Telus: the Cost of Capital Essay

1192 Words Oct 17th, 2008 5 Pages
Telus: The Cost of Capital
Telus needs to calculate the cost of capital from the variety of data given. The cost of capital is determined mostly by how the funds are used rather than where they were obtained from. It relies on the risk of investments Telus involves in, therefore, depending on cost of both equity of debt as described below. Also note that, even though the preferred shares are not attractive to issuers and may not get issued again, it is still on the company’s balance sheet and affect firm’s overall wealth.

PREFFERED SHARES

We assume that Telus maintains a fixed debt to equity ratio and hence, the calculation will include preferred shares. 5.00 percent of cost in the past cannot be used towards final calculation
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Most of the risks are offset by different debts; therefore, short term debt should not be counted. To calculate the bond face value, we chose coupon rate of 11% because it is an average of all the company’s bonds. In deciding the bond’s yield to maturity, 9.31% yield to maturity includes the underwriter’s fee. As we mentioned at the beginning of the case, we neglect all the underwriter’s fees since they are floatation cost which can be considered as a cash outlay in the cash flow calculation. Thus, we decided to use 8.81%. Finally, we did not include depreciation in our capital structure because it has no effect on financing costs, since it is not a cash flow.

According to Rick, YTM is 8.81%
Using book value to find # of bonds outstanding: $3047M/$100(par value/bond) = 30470000.
Market value of long-term bonds: 30470000*$118 (market value) = $3,595.46M

Instruments Total amount (M)
Cost Market Value weights
Long term Debts $3,595.46 Rd = 8.81% 0.334
Preferred Stock $67.796610 5.90% 0.006
Common Equity $7,125 10.04% 0.660
Total market value $10788.25661 100%

TC = Income Taxes/EBIT $496M/$990M ≈ 0.5
Assume the tax rate here is 50% in this case.

WACC = D/V*(1-TC)* RD + P/V* RP + E/V* RE
=0.334*0.0881*(1-0.5) + 0.006*0.059 + 0.660*0.1004
=0.0813307 or 8.13%

The WACC is the weighted

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