You are required to present a consultant’s report containing your responses to the questions listed below in reference to the same Australian listed public company you have chosen in Part A of Assessment 2, focusing on the company’s financial strategies that create shareholder value. Use the general purpose financial statements in the annual report you submitted in PART A for your analysis. It is necessary you carry out additional secondary research to collect data (or proxy data) from different sources to help you answer the questions.
The purpose of these questions is to require you to demonstrate your ability to conduct research into real companies, their operations and events affecting those companies. You should demonstrate your ability to interpret data, summarise your findings and to communicate your views in a report. The emphasis is on explaining the financial management of the company, as revealed in the accounting reports, and also to place those reports within the wider economic context.
- Debt Valuation
- What are the short-term and long-term debts used by your firm?
- Is your company’s debt structure consistent with the industry?
- How does the industry your company operates in influence the proportion of short-term to long-term debts of your company?
- What is your company’s the cost of debt?
- Share Valuation
- What is your company’s cost of equity?
- Evaluate and discuss your company’s revenue, earnings, EPS, dividends and growth expectations. Use the most recent reported earnings results from the annual report you submitted in PART A for your analysis.
- Value your company’s stock using comparables approach(ie. P/E) and constant dividend growth rate model. What are the factors that influence your company’s stock price and how are they captured in these models?
- Which of the values in question 3 appear most reasonable compared to the market price of your company’s stock?
- What additional data and information would you prefer for valuing your company’s stocks? Explain your reason(s).
- Cost of Capital
- Calculate the weighted average cost of capital (WACC) of your company?
- Explain the company’s tax rate in the calculation of WACC?
- Why is there a difference in the cost of debt and the cost of equity?
- Should current liabilities be included in the cost of capital calculation? What are the pros and cons?
- What is the major value of the WACC calculation for your company and how is it applied in investment decision-making?
- Provide examples of how your company might have recently used WACC in its investment decision-making with reference to two projects recently undertaken by your company. You may need to synthesize information from your readings (ie. Annual reports, GPFS etc.) to identify the projects.
- Define and explain capital structure of your company. Discuss whether it is consistent with the industry and why or why not.
- What is the optimal capital structure and what economic circumstances will likely cause a change in it?
- Comment on your chosen company’s financial performance relative to its industry. You will have to investigate your company’s industry using sources such as Bureau of Statistics, industry journals/publications, analysis in financial press, IBISWorld etc.
- Conduct a literature search on your company. Summarise and explain how your company is being viewed by financial analysts and others in the press (or has been viewed over recent years, as appropriate to your company). Do you agree with the comments?Why/why not? Explain.
- Comment on any other item that is important or different about your company (that is relevant to the topics in this course).
It is obligatory for every human being, character and shareholder to evaluate the condition of the market and deposit the money into the security or financial market according to the various changes such as fluctuations in the market, company’s internal position and external position, performance of the comapny in terms of finance, state of the stability of the comapny, comapny various micro and macro factors etc. For identifying the above explained elements, an entity must take the assistance of financial analyst. Being a consultant, Telstra Corporation Limited has been evaluated to express the investor or individual about the company’s performance and the opportunity of investment in the Telstra Corporation Limited. This analysis and paper expresses the result on the basis of various tools such as debt valuation, securities valuation, analysis of the market, cost of capital etc. the paper has been made to express the investment prospect in Telstra Corporation Limited to the share holders and debt holders.
Telstra Corporation Limited:
This report depicts the investors about the TELSTRA Corporation. This company is recognized as the biggest companies in the Australian market in the industry of telecommunication and Media. This company develops and runs its activities in the business of mobile network, internet access, telecommunication networks and numerous other services of entertainment. The main office of the company is at Melbourne, Australia. Comapny runs its activities and main operations from there only. The main objective of TELSTRA CORPORATION is to extend the position of company’s services and products as the biggest service and products provider of IT (information and technology) in the Australian market (Our Company.2017). In 1901, this business has come into existence. This company is frequently increasing its functions and operations through various practices and activities.
Telstra Corporation Limited has been examined in terms of finance on the basis of the debts in this study. Debt valuations study depicts the investor about the performance and the financial strength of the comapny. The study over the debt valuation of Telstra Corporation Limited depict that the short term of the comapny is $ 2369 million which has been raised through the bank overdraft and by issuing some debts for the short term whereas the long term debt has been raised through issuing the debts for a long period into the market to manage the activities and performance. Following are the details of the debts of the company:
|Telstra Corporation Limited|
|Long term debt||14574000000||14378000000||13887000000||1.3316E+10||14099000000|
|Short term debt||2369000000||2537000000||1403000000||2199000000||685000000|
(Morning star, 2017)
Further, in this analysis, industry has been analyzed and the debt value of the industry has been compared to the comapny to evaluate the strength and position:
|Industry’s debt structure|
|Long term debt||1459000000||1387000000||1403000000||1287000000||185000000|
|Short term debt||200000000||10000000||154700000||12487900||12698745|
Through this analysis, it has been evaluated that the debt position of the comapny and the industry is bit similar. Industry has raised the funds from the debt in current year and same has been done from the company. Thus it has been found that the debt structure of the company is bit constant with the performance of the industry.
According to this analysis, comapny is not required to make any changes into the policies and debt position of the comapny. Current situation depict that the comapny is leader in the market and thus the position and the state of the company presents the industry. The industry doesn’t influence over the short term and long term debts of the comapny.
At the end, it has been found that the cost of debt of the comapny is 4.9%. The interest rate of the debt of the comapny is 7% and according to the Australian government, the tax rate is 30%. Thus through it, it has been found that the following are the calculations of the cost of debt of the comapny.
|Calculation of cost of debt|
The comapny is required to pay 4.90% to the debt holders. This calculations and rate depict that if the rate would be higher the comapny would have to pay extra to raise the funds through debt.
Telstra Corporation Limited has been examined in terms of finance on the basis of the equity in this study. Share valuations study depicts the investor about the performance and the financial strength of the comapny. The study over the share valuation of Telstra Corporation Limited depict that the following are the details of the cost of equity of the company:
|Calculation of cost of equity|
|Price per share||3.52|
|cost of equity||7.01%|
It has been found that the cost of equity of the comapny is 7.01%. The growth arte of the debt of the comapny is 7% and according to the stock price, the market price of the comapny is $ 3.52. This calculations and rate depict that if the rate would be higher the comapny would have to pay extra to raise the funds through equity.
Further, the evaluation study has been performed over the some terms of the comapny. Following are the details of that:
This expresses that the performance of the comapny is becoming better day by day. Through the calculations and analysis, it has been found that the performance of the comapny is becoming more attractive in concern of the shareholders of the comapny.
Intrinsic value of a comapny is the value which is real worth of that stock. The intrinsic value of the comapny has been analyzed through two models to identify the real worth of the stock and it has been analyzed that is the current market price of the stock is worth.
|Dividend Discount Model|
|PE Multiple Model|
|Industry PE ratio||9.76|
Through the evaluation, it has been found that various factors are there which have impacted over the performance of the comapny. This analysis depict that the comapny is required to look over the EPS, PE ratio of the industry, growth rate. Discount rate, expected dividend etc.
The analysis over both the models depict that the PE model is way better and more realistic. According to both the analysis, it has been found that the PE approach is more reasonable as the intrinsic value through this method is closer to the share price and it takes the concern of the more reasonable factors.
More, it has been found through me that various factors are there which must also be calculates and analyzed by the investors while investing over the stock price of the company such as the fluctuations in the share price, dividend declaration, last 5 years’ performance of the compact etc.
Cost Of Capital:
Telstra Corporation Limited has been examined in terms of finance on the basis of the equity and debt in this study. Cost of capital study depicts the investor about the performance and the financial strength of the comapny. The study over the share and debt cost of Telstra Corporation Limited depict that the following are the details of the weighted average cost of capital of the company:
|Calculation of WACC|
This table depict that currently the comapny is required to pay around 5.95% of total to the debt and equity holders in terms of their invested amount (Yahoo finance, 2017).
Australian goverenent has decided the rate of tax is 30%. For analyzing the cost of capital, 30% tax rate has been analyzed. Following are the values of the debt cost, equity cost and total debt and total equity of the company:
This difference in the cost of debt and equity has taken place due to the nature of the debt and equity as well as the fixed % of the interest and the fluctuative profits of the company. Curreent liabilities must not be added into the cost of capital so that the best analysis of long term values could be done. Short term debt is just required to manage the working capital of a company.
WACC’s major value is 5.95% in which the weight of the debt is 2.45% and the weight of the equity is 3.51%. whenever comapny wants to raisse more funds look over the cost and risk and make a new decision on the basis of that.
The comapny has just looked into the new market to diversify the market as well as comapny has cracked a big deal. For both of these projects, the comapny has enhanced the funds from debt and equity as well to amnage the factor of risk and return both (morningstar, 2017).
Below details are of capital structure of the industry:
|Capital structure of Industry|
The level of the debt and equity of both the companies are similar and the comapny is just required to manage the optimal capital structure.
Optimal capitslstructure is the level where the debt and equity are in a position that the risk and cost factors of the comapny is at least level, the standrds optimal capiatl structure of the comapny must be 2:3. Variosu economical factors such as inflation, GDP etc make an imapct over the optimal capitals tructure of a comapny.
Through the evaluation over the entertainment and media industry, it has been found that the Telstra Corporation Limited is the leader in the industry and thus the performance of the comapny is way better in the industry.
The Morningstar (2017) express that the performance in terms of finance of the Telstra Corporation Limited is attracting the investors and stakeholders more in the industry. Yahoo finance (2017) has expressed that the stock performance of the comapny is way better and the fluctuations on the share price of the comapny is average low. AFR (2017) express that the Telstra Corporation Limited doesn’t required to make any changes into the financial performance. Bloomberg (2017) express that the optimal capital structure is the main point which must be taken care of by the comapny so that the cost reduction could be done (Google finance, 2017). The performance of the comapny is way better, the only suggestion to the company is to make the optimal capital structure s o that the risk and return aspect of the comapny could be managed.
According to the entire evaluation, it has been concluded that the Telstra Corporation Limited is attracting the investors and stakeholders more in the industry. Optimal capital structure is the main point which must be taken care of by the comapny so that the cost reduction could be done. Though the comapny is leader in the industry and thus the performance of the comapny is way better.
AFR. 2017. Telstra Corporation Limited. Retrieved from https://www.afr.com/research-tools/TLS/company-profile/operational-history available on 27th Oct 2017.
Bloomberg. 2017. Telstra Corporation Limited. Retrieved from https://www.bloomberg.com/quote/TLS:AU available on 27th Oct 2017.
Google finance. 2017. Telstra Corporation Limited. Retrieved from https://finance.google.com/finance?q=ASX:TLS available on 27th Oct 2017.
Home. 2017. Telstra Corporation Limited. Retrieved from https://www.telstra.com/ available on 27th Oct 2017.
Morningstar. 2017. Telstra Corporation Limited. Reterived from https://financials.morningstar.com/cash-flow/cf.html?t=TLS®ion=aus&culture=en-US available on 27th Oct 2017.
Yahoo finance. 2017. Telstra Corporation Limited. Retrieved from https://finance.yahoo.com/quote/tcs.ax?ltr=1 available on 27th Oct 2017.