Table 1. Details of the Telstra Bond Issue Maturing in September 2022 ASX Code YTMTL1

Face Value $10,000

Issue Size $500,000,000

Maturity Date 16 September 2022

Coupon Type Fixed

Semi-Annual Coupon Rate 2.00% of Face Value

Payment Frequency Semi-Annual

Remaining Coupon Payment Dates -16 March 2022 16 September 2022 (Maturity Date)

Yield to Maturity 0.248%

Table 2. Telstra Financial Data

ASX Code TLS

Share Price $4.05 (Closing Price Monday 24 January 2022)

Reported EPS for year ending June 2021 0.15 (15 cents per share)

Median Consensus EPS Forecast 0.18 (18 cents per share)

Reported dividend for year ending June 2021 (D0) 0.10 (10 cents per share)

Growth Rate in Dividends (g) 1.00%

Median Consensus Dividend Forecast (D1) 0.101 (10.1 cents per share)

TLS Beta () 0.51

Australian Risk Free Rate (RFR) 1.67%

Australian Market Return (E(RM)) 3.73%

1. Calculate the current market price of the TLS bond using the details reported in Table 1. Explain why the price you have calculated is not equal to the face value. (7 marks)
2. Calculate the trailing and forward price to earnings (PE) ratios for TLS shares using the details reported in Table 2. Which PE ratio do you think is better? Explain why. (5 marks)
3. If the average forward PE ratio for the telecommunications sector is 21, determine the relative valuation for TLS shares. Are TLS shares undervalued or overvalued? (3 marks
4. Calculate the valuation for TLS shares using the constant growth dividend model using the details reported in Table 2. Which valuation do you think is better, the relative PE valuation in Q3, or the absolute dividend valuation in this question? Explain why. (5 marks)