Tesla's Convertible

On May 2, 2019, Dan Cohen, a financial analyst at Tesla, Inc., was tasked by the CFO team with proposing a thesis for issuing a convertible bond. Tesla needed to raise $2 billion for capital expenditures and R&D to achieve sustainable profitability. The CFO team was considering three fundraising options: equity, a straight bond, and a convertible bond. Cohen’s job was to analyze and present the pros and cons of issuing convertible debt, considering Tesla’s complex financial history and alternative fundraising options. This case includes an overview of Tesla’s current cash position and its historical methods of raising cash; the characteristics of convertible bonds and how they compare to equity and straight bonds; pricing of convertible bonds; and analysis of the optimal conversion premium and coupon rate pairs for Tesla to strategically raise capital. Using basic financial market concepts and option pricing techniques, students will explore the financing decision faced by Tesla in 2019 and replicate the analysis Tesla’s CFO team members would have conducted as they developed their own thesis for raising capital. At the University of Virginia Darden School of Business, this case has been successfully taught in the capstone module of “Valuation in Financial Markets,” an elective finance course in the MBA program. The case is also well suited for the option pricing module in a core first-year MBA finance course and in a corporate financing course. With some additional analysis, it could be employed in a course on derivatives. The teaching plan assumes basic familiarity with option pricing, specifically the Black-Scholes model, but it can be adapted for students who need more review. It also includes video by Darden Media about the process of pricing a convertible bond.