Managing Finance: Analysis of Amaysim and Telstra Stocks, WACC, Dividend Policy and Share Purchase

This report contains the analysis of the stocks for Amaysim Australia Limited and Telstra Corporation Limited, compared with the market index ASX S&P 200. It includes the calculation of systematic and unsystematic risk by figuring out the daily returns of companies’ stock and the market. In addition, the report also discusses the WACC and dividend policy of both the companies, reflecting their performance in past three years that are 2015, 2016 and 2017. In the later part, recommendation is been provided regarding the purchase of shares of one of the two companies, followed by conclusion.

RUNNING HEAD: MANAGING FINANCE
managing finance

Managing finance 1
Contents
Introduction...........................................................................................................................................2
Systematic and Unsystematic risks........................................................................................................2
Weighted average cost of capital...........................................................................................................2
Dividend policy.....................................................................................................................................5
Share purchase.......................................................................................................................................8
Conclusion.............................................................................................................................................8
References...........................................................................................................................................10

Managing finance 2
Introduction
The procedure of evaluating and examining the stocks and instruments of a particular
company is known as stock analysis. The process is employed by the analyst who are
interested in knowing the past movements in the stock prices and market performance.
Furthermore, the analysis is helpful for many investors and traders as their decisions of
buying and selling the shares depends upon the results of the analysis. Critical examination of
the past movements help in predicting the future performance and trends in a stock and
market index (Edwards, Magee & Bassetti, 2012).
This report contains the analysis of the stocks for Amaysim Australia Limited and Telstra
Corporation Limited, compared with the market index ASX S&P 200. It includes the
calculation of systematic and unsystematic risk by figuring out the daily returns of
companies’ stock and the market. In addition, the report also discusses the WACC and
dividend policy of both the companies, reflecting their performance in past three years that
are 2015, 2016 and 2017. In the later part, recommendation is been provided regarding the
purchase of shares of one of the two companies, followed by conclusion.
Systematic and Unsystematic risks
Note: Please find the attached excel file for the calculation performed in the report.
Weighted average cost of capital
WACC represents the cost of capital of the firm comprises of the debt and equity elements,
proportionately weighted. It is been calculated by identifying the cost of equity and cost of
debt of the firm. Usually, the operations of an organization are financed through debt and

Managing finance 3
equity that make up to the total capital of that corporation. It is very important for the entities
to maintain a preferred and optimal capital structure to remain profitable in long run.
However, calculation of WACC is important for the investors and lenders to figure out the
returns, they are expected to receive on their investment (Fernandes, 2014). The weighted
average cost of capital of a company increase as and when the amount of its beta factor and
return on equity rises. Such upsurge in the cost of capital reflects high risk and low valuation.
However, there are many reasons for the fluctuations and differences in the companies’
WACC.
2015 2016 2017
Weig
hts
(A)
Cost
of
capital
(B) A*B
Wei
ghts
(A)
Cost of
capital
(B) A*B
Wei
ghts
(A)
Cost
of
capital
(B) A*B
Equity
-
1.92 2.7%
-
0.0523 0.69 6.7%
0.046
7 0.48 2.6%
0.012
3
Debt 2.92 2.2% 0.0633 0.31 8.5%
0.026
3 0.52 2.9%
0.015
1
WACC 1.10% 7.30% 2.74%
In case of Amaysim Australia Limited, the WACC of the company increases from 1.10% to
2.74% over the period of past three years. This was basically due to a significant upsurge in
its debt component from $3,973,000 to $82,558,000. However, when compared between
2016 and 2017, the WACC reduces from 7.30% to 2.74%. This change was due to the
reduction in company’s cost of debt and cost of equity. The reason for this reduction is the
fluctuations in the value of beta of AYS which affected its cost of equity over the past three

Managing finance 4
years (Amaysim Australia Limited. 2017). In 2016, company’s beta was 0.93 which turns
negative to -0.02 in 2017. This brings the firm’s cost of equity to 2.6% from 6.7%.
Considering the cost of debt, the changes in pre-tax cost affected the after tax cost of debt.
Fluctuations in interest expense and total debt of the company results in the changes in
overall cost of debt of AYS. However, in the given calculation the risk free rate and market
return is kept same for three years but variation in them can also cause changes in company’s
WACC.
2015 2016 2017
Wei
ghts
(A)
Cost of
capital
(B) A*B
Weigh
ts (A)
Cost
of
capital
(B) A*B
Weigh
ts (A)
Cost
of
capital
(B) A*B
Equity 0.52 2.8% 0.0144 0.56 5.0%
0.028
3 0.49 2.7%
0.013
2
Debt 0.48 4% 0.0174 0.44 4.4%
0.019
1 0.51 2.7%
0.013
6
WACC 3.17% 4.74% 2.68%
The same trend is been followed in case of Telstra Corporation Limited. Its WACC has also
reduced over the past three years. However, in 2016 it increased to 4.74% as compare to 2015
but again reduces to 2.68% in 2017. Such reduction was due to the overall decrease in
company’s cost of equity and cost of debt after tax. The beta of Telstra reduces from 0.54 to
0.0042 which makes the cost of equity to fall from 5% to 2.7%. The pre-tax cost of debt of

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the company also reduces from 5.70% to 3.87% in 2017 due to a significant reduction in
Telstra’s interest expense (Telstra. 2015). However, in that year, the debt component of the
firm increases, covering 51% of Telstra’s total capital. With such upsurge, the financial risk
taken by the corporation also rises as its borrowings increased during the year. So, here also
the reasons are same for the changes in working capital.
Furthermore, the market return and risk free rate also fluctuates from time to time which
results in the variations in cost of capital of the companies. Here, both the rates are kept same
and only the changes in beta and interest rate are noticed.
Dividend policy
The policies of dividend are the guidelines framed and followed by the companies for
deciding and declaring the amount of dividend to pay out in a particular fiscal year. As per
some facts and researches it is observed that dividend policy is irrelevant for some investors
as they can easily buy and sell their shares as and when they require cash. However,
irrespective of this, it is noted that the policy of dividend do impact the share prices of the
company (Baker, 2009). Generally, when a company pay out some dividends, its stock prices
rises as payment of dividends generate income to the investors. Therefore, firms paying
regular dividends attract more investors as compare to the ones who pay irregular or no
dividends to their stakeholders. As a result, the profitability and stock prices are highly
influenced and impacted. In order to decide the amount of dividend and study the dividend
policy of a company, analysts evaluates and examines the dividend pay-out ratios of the
firms. DPR measures the total dividends paid by the company to its investors against its net
income during a particular financial year. It is calculated by dividing the dividend per share
with the earnings per share of the organization (Frankfurter, Wood & Wansley, 2003).
2015 2016 2017

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Dividend per share (in cents) 0 8.3 9.1
Earnings per share (in cents) 14.5 6.9 6.1
DPR 0.00%
120.29
%
149.18
%
From the above table, it can be interpreted that Amaysim follows an irregular dividend policy
as the company has not declared any sort of dividends before 2016. However, its DPR has
increased from 120.29% to 149.18% in 2017. This is due to the increase in the amount of
company’s dividend from 8.3 cents per share to 9.1 cents per share. The declaration of
dividends has impacted the stock prices to AYS to some extent (Amaysim Australia Limited.
2017).
(Source: Yahoo Finance. 2018).
The above chart shows the fluctuations in share prices of the company from 2016 to mid of
2018. This period is taken because the dividends are declared after 2015 only. Prior to that,
the company has not paid out any sort of dividends to its shareholders. According to the data
available on Yahoo finance, initially when AYS declared 0.053 dividend in September 2016,
its share price tends to reduce till February 2017 (Amaysim Australia Limited. 2016). After

Managing finance 7
that company paid a dividend of 0.04 cents due to which its share price increases during the
year. High amount of dividend attracted more investors which brings an upsurge in AYS’s
stocks. Later on the price tends to fall and the stock is current trading at $1.06.
2015 2016 2017
Dividend per share (in cents) 30 31 31
Earnings per share (in cents) 34.5 31.6 32.5
DPR
86.96
%
98.10
%
95.38
%
Talking about Telstra Corporation, the company has paid regular dividends from the past
three years. Moreover, it has almost stable rate of dividends which can be seen from the
above table. In addition, the DPR of Telstra has been increased from 86.96% to 95.38% in the
past years. Therefore, it can be said that company follows a regular dividend policy (Telstra.
2017).
(Source: Yahoo Finance. 2018).

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From the above chart, it can be observed that the share price of Telstra Corporation has been
reduced over the past years and are significantly impacted by the dividends declared by the
company. Telstra paid dividend on August 2015, at a rate of 0.155 due to which its share
price reduces till February 2016. In March and August 2016, the company again declared the
dividends on the same rate which further reduces the price till January 2018. In February
2018, Telstra paid dividend of 0.075 cents which again results in the decline of stock prices.
Overall, it can be said that the dividends has a negative impact on the stock prices of Telstra
Corporation Limited.
In the above cases, the payment of dividends has affected the prices of company’s stock and
their profitability. As far as dividend policies are concerned, Amaysim Australia Limited
follow irregular dividend policy and Telstra follows a regular dividend policy. Relevant
theories provided by Walter and Gordon applies to the above patterns noticed for both the
companies. Their payment of dividends and polices are very much relevant as they have
affected the share prices respectively. Moreover, they had paid dividends from their retained
earnings which impact their profitability also.
Share purchase
From the above analysis, it is recommended that the shares of Telstra Corporation should be
purchased with the amount of $10 million. Reason being, the organization offer regular
dividends to its stakeholders and has 49% of equity. Moreover, its WACC has reduced over
the years and its DPR has increased. Telstra has paid stable amount of dividends for a long
time to its shareholders and investors. So, it will be better to purchase the shares of Telstra as
investors can generate a regular income in form of company’s dividends. Though its share
price has shown an overall reduction during the past three years but the company continues to
improve and increase its earnings per share along with the amount of dividend. Therefore, it

Managing finance 9
will be advised to invest the amount in Telstra rather than investing it in Amaysim Australia
Limited.
Conclusion
The above report concludes that stock analysis is very important for the investors to conduct,
so that they can clearly understand the position and performance of the company in a market.
The analysis helps to study the movements in the stock prices of the company along with the
changes in market return. In addition, calculation of WACC and evaluation of dividend
policies provide a clear picture of the performance of company’s stocks during the past three
years. Overall, such analysis helps in taking better investment related decisions such as
purchasing or selling the shares of a particular entity. Thus, it can be said that before making
any kind of investment the investors should properly analyse its stocks and their performance.

Managing finance 10
References
Amaysim Australia Limited. (2017). Annual report 2017. Retrieved from:
https://investor.amaysim.com.au/irm/PDF/1418_0/FullyearresultsAppendix4EandAnn
ualReport
Amaysim Australia Limited. (2016). Annual report 2016. Retrieved from:
https://investor.amaysim.com.au/irm/PDF/1218_0/AnnualReporttoshareholders
Baker, H. K. (Ed.). (2009). Dividends and dividend policy (Vol. 1). John Wiley & Sons.
Edwards, R. D., Magee, J., & Bassetti, W. H. C. (2012). Technical analysis of stock trends.
2nd ed. Boca Raton: CRC Press.
Fernandes, N. (2014). Finance for Executives: A practical guide for managers.
NPVPublishing.
Frankfurter, G., Wood, B. G., & Wansley, J. (2003). Dividend policy: Theory and practice.
Elsevier.
Telstra. (2015). Telstra Annual Report 2015. Retrieved from:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf%20D/telstra-
annual-report-2015.pdf

Managing finance 11
Telstra. (2017). Telstra Annual Report 2017 . Retrieved from:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/Annual-
Report-2017.PDF
Yahoo Finance. (2018). Amaysim Australia Limited (AYS.AX) Retrieved from:
https://finance.yahoo.com/quote/AYS.AX/history?p=AYS.AX
Yahoo Finance. (2018). Telstra Corporation Limited (TLS.AX). Retrieved from:
https://finance.yahoo.com/quote/TLS.AX/history?
period1=1435689000&period2=1530297000&interval=1mo&filter=history&frequenc
y=1mo