Research Paper on Financial Instruments and Markets

Introduction

Tesla Inc. is American energy and the automotive company that is based in Palo Alto, California. The company mainly specializes in electric care manufacturing, and through its subsidiary, SolarCity is manufactured solar panels. The firm operates several production and assembly plants. As of June 2018, the company sells its new Model S, Model 3, and Model X vehicles. The company over the last six months have been struggling to fulfill its ambitious deadline, and this has affected its share price.

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Question 1

Tesla has made some bold, forecasting, time-constrained goal with becoming both profitable and cash flow positive in the second half of 2018. Several issues have affected the share price of Tesla Inc., and they include the comment by its iconic CEO. The CEO claimed that the organization is id not raising any equity. This means instead of the organization raising capital is trying to raise cash with creative maneuvers that will significantly impact on its income statement. The firm is mainly doing something that has never been tried before by raising money by being profitable. The rush to achieve its deadline has indicated a sign of desperation that shows that the organization is not financially healthy and confident in the long-term future. This action has alienated customers and the diminishing long-term growth.

Moreover, combined with the firm's inability to meet its deadline and the collage action paints Tesla in a desperate position and show a gloomy future to the firm's owner. This has affected the price shares of the organization negatively as the owners are not confident if the organization will be able to meet is an obligation. The price share of the firm dropped by 5% percent following the announcement by Elon Musk.

Tesla has historically had several problems on the overvaluation, and this is due to the messianic reputation of CEO Elon Musk. This has become a risk after the dramatic drop in demand for the new vehicles that are manufactured by the organization. Moreover, due to the underlying supply of cash meant that the organization kept expanding and extending its operation in the face of non-stop operational bungling by the CEO. Through such activities, something went wrong, and from some unexplainable reasons, the organization did not raise equity capital. On the same, not the management maintained the unequal balance sheet. Instated of the organization saying true to its investors the firm started to leveraging various parts of its operation resulted in tons of debt. The interest expense of the organization is at $640M per year run rate. The acumination of such liability has affected the share price of the organization significantly. Some of the of the investors decided to sell their shares, therefore, resulting in a drop in share price of the organization. It can be argued that Elon Musk has played a crucial role in troubles that the organization is going through. Additionally, Tesla's earnings calls have become a spectacle where investors have increasingly questioned Elon Musk tales.

The Model 3 demand is another issue that has affected the price share of Tesla. The demand for Model 3, Model X, and Model S are the single most significant drivers of the organization narrative. The Model 3 and other models have been overstated and vastly overplayed. The demand for the units is between 2000 to 3000 per week while the production is 5000 per week. This has resulted in overproduction. Moreover, the demand for the product 3 care models has dropped over the past few months as indicated in the graph below.

Similarly, the demand for Model S and Model X is also deteriorating rapidly. The markets indicators in China and Norway show that the sales for the Model S and Model X is dropping. The drop in sales for these model is due to the increased competition, aging Model S and Model X, trade war with China, and Osborne effect of Model 3. Moreover, these factors are not in the control of the organization, and there is not much that the organization can do to reverse the demand trends as much as the problem is expected to get worse concerns about the firm's abysmal quality increase and viability. These factors have affected the share price of the organization negatively as most investors are pulling their investment away from the organization. This means that the firm has limited resources to work with.

Question 2

The valuation of Galaxy Resources Limited (ASX: GXY) is no different from the assessment of other organizations. The valuation methods that would be used include firstly, asset valuation method. The central aspect in this section is to assess the tangible and intangible items that the company has. This can be done through the book value or market value of the assets to determine the organizations worth. Moreover, counting all the cash, equipment, real estate, stocks, inventory, trademarks, options, and customer relationship in the process of calculating the asset valuation of the business. Secondly, historical earning estimate. Primarily, the organization's gross income, capitalization of cash flow or the earnings, and the ability to repay debt determine the current value of the firm. Moreover, if an organization struggles accumulate enough money to pay its debts that it values drops. Additionally, if the organization can repay its loan or dept quickly and at the same time maintain a positive cash flow, it has a positive business value.

Thirdly, relative valuation, in this method the main aim is to determine how much similar business would bring is the owners were determined to sell them. The approach compares the value of the business's assets to the number of related assets to give a reasonable asking price. Fourthly, future maintainable earning valuation. Importantly, the profitability of an organization in the future determines its value today. This method evaluates the profits, expense, gross profit in the previous years so that it can project them in the future. These figures are crucial in predicting the future business value. Another essential method in the valuation of Galaxy Resources Limited (ASX: GXY) is a discount cash flow valuation. If the profits are not expected to remain stable shortly the appropriate method is the discount cash flow valuation.

To sum up for the most accurate and best results is to compare two or more methods to get a clear picture of the value of the firm. Additionally, when valuing a company going concern is necessary to determine if the organization will be in existence shortly.