Comparative Financial Analysis of Telstra Corporation Limited and TPG Telecom Limited

This report compares and analyses the financial data of Telstra Corporation Limited and TPG Telecom Limited in the last 3 years. It covers topics such as cost structure, cost of source of capital, dividend policies, stock price index, risks, WACC value, cost of equity, Capital Asset pricing model, returns on share, cost of debt, market value of debt etc.

Running head: FINANCE
Finance
Name of the Student:
Name of the University:
Authors Note:

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Table of Contents
Introduction................................................................................................................................2
Answer A...................................................................................................................................3
Stock price index....................................................................................................................3
Market index..........................................................................................................................3
Answer B....................................................................................................................................4
Total Risk...............................................................................................................................4
Systematic risk.......................................................................................................................4
Unsystematic risk...................................................................................................................4
Answer C....................................................................................................................................5
WACC....................................................................................................................................5
Answer D:..................................................................................................................................8
Dividend policy:.....................................................................................................................8
Answer E....................................................................................................................................9
Recommendation....................................................................................................................9
Conclusion..................................................................................................................................9
Reference..................................................................................................................................10
Appendix..................................................................................................................................12
Reference..................................................................................................................................16

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Introduction
This report is being created with a purpose of comparing and analysing the financial
data given of the two reputed companies listed in Australian Stock Exchange regarding their
performance in share market in the last 3 years. This report will give a brief explanation
about the operation and the activities of these companies and the impact of those operations
upon shareholders by comparing the data with the average market standard. The discussed
topics of these companies in this report are, cost structure, cost of source of the capital,
dividend policies, stock price index, risks, WACC value, cost of Equity, Capital Asset pricing
model, returns on share, cost of debt, market value of debt etc (Renz, 2016). This report is
being analysed by the given data from the reliable sources of the company. The two
companies which are taken for this analysis are:-
Telstra Corporation Limited is the largest telecommunications company of Australia which
deals with operating telecommunications networks and market voice, mobile, internet access,
pay television and other products and services. In the last year, the company had managed to
gain a net profit of $3.9 billion and has an employee capacity of over 32000. The company
was established in 1993 which was basically a re-branding of Australian and Overseas
Telecommunications Corporation (AOTC) which was formed in 1946. The brand Telstra first
started to be recognised in the industry since 1995 (Obaidullah, 2017).
TPG Telecom Limited is an Australian telecommunications and IT company that specialises
in consumer and business internet services as well as mobile telephone services. As of
August 2015, TPG is the second largest internet service provider in Australia and operates the
largest mobile virtual network operator. The company was established in 1986 by David and
Vicky Teoh. The company provides five ranges of products and services such as internet

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access, networking, mobile phone service, OEM service and accounting software. The net
income of the company was accounted as $171.7 million with a employees capacity of 5,083
(Boczko, 2016).
Answer A
Stock price index
The stock price index report is prepared to calculate the versatility of the price of
shares within a certain period of the year of the operation of the company. The price of the
shares is prone to vary every day. It is also uncertain to predict the cost of the shares in every
quarter of a same day. Thus the best way to monitor the ups and downs in the share market is
to measure the price with proper market index. This index can provide a detailed and
comprehensive aspect to the price structure of the shares of any company. As par the daily
return statement of the organisations is concerned, the third quarter of 2015 was good in
terms of stock price index for both the companies (Doherty et al., 2014). Then in the last
quarter of the same year the price index witnessed some fall which continues up to the third
quarter of 2016. From the last quarter of 2016, the index witnessed some hike which
continues until the second quarter of 2017. Then the index fall again. But from the third
quarter of 2017 to the present time, there was a constant stability in the price index which
could be observed for both of the companies. But as an average, the index of Telstra
Corporation Limited was more profitable than TPG.
Market index
Market index indicates the performance of the company in comparison with the other
companies that are operating in the same market. A base value of index is taken in order to
monitor the probable profit or loss of the company on the basis of that index. The value is just
an average which is based on the economic situation of the market within a specific period of

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time. Apart from just comparing the profits and losses of the companies, the market index
also helps to figure out the probable growths of the company and the effectiveness in the
operations of the company measured by the financial performance done by it in a period of
time (Gitman et al., 2015).
Answer B
Total Risk
Total risk is calculated by doing the beta analysis of the company. The beta
measurement signifies the risks which are involved in the investments done by the
shareholders to a specific company. The total risk measurement follows specific rules of
thumb which is, the higher the amount of risk involved in an investment, the probability of
profits and loss should be higher with that risk. It is very important for the shareholders to
consider the probable risks regarding the investment to a company (Cooperman, 2016).
The beta measurement for both of the companies were lower in 2016 and 2018 which
means the shareholders faced less risk with high expectation of return upon their investment.
But in 2017, the beta index was hiked up a little bit which caused some loses to the
shareholders
Systematic risk
Systematic risks denote that all the probable risks involved in the operations of any
organisations are being measured in a dignified manner. If the amount of total risks is not
being measured in a proper and systematic way, it is very unlikely to forecast the outcome of
any investment made by the shareholders.
Unsystematic risk
The unsystematic risk is the measurement of risk which is done in an undignified
manner by the company. In this case, the expected outcome from the investments made by

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the investors or the shareholders cannot be forecasted properly and the scope of measuring
the actual growth of the company will be limited. If the amount of risk is being measured
unsystematically, it is expected that the shareholders might face a loss upon their investment
and furthermore, the shareholders would not be willing to invest or purchase the shares of the
company (Haldane, 2014).
Answer C
WACC
WACC or the weighted average cost of capital in the measurement of the cost
percentage that the company is paying to the investors and the borrowers of the company.
The WACC is measurement depends on several internal and external sources and statements.
Before calculating this, several other calculations have to be done in order to get the final
results. The components which are associated with WACC are cost of equity, capital asset
pricing model, risk free return, market rate of return, dividend growth model, cost of debt and
market value of debt (Gamper et al., 2017). All the components are discussed below:-
Cost of Equity:
The equity share holders of the company are basically the owners of the company who gets
the share of profits instead of any kind of interest for the purchased share. The cost of equity
is being measured by the rate of return that the shareholders expect from the company. The
Cost or equity and the cost or retained earnings are portion of the profits that are not being
distributed among the shareholders of the company (Rammal, 2015). There are two methods
for determining the cost of equity i.e. the Capital Assets Pricing Model (CAPM), Dividend
Growth Model and own bond yield plus judgment risk premium method.

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The cost of equity for both the companies were decreased in 2018 than the previous
year.
Capital Asset pricing model:
Investors and shareholders has to depend on the CAPM or the capital asset pricing model
method to evaluate the cost of equity. This model determines the association between return
expected from an asset and the systematic risks applied for calculating CAPM is given in the
calculation below:
CAPM: RE = RRF + (RM – RRF)b
= RRF + (RPM)b.
RE = the cost of equity;
RRF = the risk free return;
RM = the expected return from the market;
B = Beta.
Risk free Return
The risk free return is the amount of return which can be gained by investing on a
company without any risk. This means that the investor will surely gain the return in the
exact same way as the investor expected to get. The interest rate of U.S Treasury bill is
regarded as the risk free rate of return for the purpose of calculation.
Market rate of return

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The market rate of return is the return that the investor expects for taking the risk of
investing in the stock market. The difference between the market rate of return and the risk
free rate of return is known as the market risk premium. This premium return is received by
an investor for taking the additional risk of investing in the stock market. From the stock
market the rate of return can be calculated by averaging the rate of return (Ursitti et al.,
2016).
Dividend growth model
In this method, the cost of equity is calculated by a constant growth. The growth can be
derives by multiplying the growth rate and Beta of the company. This is calculated in the
understated procedure.
Formula is provided below:
RE = {[D0* (1+g)] /P0} + g
RE = cost of equity;
D0 = current year’s dividend;
G = growth rate;
P0 = current stock price;
Cost of debt:
Cost of debt is totally a separate investment structure. This is collected by issuing bonds and
the debenture of the company which is quoted with the redemption date and premium. The
debenture can either be issued at discount, at par or premium. However, it is redeemable only
at par and premium. The interest that is obliged by the sub-scripter is to be paid in half yearly
or annual instalment. The main feature of the debenture or the debt investment is that it is tax

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saving for the company. The cost of debt is referred to as the effective rate of interest that the
company pays for using the debt capital (Freeman, 2015). The company uses various bonds,
debts and loans so the calculation of the cost of debt is essential because it gives an idea of
the cost incurred by the company for overall debt financing The cost of debt incurred by the
company is calculated by dividing the total interest paid by the company with the total debt.
The cost of debt for both of the companies was reduced in 2018 than 2017, but the
percentage of the cost of debt was far higher in TCL than TPG.
Market value of Debt:
Market value of the debt means that some of the debenture and the bonds are listed in the
securities exchange; they are transferred in the same manners as the equity share. The market
value of the debt means the price of that particular debt is trading on by the total number of
debt bonds (Shirvani et al., 2018).
The market value of debt was decreased in TCL in 2018 than the previous year where
as the amount of the same was increased in the case of TPG.
Answer D:
Dividend policy:
The dividend policy is the amount of dividend that a company usually pays to the
shareholders out of its profits that are earned in a particular year.
Dividend pay-out ratio is the percentage of dividend that the company is paying out of
its earnings (Grobys & Äijö 2018).
In terms of dividend pay-out ratio, the percentage of both of the companies had
decreased in the successive years. But the ratio of TPG was far better than the TCL.

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Answer E
Recommendation
As far as the report is concerned, it can be noticed that TPG has done a better
performance and all the index including the WACC and dividend ratio was in favour of TPG.
Thus the investors should consider TPG as their first priority. But according to the portfolio
investment method, if the investors wants to invest a huge amount of money, it is not secure
anywhere to invest it in just one company regardless how much the index of the company
seems profitable (Balasubramanian & Nazer, 2018). The investors should invest some
amount of money to the other company also in case any of the companies face any slow
down so that the loss can be recoverable.
Conclusion
As far as the report is concerned, it can be seen that TPG has performed better than
TCL in term of last three year. All the measurements have been done to compare the
performance of these companies in a distinguished way and as a result, TPG beat TCL with a
little but significant margin. Thus, by created this report, the investors can invest their money
to the profitable company as indicated in this report.

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Reference
Balasubramanian, P., & Nazer, M. (2018). ISSUES AND CHALLENGES OF MANAGING
HUMAN RESOURCES IN INDIAN AGRICULTURE–A SYNOPTIC
LOOK. INTERNATIONAL JOURNAL OF SCIENTIFIC RESEARCH, 7(7).
Boczko, T. (2016). Managing Your Money: A practical guide to personal finance. Macmillan
International Higher Education.
Cokins, G., & Scanlon, C. (2017). Measuring and managing patient profitability: activity-
based costing is an imperative for health systems seeking to ensure the profitability of
their enterprises under value-focused health care. Healthcare Financial
Management, 71(4), 34-45.
Cooperman, E. S. (2016). Managing financial institutions: Markets and sustainable finance.
Routledge.
Doherty, T. L., Horne, T., & Wootton, S. (2014). Managing public services-implementing
changes: a thoughtful approach to the practice of management. Routledge.
Freeman, M. W. (2015). Managing Your Cholesterol (Harvard Medical School Special
Health Reports) (Doctoral dissertation, harvard medical school).
Gamper, C., Signer, B., Alton, L., & Petrie, M. (2017). Managing disaster-related contingent
liabilities in public finance frameworks.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson
Higher Education AU.
Grobys, K., & Äijö, J. J. (2018). Volatility-managing international equity risk factors.

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Haldane, A. G. (2014). Managing global finance as a system. Bank of England, Speech at the
Maxwell Fry Annual Global Finance Lecture, Birmingham University, 29.
Maskell, B. H., Baggaley, B., & Grasso, L. (2016). Practical lean accounting: a proven
system for measuring and managing the lean enterprise. Productivity Press.
Obaidullah, M. (2017). Managing Climate Change: The Role of Islamic Finance (No. 2017-
1). The Islamic Research and Teaching Institute (IRTI).
Rammal, H. G. (2015). 12. Managing the ethical aspects of Islamic banking and
finance. Handbook of Research on Islamic Business Ethics, 246.
Renz, D. O. (2016). The Jossey-Bass handbook of nonprofit leadership and management.
John Wiley & Sons.
Shirvani, F., Scott, W., Perez, P., & Campbell, P. (2018). Managing the complexities of
infrastructure procurement projects-a model based systems engineering approach.
In Systems Evaluation Test and Evaluation Conference 2018: Unlocking the Future
Through Systems Engineering: SETE 2018 (p. 502). Engineers Australia.
Ursitti, M. A., Collier, V., Cook, D., Attanasio, A., & Reynolds, K. (2016). U.S. Patent No.
9,495,467. Washington, DC: U.S. Patent and Trademark Office.

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Appendix
Calculation of yearly variance, standard deviation, covariance and
unsystematic risk
AUX TLS TPG
Variance-2018
0.0061
% 0.0509% 0.0509%
Variance -2017
0.0027
% 0.0167% 0.0167%
Variance-2016
0.0117
% 0.0171% 0.0171%
Std deviation-
2018
0.7828
% 2.2567% 2.2567%
Std deviation-
2017
0.5149
% 1.2931% 1.2931%
Std deviation-
2016
1.0797
% 1.3073% 1.3073%
Covariance-2018
-
0.000012142
-
0.000012142
Covariance-2017 0.000004327 0.000004327
Covariance-2016
-
0.000002890
-
0.000002890
Unsystematic risk-2018 2.25% 2.25%
Unsystematic risk-2017 1.30% 1.30%
Unsystematic risk-2016 1.32% 1.32%
Table 5: Calculation of yearly beta and cost of equity
TLS TPG
Beta-2018 -0.1982 -0.1982
Beta-2017 0.1632 0.1632
Beta-2016 -0.0248 -0.0248
Rf (US 5-year bond yield) 2.765% 2.765%
Rm 9.7% 9.7%
Rm-Rf 6.962% 6.962%
Ke-2018 1.385% 1.385%
Ke-2017 3.901% 3.901%
Ke-2016 2.592% 2.592%

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TLS TPG
2017 2016 2017 2016
Long-term debt 22919 25800 4989 4897
Short-term debt 7081 6491 76 76
Toal Interest 848 1111 94 56
Total debt 30000 32291 5065 4973
Cost of debt 2.83% 3.44% 1.86% 1%
TLS TPG
2018 2017 2018 2017
No of shares 1800 1808 2184 2193
Share price 33.5438 26.2508 33.5438 26.2508
Market value of
Equity 60379 47461 73260 57568
Market value of
debt 30000 32291 5065 4973
Weight for equity 0.67 0.60 0.94 0.92
Weight for debt 0.33 0.40 0.06 0.08
Cost of equity 1.4% 3.9% 1.4% 3.9%
Cost of debt 2.83% 3.44% 1.86% 1.13%
Effective tax rate 21% 12% 28.7% 47%
WACC 1.67% 3.55% 1.38% 3.64%
TLS TPG
2018 2017 2016 2018 2017 2016
Dividend per
share 2.36 1.51 2.2 1.53 1.48 3.13
EPS 4.86 2.55
-
0.47 0.02 1.42 0.03
Payout ratio 48.56% 59.22% -468% 94.3 96% 113.6
Capex (bn) -4.4 -3 -4.7 -3 -13.4 -29.5

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No of shares 1.8 1.808 1.825 8.52 8.46 8.34
Capex per share
-
2.44
-
1.66
-
2.58
-
0.35
-
1.58
-
3.54
SUMMARY
OUTPUT TGP
Regression Statistics
Multiple R
0.0599
15
R Square
0.0035
9
Adjusted R
Square
-
0.0003
3
Standard Error
0.0078
07
Observations 256
ANOVA
df SS MS F
Significa
nce F
Regression 1 5.6E-05
5.6E-
05
0.918
701
0.33872
8
Residual 255 0.015541
6.09E
-05
Total 256 0.015597
Coeffici
ents
Standard
Error t Stat
P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept 0 #N/A #N/A #N/A #N/A #N/A #N/A #N/A
X Variable 1
-
0.0207
8 0.02168
-
0.958
49
0.338
724 -0.06347
0.0219
15
-
0.06347
0.02191
5
SUMMARY
OUTPUT TSL
Regression Statistics
Multiple R
0.0631
55
R Square
0.0039
89
Adjusted R
Square
6.73E-
05
Standard Error 0.0078

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07
Observations 256
ANOVA
df SS MS F
Significa
nce F
Regression 1 6.2E-05
6.2E-
05
1.017
161
0.31415
3188
Residual 254 0.015482
6.1E-
05
Total 255 0.015544
Coeffici
ents
Standard
Error t Stat
P-
value
Lower
95%
Upper
95%
Lower
95.0%
Upper
95.0%
Intercept
0.0004
81 0.000489
0.984
622
0.325
747
-
0.00048
1156
0.00144
3367
-
0.00048
0.00144
3
X Variable 1
-
0.0219 0.021711
-
1.008
54
0.314
153
-
0.06465
2756
0.02085
9927
-
0.06465 0.02086

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Reference