Telus Essay

716 Words Apr 28th, 2014 3 Pages
To: Natasha Burns
From: Judith Ayala Rojas, Jason Campbell, Joshua Garcia
Re: Cost of Capital for Telus Corporation.
Date: February 13, 2014

Executive Summary
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
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Also, the issuance of preferred stock results in a higher after-tax cost compared to the cost of debt which makes them less attractive for most issuers.

Tax Rate

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.

Formula:
Tax Rate = Income Taxes/EBIT
Given:
Income Taxes = $496 million
EBIT = $990 million
Solution:
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.

Formula:
WACC = (E/E+D)(rE) + (D/E+D)(rD)(1- t)
Given:
E = $6,348 million
D = $8, 361 million
E + D = $14,709 million
rE = 9.7%
rD = 15.2%
t = 50%
Solution:
WACC = (6,348/14,709)(.097) + (8,361/14,709)(.152)(1-.5)
= .042 + .043
WACC = 8.52%

Recommendations

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…

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