From: Judith Ayala Rojas, Jason Campbell, Joshua Garcia
Re: Cost of Capital for Telus Corporation.
Date: February 13, 2014
Barb Williams and Rick Thomas, while attending an executive education course at a well-known business school, came across a case which involved calculating the cost of capital for Telus Corporation (Telus). Basic data such as the Balance Sheet, Income Statement, Data on Telus’ Common Stock, Market Index, and the Average Annual Returns in North American Capital Markets were provided. In order to calculate Telus’ cost of capital we need to calculate the company’s Cost of Equity, Cost of Debt, and Tax Rate along with their weighted cost and then apply these to the Weighted Average …show more content…
To calculate the company’s tax rate we simply used the numbers for Income Taxes and Earnings Before Taxes, Non-controlling Interest and Goodwill Amortizations (EBIT) which were provided in the Income Statement.
Tax Rate = Income Taxes/EBIT
Income Taxes = $496 million
EBIT = $990 million
Tax Rate = $496/$990
Tax Rate = 50%
Weighted Average Cost of Capital (WACC)
Now that we have the company’s cost of capital, cost of debt, and tax rate we can calculate WACC which will give us Telus’ Cost of Capital.
WACC = (E/E+D)(rE) + (D/E+D)(rD)(1- t)
E = $6,348 million
D = $8, 361 million
E + D = $14,709 million
rE = 9.7%
rD = 15.2%
t = 50%
WACC = (6,348/14,709)(.097) + (8,361/14,709)(.152)(1-.5)
= .042 + .043
WACC = 8.52%
In order for Telus Company to raise its shareholders wealth, we recommend that the company invests in projects that can provide a return of at least 8.52%. The case does not directly state how they will finance in…