0. Your team of three people forms a financial analysis team at Aussie Finance Consulting (AFC), a renowned financial institution. The executive management of AFC has assigned you a task to carry out a special project for its client Telstra Corporation Ltd (TLS), which requires preparing a business report. This report will be presented to AFC executive management and the senior management of TLS.

   Telstra Corporation Limited is a telecommunications and technology company. Its principal activity is to provide telecommunications and information services for domestic and international customers. It operates through four segments: Telstra Consumer and Small Business, Telstra Enterprise, Networks and IT(N&IT), and Telstra InfraCo. Telstra Consumer and Small Business is a provider of telecommunication products, services, and solutions across mobiles, fixed and mobile broadband, telephony and Pay Television, and digital content to consumer and small business customers in Australia. Telstra Enterprise is engaged in sales and contract management for medium to large business and government customers in Australia and globally. N&IT is engaged in the overall planning, design, engineering architecture, and construction of Telstra networks, technology, and information technology solutions. Telstra InfraCo is the provider of a wide range of telecommunication products and services.

   Requirements

   You are required to advise the company on the following:

   Part 1. Estimate TLS’s Weighted Average Cost of Capital (WACC). (20 marks)

   (a) Estimate the firm’s cost of debt.

Corporate Financial Management (BAFI3257) S1 2021 Page 2 of 9

• - Assume that the only long-term debt the firm has is 3.85% coupon bonds (due Dec 2031 issued at @100 each).

• - The bonds are currently priced at $97 each and pay annually on 31st December.

• - Default rate is 0.5% and expected loss rate in the event of default is 58%.

(b) Estimate the firm’s market value of long-term debt.
- Use the reported amount of Long Term Debt in the Balance Sheet for period ended

on 31 Dec 2020 as the book value (par value) of the bonds stated in part a). Assume that the amount of Long Term Debt in the Balance Sheet is the book value (par value) of the bonds stated in part a).

(c) Implement CAPM to estimate TLS’s stock beta yourselves.

• - Collect data on monthly closing share prices, market return, and risk-free rate from

  1 Jan 2016 to 1 Jan 2021.

• - Use the ASX/S&P 200 as the market portfolio.

• - Use the 10-year Australian Government bond yield as a proxy for the risk-free

  rate. Historical data of the bond yield can be found on Eikon page AU10YT=RR. Take the Bid yield (do not use the bond price).

(d) Estimate the firm’s cost of equity capital using CAPM based on your beta estimate. - Assume that the expected market return is 9.85%.

(e) Calculate the market value of equity.
- You will need to collect information about the number of shares outstanding and

the company’s share price.

(f) Estimate the firm’s WACC. How confident are you of your WACC estimate? Discuss, if any, implicit assumptions you make in your estimation.
- Assume that the firm’s tax rate is 30%.