance $($This means that it is important that you do not know what would happen after $2016).$

By the fall of $2015,$ Tesla was well on its way to executing the biggest game change in the auto industry since Ford introduced the Model T$.$ The ascendancy of the Model T in $1908$ initially gave rise to the dominance of the internal combustion engine. Before that, electric vehicles $($EVs$)$ shared the road in similar numbers to gas$-$powered vehicles. The next century saw numerous attempts to introduce EVs, but all met with failure. Perhaps the best known was GMs EV$1,$ the first mass$-$produced electric car from a major automaker. Over $1,000$ EV$1$s were produced between $1996$ and $1999.$ But in $2002,$ GM declared it an unprofitable niche, repossessing and destroying the EV$1$s$.$ Critics argued that GM was concerned with cannibalizing its traditional gas$-$powered vehicle sales, and particularly the lucrative spare$-$parts market, since EVs require less maintenance and replacement parts.

Interest in electric vehicles was rekindled in $2004$ when a dynamic young entrepreneur called Elon Musk took control of a fledgling EV company called Tesla and set out on a mission to create affordable mass$-$market EVs. Tesla$$s first vehicle, the Roadster, hit the market in $2008.$ Employing lithium$-$ion battery technology, it was the first mass$-$produced EV to have a range in excess of $200$ miles on a single charge. The Roadster was a small two$-$seat sports car based on a Group Lotus body. Musk$$s next project was a four$-$door electric sedan designed and produced by Tesla from the bottom$-$up$.$ To help with its burgeoning financing needs, Tesla went public in $2010.$ The Model S hit the auto market in $2012$ to wide critical claim. A family$-$style four$-$door sedan with sleek looks and high performance, Tesla was selling over $20,000$ units per year by $2013.$ Tesla$$s next project was the Model X$,$ an electric SUV with gull$-$wing doors and a high sticker price. Hitting the market late in $2015,$ initial deliveries failed to meet expectations due to production problems. These initial models laid the groundwork for Musk$$s grand vision of an affordable mass$-$produced electric car. A tweet on July $162015$ confirmed that this car would be called the Model $3,$ with first deliveries subsequently slated for late $2017.$

Despite Tesla$$s remarkable accomplishments, the company also faced a number of challenges in its quest to revolutionize the auto industry. First, Tesla was making large losses and requiring huge inflows of cash to fund its ever$-$increasing investment expenditures. Analysts questioned many aspects of Tesla$$s business model, including Tesla$$s vertically integrated distribution network, generous resale value guarantees and lengthy warranties. Tesla also faced growing competition, particularly in its target Model $3$ market. The Nissan Leaf had long been available in this segment and the Toyota Prius had long provided an attractive hybrid alternative for energy$-$conscious drivers. In the luxury market, Mercedes, BMW and Volvo all had plans to compete in the EV segment. Despite these challenges, Tesla$$s stock price was soaring. After initially pricing at around $$20$ in $2010,$ Tesla$$s stock price was in the mid $$200$s by late $2015.$ The huge run$-$up led many commentators to argue that Tesla was overpriced. For example, in an article published in the Journal of Portfolio Management, two respected finance academics concluded that Tesla$$s stock price was two and one$-$half times an aggressively optimistic value estimate.

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QUESTIONS

Business Strategy Analysis

$1.$Tesla has a distribution model that is not common in the automobile industry. Briefly describe Tesla$$s distribution model.

$2.$List the key success factor and key risks associated with Tesla$$s distribution model.

Accounting Analysis

$3.$Tesla uses lease accounting for automotive sales under its resale value guarantee program. Assume that instead of using lease accounting for automotive sales under its resale value guarantee program, Tesla instead recognized these sales and the associated cost of sales at the inception of the sale. Estimate the Income $($Loss$)$ from operations that Tesla would have reported for $2014.$

$4.$Summarize the accounting policy that Tesla uses for warranties.

$5.$Assume that instead of using its current accounting policy for warranties, Tesla instead expensed all warranty costs as costs were incurred. Estimate the Income $($Loss$)$ from operations that Tesla would have reported for $2014.$

$6.$Which of the above two accounting methods for warranties do you think best reflects the underlying economics of the warranty obligations? Briefly explain your answer.