Financial analysis for a public limited firm

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Title page
 
Executive summary
 
Table of contents
 

  1. Introduction
    • Purpose and scope of the report
    • Introduce your firm
    • Introduce the areas analysed

 

  1. Discussion
    • Corporate governance
      • Management, board of directors and shareholders
      • Lenders
      • Financial market considerations
      • Social constraints
    • Risk and return
      • Cost of equity
      • Cost of debt
      • Cost of capital
    • Earnings and cash flows
      • Analysing existing investments and ratio analysis
      • Assessing competitive strengths
      • Sustainability of competitive strengths
    • Financing sources
      • Current Financing
      • Trade-off on Debt versus Equity
        • Benefits of debt
        • Costs of debt
      • Dividend policy
        • Historical dividend
        • Analysing dividend policy
          • Firm characteristics
          • Cash/trust nexus
          • Peer group analysis
        • Conclusions and recommendations
        • References
        • Appendices (excel demonstrations)

 
For report writing refer: https://www.youtube.com/watch?v=AFGNKJruxdg
Exemplar Case study 1
Analysing Governance
Structure, and Risk and
Return Profile of
Telstra Corporation
Limited
Table of Contents
Introduction ……………………………………………………………………………………………………… 2
Corporate Governance ……………………………………………………………………………………….. 2
Company Management ………………………………………………………………………………………………2
Conflicts/Social Constraints…………………………………………………………………………………………4
Financial Market Considerations…………………………………………………………………………………..6
Risk and Return …………………………………………………………………………………………………. 7
Risk Profile and Cost of Equity ……………………………………………………………………………………..7
Performance Profile …………………………………………………………………………………………………..9
Cost of Debt……………………………………………………………………………………………………………..9
Cost of Capital………………………………………………………………………………………………………… 10
Conclusion………………………………………………………………………………………………………. 11
References ……………………………………………………………………………………………………… 12
Appendices …………………………………………………………………………………………………….. 13
Appendix 1…………………………………………………………………………………………………………….. 13
Appendix 2…………………………………………………………………………………………………………….. 14
Appendix 3…………………………………………………………………………………………………………….. 15
Appendix 4…………………………………………………………………………………………………………….. 15
Appendix 5…………………………………………………………………………………………………………….. 15
Introduction
Telstra Corporation Limited (TLS) is a full service domestic and international communications
provider for Australia. Telstra provides telephone exchange lines to homes and businesses, online
services and directory services. As Australia’s number one telecommunications carrier, Telstra
services over 16.7 million mobile phone customers and provides approximately 11 million fixed-line
services to access lines. Telstra’s largest market is consumer and residential customers, followed by
business and government. Telstra is currently expanding into Asia with San Migual (Philippines) and
Telkom Indonesia. Telstra’s networks cover about 99% of Australia’s population with Australian
accounts being 95% of Telstra’s revenue; the other 5% from international operations mainly in China
(Bloomberg, 2017). This case study will highlight the corporate governance structure of the firm,
discussing any risks that may result in problems regarding the firm and shareholder growth. A risk
profile will also be developed in order to estimate the firm’s cost of debt, equity and hence capital
for the firm.
Corporate Governance
Company Management
The current CEO of Telstra is Andrew Penn, who was appointed in 2015. The CEO first joined the
company in 2012 as the Chief Financial Officer. The CEO has held a number of responsibilities
including strategy, mergers and acquisitions, treasury, internal audit, risk management, tax,
corporate planning, reporting and analysis, external reporting and investor relations. Andrew was
also responsible for Telstra’s expansion outside of Australia. Prior to joining Telstra, Andrew held
various positions with AXA Asia Pacific for 20 years including Group CEP from 2006 – 2011, Chief
Executive Officer Australian and New Zealand, Group Chief Financial Officer, and Chief Executive for
Asia (Telstra, 2017). The CEO is also an ambassador for the Amy Gillet Foundation, advocating for the
reduction of serious injury and death of cyclists in Australia. He is also a board member of Very
Special Kids and member of Juvenile Diabetes Research Foundation Advisory Council. Penn receives
an annual remuneration mainly in the form of remuneration, benefits, incentives and shares. In
2016, this totalled to $6.7 million, which comprised of a fixed remuneration, non-monetary benefits,
cash incentives and shares. Penn’s ownership of Telstra comprises of 986,763 shares and 758,564
performance rights, which signifies that his success derives from the success of the company as a
whole.
Table 1 – Director Remuneration, Bloomberg 2017
Director (since) Position Remuneration Performance
Rights
Shares
John Mullen
(2008)
Non-executive
Chairman
$376,699 26,159
Andrew Penn
(2015)
Chief Executive
Officer
$6,768,514 758,564 1,301,712
Craig Dunn
(2016)
Non-executive
Director
$59,016 19,173
Peter Hearl
(2014)
Non-executive
Director
$272,533 45,000
Russel Higgins
(2009)
Non-executive
Director
$276,238 93,563
Chin Hu Lim
(2013)
Non-executive
Director
$236,549 20,274
Nora
Scheinkestel
(2010)
Non-executive
Director
$305,000 91,549
Margaret Seale
(2012)
Non-executive
Director
$270,000 269,540
Steven Vamos
(2009)
Non-executive
Director
$268,252 40,000
Trae Vassallo
(2015)
Non-executive
Director
$168,244 0
The non-executive directors of TLS hold only 0.04% of total equity, thus signalling that the majority
of their remuneration is salary and performance based. Table 1 represents the total remuneration
and of the CEO and board of directors, including the amount of equity they hold within the
company. Table 1 represents the total amount of remuneration for the non-executive directors and
executive CEO. While the non-executive directors are paid more compared to the market, the
majority of directors are domestic which can be beneficial or hazardous towards Australian
shareholders. For example, Russell Higgins is the director of APA Group and Argo Investments
Limited, and Steven Vamos is the director of Fletcher Building Limited, a manufacturer and
distributor of building and construction products and services. Non-executive director Chin Hu Lim is
also director of Citibank Singapore, Heliconia Capital Management and Kulicke & Soffa Industries, so
with Telstra’s recent expansion into the Asia Pacific Region, there is a likely chance that these
companies may be offered a contract, depending on what Telstra requires. Table 2 displays the
other connections these directors have. As it can be seen, the overall board of directors have
connections to a wide range of industries ranging from energy, technology, banking and retail; both
domestically and globally.
Director Current Directorships Previous Directorships
John Mullen Asciano Ltd (from 2011) Brambles Limited, DHL
Express, TNT Group
Craig Dunn Westpac AMP Group, Colonial Mutla
Group, EON CMB Life
Insurance (Malaysia)
Peter Hearl Santos Ltd, Treasury Wine
Estates, Goodman Fielder Ltd
Yum! Brands Inc, PepsiCo Inc
Russell Higgins APA Group, Argo Investments,
Leighton Holdings Limited
Ricegrowers Limited, Snowy
Mountains Hydro Electric
Scheme, Global Carbon
Capture
Chin Hu Lim Kulicke & Soffa Industries Inc,
Keppel DC Reit PTE Ltd,
Heliconia Capital
Management, Citibank
Singapore, Changi General
Hospital
Frontline Technologies Corp
Inc, BT South East Asia, Sun
Microsystems
Nora Scheinkestel Macquarie Atlas Road,
Stockland Group
Orica Limited, Insurance
Australia Group, Pacific Brands
Limited, AMP Limited
Margaret Seale Scentre Group, Ramsay Health
Care Limited, Bank of
Queensland Limited
Random House Inc
Steven Vamos Fletcher Building Limited David Jones Limited, Microsoft
Australia and NZ, Ninemsn
Trae Vassallo Enlighted Inc Good Technology
This provides a wide array of opportunities if the company would like to expand further into
different markets, as well as different perspectives when it comes to high profile decision making.
Nevertheless, due to the wide spread of connections the directors have, shareholder efficiency may
be threatened because there is more incentive to offer contracts to these insider companies rather
than more cost-effective alternatives.
There is a distinct separation between management and ownership within Telstra. With 11.89 billion
shares outstanding, there are many individual investors and organisations that hold small stakes
within Telstra. The largest shareholder within Telstra is The Vanguard Group which have ownership
stakes equivalent to only 2.29% (Bloomberg, 2017). The only other shareholder that has an
ownership stake of over 1% is Capital Group Company (Bloomberg, 2017). There is a slight overlap
between management and ownership, with the CEO having 1.3 million shares as well as a number of
executive management and non-executive directors holding shares within the company. However,
compared to the overall shares outstanding, it is a negligible amount of 0.04% (Bloomberg 2017).
Conflicts/Social Constraints
There appears to be no evident conflict between stockholders and debt holders of Telstra. While the
debt to equity ratio (118.13%) is rather high, it is expected as Telstra has been financing a lot of
growth projects such as the NBN rollout and technological advancement projects (Telstra, 2016). The
number one factor to succeeding in the telecommunications industry is customer satisfaction
(Wang, Lo, 2002). Telstra has been financing its improvements to its network in other to derive
better customer experiences using debt, however just in 2016 Telstra had paid its shareholders a
total of $1.5 billion, indicating a healthy firm. Payments of this amount are unlikely to stop in order
to maintain shareholder confidence due to the high amount of debt. As Telstra seeks to improve and
expand their network, the inclusion of debt covenants within their lending agreements ensures that
debt holders can control the level of risk they are facing; whilst allow shareholders to be confident
that the company is growing successfully. While Telstra is taking on more debt, it is evident that
there is not much conflict due to the debt holders debt covenants, and the payout shareholders are
receiving. In addition, Telstra has a stable credit rating of A2, providing debt holders with more
confidence in the company.
To interact with the stockholders, management release an annual Corporate Governance Statement
which presents their framework that include all details of engagement activities with the
shareholders, detailed accountability frameworks, risk management systems and a board charter.
This ensures that all stockholders can readily access adequate information regarding the company
and are given a point of contact if any issues arise. A summary of the achievements of each board
member are introduced, along with a matrix detailing the diversity of skills the overall board have.
The statement also outlines any conflicts of interests between board members, and voting
procedures to ensure that decisions are made on behalf of the company and not personal interest.
Telstra further reinforces that they put their stockholders first by outlining their ethics, values, and
code of conduct frameworks. This provides avenues for sustainability as well as whistleblowing,
allowing stockholders to take action if management does not reflect their best interests. The
company also heavily promotes social causes such as diversity and inclusion, as the statement
outlines achievements made by the company regarding diversity, inclusion and gender equality.
Overall, the corporate governance statement links the objectives of the board and management to
reflect the best interests of the shareholders. This was strongly showed through provision of basic
and performance shares to several company directors to ensure that decisions are made with the
company in best interest (Telstra 2017). To further this, Telstra have also taken measures to improve
their ESG score overtime, and have successfully generated a higher Bloomberg ESG score compared
to their peers. (Figure 1). The average ESG score is 30.93, however Telstra has managed to beat its
competitors and the average with a 56.38 ESG score. This shows that the company has taken a
strong pursuit to create a good social image within society.
Figure 1- ESG Score Comparison (Bloomberg, 2017)
Telstra have placed a strong emphasis on ESG, sustainability and diversity consideration through
issuing their annual sustainability report, corporate governance statement, and a public report
submitted to the Workplace Gender Equality Agency. Due to the size of the company, it is vital that
they abide by the social standard set by today’s society to preserve a strong socially responsible
corporate image. In doing so, Telstra actively discloses their social efforts – detailing the increase in
female workforce, female directors and goals that the company has set to reach by 2020 (Telstra,
2016). The company has also listed key sustainability priorities that it has declared to follow, as well
as a well detailed plan regarding continuous customer experience improvement.
Telstra does currently have a good social reputation, which has developed over time. The company’s
success is mainly determined by the satisfaction of its customers, so to maintain and increase that,
the company has always pursued a high ESG score as well as jumping on social movements such as
gender equality and encouraging women in the workforce. As a result, the company’s ESG score is
well above its peers.
Recently Telstra has had major network issues with the crash of their customer’s internet and 4G
networks in certain areas. One major outage affected over 8 million customers and as
compensation, Telstra announced a nationwide free data day (ABC News, 2016). Damage to Telstra’s
reputation will continue to occur if the company cannot gain control of these outages.
Telecommunications is such an essential part of our society today so Telstra cannot afford to have
56.38
14.81
45.68
32.1
45.68
15.64 21.07 16.05
10
20
30
40
50
60
ESG Disclosure Score
more outages. While Telstra’s reputation remains strong as a pricing power and market dominant
company, consumers are beginning to be more sceptical to joining to network (ABC News, 2016).
Financial Market Considerations
Telstra is a large cap stock, and is a market leader within the telecommunications industry. Due to it
having 11.9 billion shares outstanding with many ownership investors as well as its presence in the
ASX 200 index, it is therefore a heavily analysed security. Telstra’s share price has declined steadily
due to increasing competition by smaller companies such as TPG, iPrimus and Vodafone (Bloomberg,
2017). Any major change in share price usually occurs after a major network issue, or when
competitors issues new competitive prices for their products and services. Telstra currently has an
average trading volume of 26,789,663, showing that is highly liquid and therefore very tradable. The
share price dropped by 6.5% in February 2017 after it released a 14.4% decrease in profit
(Bloomberg, 2017). The share price is now at its lowest point within 3 years. Over the past year the
trend has been forming as other competitors fight for competitive prices and market share. An
example would be that in 2015, TPG consolidated with iiNet, propelling it to becoming the second
largest telecommunications provider behind Telstra (Canstar Blue, 2016). This resulted in a decrease
in price as the Telstra started to lose pricing power. This reinforces that there are a large number of
analysts monitoring the firm’s performance, as share prices rapidly adjust to company/industry
information. Therefore, Telstra’s stock price is largely dependent on market perceptions, hence why
the firm has taken a strong social image pursuit and focused on improving customer satisfaction.
All information regarding the company is made available to the public through annual financial
reports, corporate governance statements, press releases, letters to shareholders and website
access through sites such as Google Finance, Yahoo Finance, Morningstar and Bloomberg. These
sources of information are easily accessible to the public and are constantly updated to maintain
accuracy.
Figure 2 – Telstra’s Share Price over a 5 year period (Bloomberg, 2017)
12012
12013
6
2014
22015
2022016
2017
Risk and Return
Risk Profile and Cost of Equity
Figure 3 demonstrates a risk regression analysis of Telstra’s 5 year monthly data in comparison to
the ASX 200 index (see Appendix 1 for data). The intercept of the regression is 0.0085, which
indicates that TLS stock has performed above the market (Damodaran, 2015). As these are past
monthly returns, the monthly risk-free rate between 2007 and 2017 is averaged at 3.757%
(Bloomberg, 2017) (see Appendix 2 for data). Through the following equation, it can be seen that the
stock did not perform as well as expected:
???? (???????????????????? ????????????????????????????????????) < ???????? (1 − ????????????????)
0.0085 < 0.03757 (1 − 0.7675)
0.0085 < 0.0087
Equal to the slope of the regression, the Beta for TLS is 0.7675. When comparing to the standard
market beta of 1, it can be determined that TLS is less volatile and hence has less risk when
compared to the market. This is most likely attributed to Telstra being the dominant player within
the telecommunications industry in Australia, and therefore holding the largest market share at 42%
(Bloomberg, 2017). The standard of error of the data (refer to Appendix 2) extracted from the
regression was 0.0262, which indicates that the beta of Telstra could range from 0.7413 to 0.7937,
with 95% confidence. Additionally, as Telstra remains the pricing power of telecommunications, its
products and services would have a relatively inelastic levels of demand, thus allowing for steady
revenues. Similarly, this beta can also be used to calculate the expected return on equity, the
minimum return that investors require:
Expected Return = Risk Free Rate + Levered Beta (Expected Market Return – Risk Free Rate)
???????????????????????????????? ???????????????????????? = 0.03757 + 0.7675(0.11968 – 0.03757)
???????????????????????????????? ???????????????????????? = 0.1005 ???????? 10.05%
Note that the risk free rate is equal to the monthly average of the RF rate of 10 year Government
bonds, over the past 10 years (Refer to Appendix 3)
Expected Market Return = the average market return of 10 year Government bonds, over the past 10
years (Refer to Appendix 3)
Telstra must ensure that all projects they undertake result in a minimum return greater than 10.5%.
If projects fail to yield a return of 10.05%, share prices will decrease, which will create conflict
between shareholders and management. Depending on the severity, conflicts may escalate to the
point where management may be forced to resign. Thus, it can be seen that the expected return is
equal to the cost of equity, therefore Telstra’s cost of equity is 10.05%.
The proportion of Beta attributable to financial leverage can be clearly shown through the
calculation of the unlevered Beta.
???????????????????????????????????? ???????????????? = ???????????????????????????? ????????????????/(1 + (1 − ???????????? ????????????????)(???????????????????????????? ????????????????/????????????????????????))
= 0.7675/(1 + (1 − 0.3)(1.1717))
= 0.4216
(Note: Average D/E ratio from past 5 years, refer to Appendix 4)
(Note: Tax rate used is that of standard companies in Australia – 30%)
From the regression model (Figure 3), the R2
value can be extracted to reflect the proportion of
variance attributable to market risk. Telstra’s value is 0.4527, which indicates that 45.27% of the
company’s risk is market risk, and hence the remaining amount of 54.73% can be deemed as firm
specific risk. While some investors may not find this appealing, the firm specific risk provides
management with more opportunities to make business decisions (Damodaran, 2015).
Figure 3 – ASX 200 vs TLS Regression
y = 0.7675x + 0.0085
R² = 0.4527
-0.1
-0.08
-0.06
-0.04
-0.02
0.02
0.04
0.06
0.08
0.1
0.12
-0.1 -0.08 -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08
ASX 200 – TLS
Performance Profile
As it can be noted in Figure 4 below, whilst the market has been at a steady growth, Telstra has been
on a constant decrease in stock value. From around early 2014 to about mid 2016, Telstra did clearly
outperform the market. This may be due to Telstra’s introduction of its 4GX network, which offered
customers in over 1,200 suburbs and towns the fast mobile data speeds in the world (Telstra, 2015).
During that period, Telstra was also selected by the Federal Government to participate in Australia’s
largest expansion of mobile coverage to regional and remote Australia, which would have
skyrocketed its stock value, having a project backed by the almost risk free government. Telstra had
also introduced more personalised service to its customers, which boosted customer
experience/perception, a major factor in the value of the company’s stock. However, in early/mid
2016, Telstra’s stock price took a steep drop, most likely due to TPG’s partnership with Vodafone
and its merge with iiNET, which enabled TPG to become the second largest telecommunication
giant, behind Telstra (TPG, 2016). Despite a steady decrease in price, there are positive implications
for Telstra as it still remains as the pricing power, and have future plans on customer retention,
increasing customer satisfaction, as well as introducing the new 5G network (Telstra 2016). Whilst
investors who owned shares in the previous year ($5.24) may wish to sell as the current price as
decreased down to $4.55, they should hold onto their shares or even purchase more if available, as
Telstra continues to see strong customer growth (Bloomberg News, 2017).
Figure 4 – Telstra’s Performance against ASX200 for the past 5 years (Yahoo Finance, 2017)
Cost of Debt
According to the S&P scale, the Telstra’s credit rating is current A-, or A2 in terms of Moody’s scale.
In order to calculate the cost of debt, this rating will be used to determine the default spread, which
was 1% (Damodaran, 2015). The marginal tax rate for Telstra is equalled to what is charged to most
large cap companies, which is 30%. Applying the default spread of 1%, the after-tax cost of debt can
be estimated as:
???????????????????? ???????????? ???????????????? ???????? ???????????????? = (???????????????? ???????????????? ???????????????? + ???????????????????????????? ????????????????????????)(1 − ????????????)
(0.03757 + 0.01)(1 − 0.3)
= 0.0333 ???????? 3.33%
Cost of Capital
The market value of equity and debt must be obtained in order to calculate Telstra’s cost of capital.
In order to calculate the market value of equity, the current market share price is multiplied with the
total number of shares outstanding.
???????? ???????????????????????? = $4.55 ∗ $11893.30 ????????????????????????????
???????? ???????????????????????? = $54114.515 ????????????????????????????
Now in order to calculate the market value of debt, the pre-tax cost of debt (4.757%), debt time to
maturity, interest expense, and face value of debt ($14487 million) must be used. The average debt
time to maturity was derived through assessing the maturity dates of any outstanding debt, which
averaged to approximately 4.77 years (Refer to Appendix 5 for data). The current interest expense
for Telstra is $811 million (Yahoo Finance, 2017).
???????? ???????????????? = 811 (
1 −
1
(1 + 0.04757)
4.77
0.04757 ) +
14487
(1 + 0.04757)
4.77
???????? ???????????????? = $11945.58 ????????????????????????????
Therefore, the total market value (V) is MV Equity + MV Debt = $54114.515 + $11945.58 =
$66060.125 million. These values can now be used to calculate the market weights, which can then
be used to determine the cost of capital:
E/V = 54114.515/66060.125 = 0.8192 = 81.92%
D/V = 11945.58/66060.125 = 0.1808 = 18.08%
Now to calculate the cost of capital, the debt and equity values are multiplied by their respective
market weights:
Cost of Capital = Return on Equity * (E/V) + Return on Debt * (D/V)
= 0.1005(0.8192) + 0.0333(0.2391)
=0.0903 or 9.03%
Conclusion
In conclusion, it is clear that Telstra, while currently suffering from a decrease in share price is still
the market leader and pricing power within the telecommunications industry and ASX 200. Despite
the steady decrease in stock value after TPG’s immense growth, Telstra continues to power through
with increased customer satisfaction, strong customer growth, and constant improvement to their
network. The company already has a strong social reputation as the company has made it clear to its
investors that its image to their customers and potential customers is of the highest priority. Overall,
even though Telstra’s stock price is currently falling, investors should be confident in the company’s
current position as the market leader and pricing power, and should expect an increase in stock
value as Telstra continues to gain a strong steady growth of new customers.
References
ABC News. 2016. Telstra outages: CEO Andy Penn offers free data day as compensation for four-hour
blackout. [ONLINE] Available at: http://www.abc.net.au/news/2016-03-18/telstra-ceo-apologisesfor-four-hour-outages/7256706.
[Accessed 22 March 2017].
Bloomberg Finance L.P. (2017). Bloomberg Trading Database. Unknown: Bloomberg LP
Bloomberg News. 2017. Telstra Sees Continued Strong Customer Growth. [ONLINE] Available
at: https://www.bloomberg.com/news/videos/2017-02-16/telstra-sees-continued-strong-customergrowth.
[Accessed 26 March 2017].
Damodaran, A. (2015 ). Applied Corporate Finance. New York : John Wiley & Sons
Executive Director Salary (Australia) . 2017. Executive Director Salary (Australia) . [ONLINE] Available
at: http://www.payscale.com/research/AU/Job=Executive_Director/Salary. [Accessed 27 March
2017].
Yonggui Wang, Hing‐Po Lo, (2002) “Service quality, customer satisfaction and behavior intentions:
Evidence from China’s telecommunication industry”, info, Vol. 4 Iss: 6, pp.50 – 60
Rick Molinsky. 2015. Telstra Financial Results 2015. [ONLINE] Available
at: https://exchange.telstra.com.au/2015/08/13/telstra-financial-results-2015/. [Accessed 26 March
2017].
Sam Bloom. 2016. TPG takeover: What does it mean for iiNet customers?. [ONLINE] Available
at: http://www.canstarblue.com.au/phone-internet/internet/broadband/tpg-takeover-what-does-itmean-for-iinet-customers/.
[Accessed 21 March 2017].
Telstra. (2017). 2016 Annual Report. Retrieved from:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/2016-Annual-Reportsingle-pages.pdf
Telstra. (2017). 2016 Corporate Governance Statement. Retrieved from:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/FY16-CorporateGovernance-Statement-and-Appendix-4G.pdf
TPG. (2016). 2016 Annual Report. Retrieved from:
https://www.tpg.com.au/about/pdfs/FY16%20Annual%20Report.pdf
Appendices
Appendix 1
TLS ASX 200
Date Adj Close Return Adj Close Returns
1/03/2017 4.55 -0.05602 5684.5 -0.00485
1/02/2017 4.82 -0.036 5712.2 0.016243
2/01/2017 5 -0.01961 5620.9 -0.00792
1/12/2016 5.1 0.009901 5665.8 0.041412
1/11/2016 5.05 0.014056 5440.5 0.023093
3/10/2016 4.98 -0.03861 5317.7 -0.02174
1/09/2016 5.18 -0.01521 5435.9 0.000534
1/08/2016 5.26 -0.05008 5433 -0.02325
1/07/2016 5.53731 0.03777 5562.3 0.062846
1/06/2016 5.33578 -0.00537 5233.4 -0.027
2/05/2016 5.36457 0.042912 5378.6 0.024066
1/04/2016 5.14384 0.005628 5252.2 0.033328
1/03/2016 5.11505 0.059943 5082.8 0.041365
1/02/2016 4.82578 -0.06749 4880.9 -0.02489
1/01/2016 5.17507 0.003564 5005.5 -0.05483
1/12/2015 5.15669 0.046642 5295.9 0.025046
2/11/2015 4.92689 -0.00741 5166.5 -0.01391
1/10/2015 4.96366 -0.03743 5239.4 0.043373
1/09/2015 5.15669 -0.02773 5021.6 -0.03561
3/08/2015 5.30376 -0.07615 5207 -0.08636
1/07/2015 5.74093 0.057003 5699.2 0.044001
1/06/2015 5.43133 -0.01286 5459 -0.05508
1/05/2015 5.50209 -0.00161 5777.2 -0.00221
1/04/2015 5.51094 -0.01268 5790 -0.01723
2/03/2015 5.58171 -0.00942 5891.5 -0.00629
2/02/2015 5.63478 0.012938 5928.8 0.060931
1/01/2015 5.56281 0.088777 5588.3 0.032767
1/12/2014 5.10923 0.049209 5411 0.018445
3/11/2014 4.8696 0.010657 5313 -0.03865
1/10/2014 4.81825 0.062264 5526.6 0.044173
1/09/2014 4.53583 -0.04676 5292.8 -0.05921
1/08/2014 4.75834 0.052025 5625.9 -0.00124
1/07/2014 4.52303 0.053742 5632.9 0.043961
2/06/2014 4.29235 -0.02434 5395.7 -0.01762
1/05/2014 4.39945 0.022988 5492.5 0.000619
1/04/2014 4.30059 0.027559 5489.1 0.01748
3/03/2014 4.18525 0.005942 5394.8 -0.00185
3/02/2014 4.16053 0.022846 5404.8 0.041387
1/01/2014 4.0676 -0.02095 5190 -0.03031
2/12/2013 4.15465 0.03755 5352.2 0.006034
1/11/2013 4.00429 -0.02317 5320.1 -0.01943
1/10/2013 4.09925 0.042252 5425.5 0.039587
2/09/2013 3.93307 0.014287 5218.9 0.016339
1/08/2013 3.87767 0.022045 5135 0.016429
1/07/2013 3.79403 0.046121 5052 0.05193
3/06/2013 3.62676 0.006329 4802.6 -0.02517
1/05/2013 3.60395 -0.04819 4926.6 -0.05097
1/04/2013 3.78643 0.104212 5191.2 0.045243
1/03/2013 3.42908 -0.01743 4966.5 -0.02696
1/02/2013 3.4899 0.042873 5104.1 0.046179
1/01/2013 3.34643 0.052631 4878.8 0.04943
3/12/2012 3.17911 0.013921 4649 0.031735
1/11/2012 3.13546 0.041065 4506 -0.00244
1/10/2012 3.01178 0.05612 4517 0.029633
3/09/2012 2.85174 0.018184 4387 0.016427
1/08/2012 2.80081 0.014525 4316.1 0.010986
2/07/2012 2.76071 0.084013 4269.2 0.042642
1/06/2012 2.54675 0.039435 4094.6 0.004489
1/05/2012 2.45013 0.002824 4076.3 -0.07285
2/04/2012 2.44323 0.07599 4396.6 0.014163
23/03/2012 2.27068 4335.2
Appendix 2
Regression Statistics
Multiple R 0.672856454
R Square 0.452735808
Adjusted R Square 0.443300218
Standard Error 0.026273329
Observations 60
Appendix 3
Appendix 4
Average D/E
2012 2013 2014 2015 2016 AVERAGE
130.58% 117% 113.35% 107.75% 108.77% 117.17%
Appendix 5
 

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Financial analysis for a public limited firm

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Title page
 
Executive summary
 
Table of contents
 

  1. Introduction
    • Purpose and scope of the report
    • Introduce your firm
    • Introduce the areas analysed

 

  1. Discussion
    • Corporate governance
      • Management, board of directors and shareholders
      • Lenders
      • Financial market considerations
      • Social constraints
    • Risk and return
      • Cost of equity
      • Cost of debt
      • Cost of capital
    • Earnings and cash flows
      • Analysing existing investments and ratio analysis
      • Assessing competitive strengths
      • Sustainability of competitive strengths
    • Financing sources
      • Current Financing
      • Trade-off on Debt versus Equity
        • Benefits of debt
        • Costs of debt
      • Dividend policy
        • Historical dividend
        • Analysing dividend policy
          • Firm characteristics
          • Cash/trust nexus
          • Peer group analysis
        • Conclusions and recommendations
        • References
        • Appendices (excel demonstrations)

 
For report writing refer: https://www.youtube.com/watch?v=AFGNKJruxdg
Exemplar Case study 1
Analysing Governance
Structure, and Risk and
Return Profile of
Telstra Corporation
Limited
Table of Contents
Introduction ……………………………………………………………………………………………………… 2
Corporate Governance ……………………………………………………………………………………….. 2
Company Management ………………………………………………………………………………………………2
Conflicts/Social Constraints…………………………………………………………………………………………4
Financial Market Considerations…………………………………………………………………………………..6
Risk and Return …………………………………………………………………………………………………. 7
Risk Profile and Cost of Equity ……………………………………………………………………………………..7
Performance Profile …………………………………………………………………………………………………..9
Cost of Debt……………………………………………………………………………………………………………..9
Cost of Capital………………………………………………………………………………………………………… 10
Conclusion………………………………………………………………………………………………………. 11
References ……………………………………………………………………………………………………… 12
Appendices …………………………………………………………………………………………………….. 13
Appendix 1…………………………………………………………………………………………………………….. 13
Appendix 2…………………………………………………………………………………………………………….. 14
Appendix 3…………………………………………………………………………………………………………….. 15
Appendix 4…………………………………………………………………………………………………………….. 15
Appendix 5…………………………………………………………………………………………………………….. 15
Introduction
Telstra Corporation Limited (TLS) is a full service domestic and international communications
provider for Australia. Telstra provides telephone exchange lines to homes and businesses, online
services and directory services. As Australia’s number one telecommunications carrier, Telstra
services over 16.7 million mobile phone customers and provides approximately 11 million fixed-line
services to access lines. Telstra’s largest market is consumer and residential customers, followed by
business and government. Telstra is currently expanding into Asia with San Migual (Philippines) and
Telkom Indonesia. Telstra’s networks cover about 99% of Australia’s population with Australian
accounts being 95% of Telstra’s revenue; the other 5% from international operations mainly in China
(Bloomberg, 2017). This case study will highlight the corporate governance structure of the firm,
discussing any risks that may result in problems regarding the firm and shareholder growth. A risk
profile will also be developed in order to estimate the firm’s cost of debt, equity and hence capital
for the firm.
Corporate Governance
Company Management
The current CEO of Telstra is Andrew Penn, who was appointed in 2015. The CEO first joined the
company in 2012 as the Chief Financial Officer. The CEO has held a number of responsibilities
including strategy, mergers and acquisitions, treasury, internal audit, risk management, tax,
corporate planning, reporting and analysis, external reporting and investor relations. Andrew was
also responsible for Telstra’s expansion outside of Australia. Prior to joining Telstra, Andrew held
various positions with AXA Asia Pacific for 20 years including Group CEP from 2006 – 2011, Chief
Executive Officer Australian and New Zealand, Group Chief Financial Officer, and Chief Executive for
Asia (Telstra, 2017). The CEO is also an ambassador for the Amy Gillet Foundation, advocating for the
reduction of serious injury and death of cyclists in Australia. He is also a board member of Very
Special Kids and member of Juvenile Diabetes Research Foundation Advisory Council. Penn receives
an annual remuneration mainly in the form of remuneration, benefits, incentives and shares. In
2016, this totalled to $6.7 million, which comprised of a fixed remuneration, non-monetary benefits,
cash incentives and shares. Penn’s ownership of Telstra comprises of 986,763 shares and 758,564
performance rights, which signifies that his success derives from the success of the company as a
whole.
Table 1 – Director Remuneration, Bloomberg 2017
Director (since) Position Remuneration Performance
Rights
Shares
John Mullen
(2008)
Non-executive
Chairman
$376,699 26,159
Andrew Penn
(2015)
Chief Executive
Officer
$6,768,514 758,564 1,301,712
Craig Dunn
(2016)
Non-executive
Director
$59,016 19,173
Peter Hearl
(2014)
Non-executive
Director
$272,533 45,000
Russel Higgins
(2009)
Non-executive
Director
$276,238 93,563
Chin Hu Lim
(2013)
Non-executive
Director
$236,549 20,274
Nora
Scheinkestel
(2010)
Non-executive
Director
$305,000 91,549
Margaret Seale
(2012)
Non-executive
Director
$270,000 269,540
Steven Vamos
(2009)
Non-executive
Director
$268,252 40,000
Trae Vassallo
(2015)
Non-executive
Director
$168,244 0
The non-executive directors of TLS hold only 0.04% of total equity, thus signalling that the majority
of their remuneration is salary and performance based. Table 1 represents the total remuneration
and of the CEO and board of directors, including the amount of equity they hold within the
company. Table 1 represents the total amount of remuneration for the non-executive directors and
executive CEO. While the non-executive directors are paid more compared to the market, the
majority of directors are domestic which can be beneficial or hazardous towards Australian
shareholders. For example, Russell Higgins is the director of APA Group and Argo Investments
Limited, and Steven Vamos is the director of Fletcher Building Limited, a manufacturer and
distributor of building and construction products and services. Non-executive director Chin Hu Lim is
also director of Citibank Singapore, Heliconia Capital Management and Kulicke & Soffa Industries, so
with Telstra’s recent expansion into the Asia Pacific Region, there is a likely chance that these
companies may be offered a contract, depending on what Telstra requires. Table 2 displays the
other connections these directors have. As it can be seen, the overall board of directors have
connections to a wide range of industries ranging from energy, technology, banking and retail; both
domestically and globally.
Director Current Directorships Previous Directorships
John Mullen Asciano Ltd (from 2011) Brambles Limited, DHL
Express, TNT Group
Craig Dunn Westpac AMP Group, Colonial Mutla
Group, EON CMB Life
Insurance (Malaysia)
Peter Hearl Santos Ltd, Treasury Wine
Estates, Goodman Fielder Ltd
Yum! Brands Inc, PepsiCo Inc
Russell Higgins APA Group, Argo Investments,
Leighton Holdings Limited
Ricegrowers Limited, Snowy
Mountains Hydro Electric
Scheme, Global Carbon
Capture
Chin Hu Lim Kulicke & Soffa Industries Inc,
Keppel DC Reit PTE Ltd,
Heliconia Capital
Management, Citibank
Singapore, Changi General
Hospital
Frontline Technologies Corp
Inc, BT South East Asia, Sun
Microsystems
Nora Scheinkestel Macquarie Atlas Road,
Stockland Group
Orica Limited, Insurance
Australia Group, Pacific Brands
Limited, AMP Limited
Margaret Seale Scentre Group, Ramsay Health
Care Limited, Bank of
Queensland Limited
Random House Inc
Steven Vamos Fletcher Building Limited David Jones Limited, Microsoft
Australia and NZ, Ninemsn
Trae Vassallo Enlighted Inc Good Technology
This provides a wide array of opportunities if the company would like to expand further into
different markets, as well as different perspectives when it comes to high profile decision making.
Nevertheless, due to the wide spread of connections the directors have, shareholder efficiency may
be threatened because there is more incentive to offer contracts to these insider companies rather
than more cost-effective alternatives.
There is a distinct separation between management and ownership within Telstra. With 11.89 billion
shares outstanding, there are many individual investors and organisations that hold small stakes
within Telstra. The largest shareholder within Telstra is The Vanguard Group which have ownership
stakes equivalent to only 2.29% (Bloomberg, 2017). The only other shareholder that has an
ownership stake of over 1% is Capital Group Company (Bloomberg, 2017). There is a slight overlap
between management and ownership, with the CEO having 1.3 million shares as well as a number of
executive management and non-executive directors holding shares within the company. However,
compared to the overall shares outstanding, it is a negligible amount of 0.04% (Bloomberg 2017).
Conflicts/Social Constraints
There appears to be no evident conflict between stockholders and debt holders of Telstra. While the
debt to equity ratio (118.13%) is rather high, it is expected as Telstra has been financing a lot of
growth projects such as the NBN rollout and technological advancement projects (Telstra, 2016). The
number one factor to succeeding in the telecommunications industry is customer satisfaction
(Wang, Lo, 2002). Telstra has been financing its improvements to its network in other to derive
better customer experiences using debt, however just in 2016 Telstra had paid its shareholders a
total of $1.5 billion, indicating a healthy firm. Payments of this amount are unlikely to stop in order
to maintain shareholder confidence due to the high amount of debt. As Telstra seeks to improve and
expand their network, the inclusion of debt covenants within their lending agreements ensures that
debt holders can control the level of risk they are facing; whilst allow shareholders to be confident
that the company is growing successfully. While Telstra is taking on more debt, it is evident that
there is not much conflict due to the debt holders debt covenants, and the payout shareholders are
receiving. In addition, Telstra has a stable credit rating of A2, providing debt holders with more
confidence in the company.
To interact with the stockholders, management release an annual Corporate Governance Statement
which presents their framework that include all details of engagement activities with the
shareholders, detailed accountability frameworks, risk management systems and a board charter.
This ensures that all stockholders can readily access adequate information regarding the company
and are given a point of contact if any issues arise. A summary of the achievements of each board
member are introduced, along with a matrix detailing the diversity of skills the overall board have.
The statement also outlines any conflicts of interests between board members, and voting
procedures to ensure that decisions are made on behalf of the company and not personal interest.
Telstra further reinforces that they put their stockholders first by outlining their ethics, values, and
code of conduct frameworks. This provides avenues for sustainability as well as whistleblowing,
allowing stockholders to take action if management does not reflect their best interests. The
company also heavily promotes social causes such as diversity and inclusion, as the statement
outlines achievements made by the company regarding diversity, inclusion and gender equality.
Overall, the corporate governance statement links the objectives of the board and management to
reflect the best interests of the shareholders. This was strongly showed through provision of basic
and performance shares to several company directors to ensure that decisions are made with the
company in best interest (Telstra 2017). To further this, Telstra have also taken measures to improve
their ESG score overtime, and have successfully generated a higher Bloomberg ESG score compared
to their peers. (Figure 1). The average ESG score is 30.93, however Telstra has managed to beat its
competitors and the average with a 56.38 ESG score. This shows that the company has taken a
strong pursuit to create a good social image within society.
Figure 1- ESG Score Comparison (Bloomberg, 2017)
Telstra have placed a strong emphasis on ESG, sustainability and diversity consideration through
issuing their annual sustainability report, corporate governance statement, and a public report
submitted to the Workplace Gender Equality Agency. Due to the size of the company, it is vital that
they abide by the social standard set by today’s society to preserve a strong socially responsible
corporate image. In doing so, Telstra actively discloses their social efforts – detailing the increase in
female workforce, female directors and goals that the company has set to reach by 2020 (Telstra,
2016). The company has also listed key sustainability priorities that it has declared to follow, as well
as a well detailed plan regarding continuous customer experience improvement.
Telstra does currently have a good social reputation, which has developed over time. The company’s
success is mainly determined by the satisfaction of its customers, so to maintain and increase that,
the company has always pursued a high ESG score as well as jumping on social movements such as
gender equality and encouraging women in the workforce. As a result, the company’s ESG score is
well above its peers.
Recently Telstra has had major network issues with the crash of their customer’s internet and 4G
networks in certain areas. One major outage affected over 8 million customers and as
compensation, Telstra announced a nationwide free data day (ABC News, 2016). Damage to Telstra’s
reputation will continue to occur if the company cannot gain control of these outages.
Telecommunications is such an essential part of our society today so Telstra cannot afford to have
56.38
14.81
45.68
32.1
45.68
15.64 21.07 16.05
10
20
30
40
50
60
ESG Disclosure Score
more outages. While Telstra’s reputation remains strong as a pricing power and market dominant
company, consumers are beginning to be more sceptical to joining to network (ABC News, 2016).
Financial Market Considerations
Telstra is a large cap stock, and is a market leader within the telecommunications industry. Due to it
having 11.9 billion shares outstanding with many ownership investors as well as its presence in the
ASX 200 index, it is therefore a heavily analysed security. Telstra’s share price has declined steadily
due to increasing competition by smaller companies such as TPG, iPrimus and Vodafone (Bloomberg,
2017). Any major change in share price usually occurs after a major network issue, or when
competitors issues new competitive prices for their products and services. Telstra currently has an
average trading volume of 26,789,663, showing that is highly liquid and therefore very tradable. The
share price dropped by 6.5% in February 2017 after it released a 14.4% decrease in profit
(Bloomberg, 2017). The share price is now at its lowest point within 3 years. Over the past year the
trend has been forming as other competitors fight for competitive prices and market share. An
example would be that in 2015, TPG consolidated with iiNet, propelling it to becoming the second
largest telecommunications provider behind Telstra (Canstar Blue, 2016). This resulted in a decrease
in price as the Telstra started to lose pricing power. This reinforces that there are a large number of
analysts monitoring the firm’s performance, as share prices rapidly adjust to company/industry
information. Therefore, Telstra’s stock price is largely dependent on market perceptions, hence why
the firm has taken a strong social image pursuit and focused on improving customer satisfaction.
All information regarding the company is made available to the public through annual financial
reports, corporate governance statements, press releases, letters to shareholders and website
access through sites such as Google Finance, Yahoo Finance, Morningstar and Bloomberg. These
sources of information are easily accessible to the public and are constantly updated to maintain
accuracy.
Figure 2 – Telstra’s Share Price over a 5 year period (Bloomberg, 2017)
12012
12013
6
2014
22015
2022016
2017
Risk and Return
Risk Profile and Cost of Equity
Figure 3 demonstrates a risk regression analysis of Telstra’s 5 year monthly data in comparison to
the ASX 200 index (see Appendix 1 for data). The intercept of the regression is 0.0085, which
indicates that TLS stock has performed above the market (Damodaran, 2015). As these are past
monthly returns, the monthly risk-free rate between 2007 and 2017 is averaged at 3.757%
(Bloomberg, 2017) (see Appendix 2 for data). Through the following equation, it can be seen that the
stock did not perform as well as expected:
???? (???????????????????? ????????????????????????????????????) < ???????? (1 − ????????????????)
0.0085 < 0.03757 (1 − 0.7675)
0.0085 < 0.0087
Equal to the slope of the regression, the Beta for TLS is 0.7675. When comparing to the standard
market beta of 1, it can be determined that TLS is less volatile and hence has less risk when
compared to the market. This is most likely attributed to Telstra being the dominant player within
the telecommunications industry in Australia, and therefore holding the largest market share at 42%
(Bloomberg, 2017). The standard of error of the data (refer to Appendix 2) extracted from the
regression was 0.0262, which indicates that the beta of Telstra could range from 0.7413 to 0.7937,
with 95% confidence. Additionally, as Telstra remains the pricing power of telecommunications, its
products and services would have a relatively inelastic levels of demand, thus allowing for steady
revenues. Similarly, this beta can also be used to calculate the expected return on equity, the
minimum return that investors require:
Expected Return = Risk Free Rate + Levered Beta (Expected Market Return – Risk Free Rate)
???????????????????????????????? ???????????????????????? = 0.03757 + 0.7675(0.11968 – 0.03757)
???????????????????????????????? ???????????????????????? = 0.1005 ???????? 10.05%
Note that the risk free rate is equal to the monthly average of the RF rate of 10 year Government
bonds, over the past 10 years (Refer to Appendix 3)
Expected Market Return = the average market return of 10 year Government bonds, over the past 10
years (Refer to Appendix 3)
Telstra must ensure that all projects they undertake result in a minimum return greater than 10.5%.
If projects fail to yield a return of 10.05%, share prices will decrease, which will create conflict
between shareholders and management. Depending on the severity, conflicts may escalate to the
point where management may be forced to resign. Thus, it can be seen that the expected return is
equal to the cost of equity, therefore Telstra’s cost of equity is 10.05%.
The proportion of Beta attributable to financial leverage can be clearly shown through the
calculation of the unlevered Beta.
???????????????????????????????????? ???????????????? = ???????????????????????????? ????????????????/(1 + (1 − ???????????? ????????????????)(???????????????????????????? ????????????????/????????????????????????))
= 0.7675/(1 + (1 − 0.3)(1.1717))
= 0.4216
(Note: Average D/E ratio from past 5 years, refer to Appendix 4)
(Note: Tax rate used is that of standard companies in Australia – 30%)
From the regression model (Figure 3), the R2
value can be extracted to reflect the proportion of
variance attributable to market risk. Telstra’s value is 0.4527, which indicates that 45.27% of the
company’s risk is market risk, and hence the remaining amount of 54.73% can be deemed as firm
specific risk. While some investors may not find this appealing, the firm specific risk provides
management with more opportunities to make business decisions (Damodaran, 2015).
Figure 3 – ASX 200 vs TLS Regression
y = 0.7675x + 0.0085
R² = 0.4527
-0.1
-0.08
-0.06
-0.04
-0.02
0.02
0.04
0.06
0.08
0.1
0.12
-0.1 -0.08 -0.06 -0.04 -0.02 0 0.02 0.04 0.06 0.08
ASX 200 – TLS
Performance Profile
As it can be noted in Figure 4 below, whilst the market has been at a steady growth, Telstra has been
on a constant decrease in stock value. From around early 2014 to about mid 2016, Telstra did clearly
outperform the market. This may be due to Telstra’s introduction of its 4GX network, which offered
customers in over 1,200 suburbs and towns the fast mobile data speeds in the world (Telstra, 2015).
During that period, Telstra was also selected by the Federal Government to participate in Australia’s
largest expansion of mobile coverage to regional and remote Australia, which would have
skyrocketed its stock value, having a project backed by the almost risk free government. Telstra had
also introduced more personalised service to its customers, which boosted customer
experience/perception, a major factor in the value of the company’s stock. However, in early/mid
2016, Telstra’s stock price took a steep drop, most likely due to TPG’s partnership with Vodafone
and its merge with iiNET, which enabled TPG to become the second largest telecommunication
giant, behind Telstra (TPG, 2016). Despite a steady decrease in price, there are positive implications
for Telstra as it still remains as the pricing power, and have future plans on customer retention,
increasing customer satisfaction, as well as introducing the new 5G network (Telstra 2016). Whilst
investors who owned shares in the previous year ($5.24) may wish to sell as the current price as
decreased down to $4.55, they should hold onto their shares or even purchase more if available, as
Telstra continues to see strong customer growth (Bloomberg News, 2017).
Figure 4 – Telstra’s Performance against ASX200 for the past 5 years (Yahoo Finance, 2017)
Cost of Debt
According to the S&P scale, the Telstra’s credit rating is current A-, or A2 in terms of Moody’s scale.
In order to calculate the cost of debt, this rating will be used to determine the default spread, which
was 1% (Damodaran, 2015). The marginal tax rate for Telstra is equalled to what is charged to most
large cap companies, which is 30%. Applying the default spread of 1%, the after-tax cost of debt can
be estimated as:
???????????????????? ???????????? ???????????????? ???????? ???????????????? = (???????????????? ???????????????? ???????????????? + ???????????????????????????? ????????????????????????)(1 − ????????????)
(0.03757 + 0.01)(1 − 0.3)
= 0.0333 ???????? 3.33%
Cost of Capital
The market value of equity and debt must be obtained in order to calculate Telstra’s cost of capital.
In order to calculate the market value of equity, the current market share price is multiplied with the
total number of shares outstanding.
???????? ???????????????????????? = $4.55 ∗ $11893.30 ????????????????????????????
???????? ???????????????????????? = $54114.515 ????????????????????????????
Now in order to calculate the market value of debt, the pre-tax cost of debt (4.757%), debt time to
maturity, interest expense, and face value of debt ($14487 million) must be used. The average debt
time to maturity was derived through assessing the maturity dates of any outstanding debt, which
averaged to approximately 4.77 years (Refer to Appendix 5 for data). The current interest expense
for Telstra is $811 million (Yahoo Finance, 2017).
???????? ???????????????? = 811 (
1 −
1
(1 + 0.04757)
4.77
0.04757 ) +
14487
(1 + 0.04757)
4.77
???????? ???????????????? = $11945.58 ????????????????????????????
Therefore, the total market value (V) is MV Equity + MV Debt = $54114.515 + $11945.58 =
$66060.125 million. These values can now be used to calculate the market weights, which can then
be used to determine the cost of capital:
E/V = 54114.515/66060.125 = 0.8192 = 81.92%
D/V = 11945.58/66060.125 = 0.1808 = 18.08%
Now to calculate the cost of capital, the debt and equity values are multiplied by their respective
market weights:
Cost of Capital = Return on Equity * (E/V) + Return on Debt * (D/V)
= 0.1005(0.8192) + 0.0333(0.2391)
=0.0903 or 9.03%
Conclusion
In conclusion, it is clear that Telstra, while currently suffering from a decrease in share price is still
the market leader and pricing power within the telecommunications industry and ASX 200. Despite
the steady decrease in stock value after TPG’s immense growth, Telstra continues to power through
with increased customer satisfaction, strong customer growth, and constant improvement to their
network. The company already has a strong social reputation as the company has made it clear to its
investors that its image to their customers and potential customers is of the highest priority. Overall,
even though Telstra’s stock price is currently falling, investors should be confident in the company’s
current position as the market leader and pricing power, and should expect an increase in stock
value as Telstra continues to gain a strong steady growth of new customers.
References
ABC News. 2016. Telstra outages: CEO Andy Penn offers free data day as compensation for four-hour
blackout. [ONLINE] Available at: http://www.abc.net.au/news/2016-03-18/telstra-ceo-apologisesfor-four-hour-outages/7256706.
[Accessed 22 March 2017].
Bloomberg Finance L.P. (2017). Bloomberg Trading Database. Unknown: Bloomberg LP
Bloomberg News. 2017. Telstra Sees Continued Strong Customer Growth. [ONLINE] Available
at: https://www.bloomberg.com/news/videos/2017-02-16/telstra-sees-continued-strong-customergrowth.
[Accessed 26 March 2017].
Damodaran, A. (2015 ). Applied Corporate Finance. New York : John Wiley & Sons
Executive Director Salary (Australia) . 2017. Executive Director Salary (Australia) . [ONLINE] Available
at: http://www.payscale.com/research/AU/Job=Executive_Director/Salary. [Accessed 27 March
2017].
Yonggui Wang, Hing‐Po Lo, (2002) “Service quality, customer satisfaction and behavior intentions:
Evidence from China’s telecommunication industry”, info, Vol. 4 Iss: 6, pp.50 – 60
Rick Molinsky. 2015. Telstra Financial Results 2015. [ONLINE] Available
at: https://exchange.telstra.com.au/2015/08/13/telstra-financial-results-2015/. [Accessed 26 March
2017].
Sam Bloom. 2016. TPG takeover: What does it mean for iiNet customers?. [ONLINE] Available
at: http://www.canstarblue.com.au/phone-internet/internet/broadband/tpg-takeover-what-does-itmean-for-iinet-customers/.
[Accessed 21 March 2017].
Telstra. (2017). 2016 Annual Report. Retrieved from:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/2016-Annual-Reportsingle-pages.pdf
Telstra. (2017). 2016 Corporate Governance Statement. Retrieved from:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/FY16-CorporateGovernance-Statement-and-Appendix-4G.pdf
TPG. (2016). 2016 Annual Report. Retrieved from:
https://www.tpg.com.au/about/pdfs/FY16%20Annual%20Report.pdf
Appendices
Appendix 1
TLS ASX 200
Date Adj Close Return Adj Close Returns
1/03/2017 4.55 -0.05602 5684.5 -0.00485
1/02/2017 4.82 -0.036 5712.2 0.016243
2/01/2017 5 -0.01961 5620.9 -0.00792
1/12/2016 5.1 0.009901 5665.8 0.041412
1/11/2016 5.05 0.014056 5440.5 0.023093
3/10/2016 4.98 -0.03861 5317.7 -0.02174
1/09/2016 5.18 -0.01521 5435.9 0.000534
1/08/2016 5.26 -0.05008 5433 -0.02325
1/07/2016 5.53731 0.03777 5562.3 0.062846
1/06/2016 5.33578 -0.00537 5233.4 -0.027
2/05/2016 5.36457 0.042912 5378.6 0.024066
1/04/2016 5.14384 0.005628 5252.2 0.033328
1/03/2016 5.11505 0.059943 5082.8 0.041365
1/02/2016 4.82578 -0.06749 4880.9 -0.02489
1/01/2016 5.17507 0.003564 5005.5 -0.05483
1/12/2015 5.15669 0.046642 5295.9 0.025046
2/11/2015 4.92689 -0.00741 5166.5 -0.01391
1/10/2015 4.96366 -0.03743 5239.4 0.043373
1/09/2015 5.15669 -0.02773 5021.6 -0.03561
3/08/2015 5.30376 -0.07615 5207 -0.08636
1/07/2015 5.74093 0.057003 5699.2 0.044001
1/06/2015 5.43133 -0.01286 5459 -0.05508
1/05/2015 5.50209 -0.00161 5777.2 -0.00221
1/04/2015 5.51094 -0.01268 5790 -0.01723
2/03/2015 5.58171 -0.00942 5891.5 -0.00629
2/02/2015 5.63478 0.012938 5928.8 0.060931
1/01/2015 5.56281 0.088777 5588.3 0.032767
1/12/2014 5.10923 0.049209 5411 0.018445
3/11/2014 4.8696 0.010657 5313 -0.03865
1/10/2014 4.81825 0.062264 5526.6 0.044173
1/09/2014 4.53583 -0.04676 5292.8 -0.05921
1/08/2014 4.75834 0.052025 5625.9 -0.00124
1/07/2014 4.52303 0.053742 5632.9 0.043961
2/06/2014 4.29235 -0.02434 5395.7 -0.01762
1/05/2014 4.39945 0.022988 5492.5 0.000619
1/04/2014 4.30059 0.027559 5489.1 0.01748
3/03/2014 4.18525 0.005942 5394.8 -0.00185
3/02/2014 4.16053 0.022846 5404.8 0.041387
1/01/2014 4.0676 -0.02095 5190 -0.03031
2/12/2013 4.15465 0.03755 5352.2 0.006034
1/11/2013 4.00429 -0.02317 5320.1 -0.01943
1/10/2013 4.09925 0.042252 5425.5 0.039587
2/09/2013 3.93307 0.014287 5218.9 0.016339
1/08/2013 3.87767 0.022045 5135 0.016429
1/07/2013 3.79403 0.046121 5052 0.05193
3/06/2013 3.62676 0.006329 4802.6 -0.02517
1/05/2013 3.60395 -0.04819 4926.6 -0.05097
1/04/2013 3.78643 0.104212 5191.2 0.045243
1/03/2013 3.42908 -0.01743 4966.5 -0.02696
1/02/2013 3.4899 0.042873 5104.1 0.046179
1/01/2013 3.34643 0.052631 4878.8 0.04943
3/12/2012 3.17911 0.013921 4649 0.031735
1/11/2012 3.13546 0.041065 4506 -0.00244
1/10/2012 3.01178 0.05612 4517 0.029633
3/09/2012 2.85174 0.018184 4387 0.016427
1/08/2012 2.80081 0.014525 4316.1 0.010986
2/07/2012 2.76071 0.084013 4269.2 0.042642
1/06/2012 2.54675 0.039435 4094.6 0.004489
1/05/2012 2.45013 0.002824 4076.3 -0.07285
2/04/2012 2.44323 0.07599 4396.6 0.014163
23/03/2012 2.27068 4335.2
Appendix 2
Regression Statistics
Multiple R 0.672856454
R Square 0.452735808
Adjusted R Square 0.443300218
Standard Error 0.026273329
Observations 60
Appendix 3
Appendix 4
Average D/E
2012 2013 2014 2015 2016 AVERAGE
130.58% 117% 113.35% 107.75% 108.77% 117.17%
Appendix 5
 

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