Valuation of Telstra Company

Corporate Finance
Valuation of Telstra company
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Executive Summary
This report performs the valuation of Telstra Company. Discounted cash flows method is
used for the valuation of the company and the cash flows used for this purpose are the
company’s operating cash flows (OCF). The operating cash flows for 2018 are calculated at
6,267 ($m) after assuming that 81 per cent and 75 per cent of the operating revenues and
expenses respectively are in cash. The growth rate of 5.95 % is assumed to forecast the OCF
for next five years. The Gordon growth method assuming the constant perpetual growth rate
is used for calculating the terminal value of the company. Terminal value at period 5 is found
to be 6,19,427 ($m) using the weighted average cost of capital of 4 per cent and constant
growth rate of 2.61 per cent. This resulted in the present value of Telstra of 5,42,267 ($m)
and the estimated share price of 44.17 ($) on 30 July 2018. It is found that this estimated
price is different than the market price of 2.81 ($). This difference can be due to the prevalent
market conditions and sensitivity of the valuation model to various assumptions.
Contents
Introduction............................................................................................................... 1

Telstra Valuation........................................................................................................ 1
Step 1: Reconstruction of the profit and loss statement in the format of Operating Cash flow........1
Step 2: Forecasting the reconstructed P&L for the next 5 years.............................................3
Step 3: Calculating the after tax OCF for the next 5 years....................................................4
Step 4: Calculating the terminal value (TV) at time 5.........................................................4
Step 5: Calculating the cost of equity (Re)......................................................................5
Step 6: Calculating cost of debt (Rd)............................................................................. 5
Step 7: Calculating Debt/Value and Equity/Value ratio from the Debt/Equity ratio....................6
Step 8: Calculating the Weighted Cost of Capital (WACC or k)............................................6
Step 9: Calculating the present value of the asset of your company at time zero........................6
Step 10: Calculating the Equity Value...........................................................................6
Step 11: Calculating the share price..............................................................................7
Step 12: Comparing the estimated share price of Telstra with its market price..........................7
Conclusion................................................................................................................ 8
Recommendations....................................................................................................... 9
References.............................................................................................................. 10
Appendices.......................................................................................................... 11
Appendix 1: Balance sheets and Profit & Loss statements...............................11
Appendix 2: Telstra’s operating revenues and expenses.................................15
Appendix 3: Assumptions used for forecasting next 5 years reconstructed profit
and loss statement........................................................................................... 16
Appendix 4: Average GDP growth rate for estimating the perpetual growth rate
of Telstra.......................................................................................................... 17

Corporate Finance [Surname, Student ID #]
Introduction
This report is on the valuation of Telstra Company. Telstra is the largest telecommunications
firm in Australia, founded in 1975. The company provides mobile phones, home phones and
broadband internet. This report uses the past five years balance sheets and profit and loss
statements for the valuation purpose. It reconstructs profit and loss statement in the format of
operating cash flows (OCF) by assuming certain percentage of revenues and expenses that
are cash. Then, it forecasts the OCF for next five year using certain growth rate assumption.
The report uses above cash flows and Gordon growth model to find the terminal value of
Telstra at period 5. Then, it uses discounted cash flows method to find the present value of
the company by assuming certain perpetual growth rate and the company’s weighted average
cost of capital (WACC). The report also estimates the share price of Telstra on 30 July 2018
and compares it with the actual market share price on that date. It uses the backward
induction method to find the growth rate and WACC that will cause the estimated share price
to equal the actual market price. The report further evaluates these rates to check if they are
acceptable. The document also provides an explanation of the difference between the
estimated share price and the market share price.
Telstra Valuation
Appendix 1 shows the historical balance sheets and income statements of Telstra: Data taken
from Telstra Annual Reports (2014), Telstra Annual Reports (2015), Telstra Annual Reports
(2016), Telstra Annual Reports (2017) and Telstra Annual Reports (2018).
Step 1: Reconstruction of the profit and loss statement in the format of
Operating Cash flow.
The profit and loss statements can be reconstructed in the format of Operating Cash flow as:
OCF = (Revenue – Expenditure) (1 – tc) + Depreciation x tc
Considering only the income from operations but excluding other gains and incomes for
calculating revenue for the OCF and considering only labour costs, goods & services costs
and SG&A costs but excluding amortisation & depreciation costs for calculating expense for
the OCF as shown in appendix 2.
1