Mispricing and the Cost of Capital: The Example of Tesla

7 Pages Posted: 10 Mar 2020 Last revised: 11 Mar 2020

See all articles by Bradford Cornell

Bradford Cornell

Anderson Graduate School of Management, UCLA

Date Written: February 18, 2020

Abstract

Sentiment based mispricing of a common stock can be interpreted as a subsidy that reduces the cost of capital. The subsidy is provided by the investors who are willing to accept a lower return than the “true” cost capital. In the case of Tesla, I estimate the subsidy to be 248 basis points. To the extent that sentiment-based mispricing can be realized by issuing new shares at a lower effective cost of capital, Tesla has a significant competitive advantage over incumbent auto makers that is exacerbated by the capital-intensive nature of the business. This results in a feedback from stock market pricing to fundamental value. The feedback mechanism is a significant threat to traditional car makers.

Keywords: valuation, cost of capital, mispricing

JEL Classification: G00, G10

Suggested Citation

Cornell, Bradford, Mispricing and the Cost of Capital: The Example of Tesla (February 18, 2020). Available at SSRN: https://ssrn.com/abstract=3539698 or http://dx.doi.org/10.2139/ssrn.3539698

Bradford Cornell (Contact Author)

Anderson Graduate School of Management, UCLA ( email )

Pasadena, CA 91125
United States
626 833-9978 (Phone)

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