Company Valuation and Managing Finance

RUNNING HEAD: MANAGING FINANCE
Company valuation

Managing finance 2
Contents
Introduction.................................................................................................................................................3
Part-A..........................................................................................................................................................3
Part-B..........................................................................................................................................................6
Part-C..........................................................................................................................................................8
Part-C..........................................................................................................................................................9
Part-D..........................................................................................................................................................9
Computation of the discounted cash flow method.................................................................................9
Price Earnings Ratio...............................................................................................................................14
Part-E.........................................................................................................................................................16
Part-G........................................................................................................................................................17
Conclusion.................................................................................................................................................18
References.................................................................................................................................................19

Managing finance 3
Introduction
This report emphasizes upon the capital structure, market value and valuation methods
which could be used to analyze the market price of the shares of two companies. In this report,
two companies named, Telstra and Wesfarmers Company have been selected. Each and every
company needs to keep its financial leverage low and profitability high if it wants to survive in
long run. It will allow company to sustain its business in long run.
Part-A
Capital structure of the company generally comprises of two elements named as debt and
equity. Every firm raises its capital from borrowing the funds and issuing the shares. Therefore,
it becomes necessary for them to maintain a balance between its debt and equity portion in order
to have optimal capital structure (Robb & Robinson, 2014). In case of Wesfarmers, the company
is focused on providing a satisfactory return to its shareholders by managing its capital. Its
capital structure consists of Net debt, shareholders’ equity and reserves.
Source of capital Number in
issue
Price per share Market Value Proportion
to total
long term
capital
Ordinary shares 2275.4 10 26195 84.82%
Preference shares 0 0 0 0
Long Term Debt# 3441 10 3441 15.12%
Total 100%
It can be observed from the below table that the debt element of the firm has reduced after 2016
along with the slightest reduction in its equity. It has a high Debt/equity ratio in 2016 at 29.16%
which fall to 15.125 in 2018. Repayment of debt for working capital requirements and

Managing finance 4
monitoring the structure as per the group ratings has helped Wesfarmers to reduce its debt
portion. Also when compared with the industry average of 24.50%, the ratio of the company was
lower in the past years except the 2016. This reflects that Wesfarmers relies more on equity and
has less financial obligations which can prove to be an attractive point for the investors.
Moreover, the company uses relevant measures to manage its capital so that it can offer high
returns with low financial risk (Morningstar. 2018).
Capital structure of Wesfarmers (Amount in Million $)
2018 2017 2016 2015 2014
Debt 3441 4400 6692 5817 2998
Equity 22754 23941 22949 24781 25987
Total capital 26195 28341 29641 30598 28985
Debt/equity 15.12% 18.38% 29.16% 23.47% 11.54%
Industry
average
24.50%
On the other hand, Telstra’s capital structure comprises of equal amount of debt and
equity. The company’s capital has approximately 50% equity and 50% net debt. However, a
fluctuating trend can be noticed in the capital structure of the firm over the past five years. It can
be observed that in 2015 and 2017, the debt element of the company has increased as compare to
their prior years. Talking about the recent year the ratio has declined to 98.17% as compare to
104.95% in 2017. Also it is below the industry benchmark of 116.26%. The structure reflects
that Telstra rely heavily on the outside borrowings which forms major part of its net debt. Also it
preserves high financial risk but is trying to reduce its debt portion. Having a ratio lower than the