Tesla Motors: The Convertible Bond Decision

Set in late February 2014, this case asks Tesla Motors' management team to choose a financing package for the company's planned Gigafactory and the transition from premium electric vehicles to a mass-market platform. Tesla is considering $2 billion of five- and seven-year convertible senior notes with very low coupons, a 42.5% conversion premium, and a separately purchased hedge-and-warrant package that would defer most dilution to much higher share prices. Students evaluate Tesla's strategic capital requirements, its evolving financing policy, and the relative merits of common equity, straight debt, and convertible debt. They translate the offering terms into cash interest, conversion exposure, dilution, and maturity risk; they estimate the bond and equity-option components of each note. The case integrates capital-structure policy, credit spreads, option valuation, market timing, signaling, and financial flexibility.