Financial Analysis of Telstra Corporation Limited

The report is developed in the context of providing an understanding of the importance of financial analysis to examine the potential of a company for investment purpose. In this context, the report has presented an evaluation of the financial performance of Telstra Corporations Limited by the use of performance ratios, weighted average cost of capital, debt ratios and calculation of beta for examining the market risk. The report has also discussed the dividend policy and provided the letter of recommendation to the investors for guiding their investment making decisions.

1
HI5002: Finance for Business
Group Assignment

2
Executive Summary
The report is developed in the context of providing an understanding of the importance of
financial analysis to examine the potential of a company for investment purpose. In this context,
the report has presented an evaluation of the financial performance of Telstra Corporations
Limited by the use of performance ratios, weighted average cost of capital, debt ratios and
calculation of beta for examining the market risk. The report has also discussed the dividend
policy and provided the letter of recommendation to the investors for guiding their investment
making decisions.

3
Contents
Executive Summary.........................................................................................................................2
Introduction......................................................................................................................................4
Part 1: Description of the company.................................................................................................4
Part 2: Ownership Governance Structure........................................................................................5
Part 3: Use of ratio analysis as the fundamental tool to evaluate the financial performance of the
Telstra Corporation..........................................................................................................................6
Part 4: Telstra Stock price and All Ordinaries Index price movement during the last two years. . .9
Section 4.1: Chart or graph reflecting the price movement of both Telstra and All Ordinaries
during the last two years..............................................................................................................9
Section 4.2: Report that present the description on price movement Telstra Stock to all
Ordinaries Index- Insight of Correlation and Volatility of the stock.........................................11
Part 5: Research Regarding the Financial or Business Publications.............................................12
Part 6: Use of CAPM model to estimate the required rate of return of Telstra Corporation.........14
Section 6.1: Identification of Beta of Telstra Corporation.........................................................14
Section 6.2: Application of CAPM Model.................................................................................14
Section 6.3: Discussion on whether Telstra is good for the conservative investment...............14
Part 7: Identification of Weighted average cost of capital............................................................14
Section 7.1: Application of WACC...........................................................................................14
Section 7.2: Impact on higher rate of WACC on the prospective investment projects of Telstra
....................................................................................................................................................16
8. Capital Structure of Telstra Corporations Limited....................................................................16
Section 8.1: Optimal Capital Structure......................................................................................16
Section 8.2: Impact on Gearing Ratio........................................................................................16
Part 9: Dividend Policy..................................................................................................................16

4
Part 10: Recommendation Report..................................................................................................17
References......................................................................................................................................18

5
Introduction
This report is carried out in context of providing financial assistance to a wealthy investor
regarding the investment in a selected company listed on ASX. The financial assistance is
provided on the basis of analysis of financial performance of the company. The financial
performance analysis is carried out on the basis of the performance ratios that are, liquidity, and
profitability, solvency and market ratios. The calculation of the ratios has facilitated in assessing
the performance of the company at present and therefore providing a prediction of its future
growth potential. Also, the calculation of weighted average cost of capital has facilitated in
gaining an insight into the type of capital structure mainlined by the company. The debt ratios
and the beta calculation have also provided an assessment of the financial risk associated with
the company. At last, the report has provided a letter of recommendation for the investors to
guide their investment making decisions in the company. The selected company for carrying out
the overall report is Telstra Corporations Limited.
Part 1: Description of the company
Telstra is recognized as leading telecommunication and technology Company within
Australia involved in providing telecommunication services. The company was established in
the year 1975 and since then has developed its competency position in providing
telecommunication and information services to businesses, governments, communities and
individuals. The major products and services provided by the company include markets voice,
mobile and internet access and different types of entertainment products and services. It is
regarded to be the largest telecommunication company within Australia and has attained this
position by providing innovating communication services to customers for improving the ways
in which they live and work. It carries out its business activities by Telstra Retail, global
enterprise and services, Telstra wholesale and Telstra operations segments. It provides its
telecommunication products and services to businesses, governments, communities and
individuals across Australia and at international level. The company listed on ASX carries out its
business operations on strong purpose and values that has facilitated in promoting its growth and
development (Telstra: Annual Report, 2017).

6
Part 2: Ownership Governance Structure
(i): Major Shareholders
As depicted from its annual report, there are no shareholders having more than 20% of
the shareholdings in Telstra Corporation Limited. HSBC Custody Nominees (17.98%), JP
Morgan Nominees Australia Limited (10.89%) and Citicorp Nominees Pty Ltd (5.61%) are
having more than 5% of the shareholdings in Telstra. The firm can be regarded as non-family
company as the major shareholders are independent entities and the shareholders are not the
members of the governance team.
(ii): Main People Involved in Firm Governance
John Mullen, an independent non-executive director holds the position of the Chairman
of the company since the year 2016. The Chairman is responsible for overseeing the roles and
responsibilities of the Board. The below table depicts the board members of the Telstra
Corporation Limited:
Name of the Board Member Job Designation
Andrew R Penn Chief Executive Officer & Managing Director
Craig W Dunn Non-executive director
Peter R Hearl Non-executive director
Jane Hemstritch Non-executive director
Margaret Seale Non-executive director
Russell A Higgins Non-executive director
Nora L Scheinkestel Non-executive director
Steven M Vamos Non-executive director
Trae Vassallo Non-executive director
As depicted in the above table, Andrew R Penn is the Chief executive officer and
managing director of the company. It is early depicted from the board team members that they do
not have any role as the major shareholders of the company (Telstra: Annual Report, 2017). The
major shareholders of the company as depicted from its annual report are depicted as follows:

7
(Source: https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/Annual-Report-
2017.PDF)
Part 3: Use of ratio analysis as the fundamental tool to evaluate the financial performance
of the Telstra Corporation
Ratio Analysis is an important and widely used fundamental tool to assess financial
performance of any entity and also to comparison of same company in different years and
different companies in same years. Ratio analysis allows high level of flexibility to make
financial analysis but it has some limitations that impact the quality of financial analysis
(Glajnaric, 2016).
In this section ratio analysis of Telstra Corporation has been carried out for last two years
and results have been presented in below table:
Financial Data used to calculate the financial ratio
Telstra Company
Amount in $ million
Financial Items 2016 2017
Current Assets
$
9,340.00
$
7,862.00
Current Liabilities $ $

8
9,188.00 9,159.00
Inventories
$
557.00
$
893.00
Quick Assets
$
8,783.00
$
6,969.00
Long Term Debt
$
18,227.00
$
18,433.00
Shareholders' Equity
$
15,871.00
$
14,541.00
Total Assets
$
43,286.00
$
42,133.00
Interest Paid
$
796.00
$
729.00
EBIT
$
7,110.00
$
2,067.00
Account Receivable
$
3,343.00
$
3,635.00
Net Profit
$
5,780.00
$
3,891.00
Net Revenue (Credit Sales)
$
25,834.00
$
25,912.00
Weighted Average number
of ordinary shares (in
millions) 12215.00 11968.00
Cost of Goods Sold
$
7,247.00
$
10,958.00
Dividend Paid during the
year (Final and interim)
$
0.44
$
0.44
(Annual Report 2017: Telstra Corporation)
Financial Ratios Formulas 2016 2017
Short term solvency

9
Current ratio
Current Assets/Current
Liabilities 1.02 0.86
Quick ratio
Quick Assets/Current
Liabilities 0.96 0.76
Long term solvency
Debt Ratio Long Term Debt/Total Assets 0.42 0.44
Debt to Equity Ratio
Long Term Debt/ Shareholders
Equity 1.15 1.27
Times interest earned
ratio EBIT/Interest Expenses 8.93 2.84
Asset utilization
Inventory Turnover
Ratio Cost of Goods Sold/Inventory 13.01 12.27
Total Asset turnover
ratio Net Revenue/Total assets 0.60 0.62
Account Receivable
Turnover ratio
Credit Sales/Account
Receivable 7.73 7.13
Profitability Ratios
Net Margin Ratio Net profit/Net Revenue 22.37% 15.02%
Return on total assets Net profit/Total Assets 13.35% 9.24%
Return on ordinary
shareholders’ equity Net profit/Shareholder's Equity 36.42% 26.76%
Market Value Ratios
Earnings Per Share
Net profit/weighted average
number of shares
$
0.47
$
0.33
Dividend Per Share Dividend/weighted average $ $

10
number of shares 0.44 0.44
(Annual Report 2017: Telstra Corporation)
Part 4: Telstra Stock price and All Ordinaries Index price movement during the last two
years
Section 4.1: Chart or graph reflecting the price movement of both Telstra and All
Ordinaries during the last two years
Monthly data from 1 Apr 2016 to 31 Mar 2018
Date Telstra All Ordinaries
Monthly Share Price Index Price Scale to 100
1 30/04/2016 4.68 5447.80 54.48
2 31/05/2016 4.65 5310.40 53.10
3 30/06/2016 4.83 5644.00 56.44
4 31/07/2016 4.40 5529.40 55.29
5 31/08/2016 4.51 5525.20 55.25
6 30/09/2016 4.34 5402.40 54.02
7 31/10/2016 4.40 5502.40 55.02
8 30/11/2016 4.44 5719.10 57.19
9 31/12/2016 4.36 5675.00 56.75
1
0 31/01/2017 4.20 5761.00 57.61
1
1 28/02/2017 4.06 5903.80 59.04
1
2 31/03/2017 3.85 5947.60 59.48
1
3 30/04/2017 4.02 5761.30 57.61
1
4 31/05/2017 3.93 5764.00 57.64

11
1
5 30/06/2017 3.75 5773.90 57.74
1
6 31/07/2017 3.35 5776.30 57.76
1
7 31/08/2017 3.38 5744.90 57.45
1
8 30/09/2017 3.43 5976.40 59.76
1
9 31/10/2017 3.32 6057.20 60.57
2
0 30/11/2017 3.52 6167.30 61.67
2
1 31/12/2017 3.56 6146.50 61.47
2
2 31/01/2018 3.25 6117.30 61.17
2
3 28/02/2018 3.14 5868.90 58.69
2
4 31/03/2018 3.18 6071.60 60.72
(Yahoo Finance, 2018: ALL ORDINARIES and Telstra Corporation)

12
01/04/2016
01/05/2016
01/06/2016
01/07/2016
01/08/2016
01/09/2016
01/10/2016
01/11/2016
01/12/2016
01/01/2017
01/02/2017
01/03/2017
01/04/2017
01/05/2017
01/06/2017
01/07/2017
01/08/2017
01/09/2017
01/10/2017
01/11/2017
01/12/2017
01/01/2018
01/02/2018
01/03/2018
0.00
5.00
10.00
15.00
20.00
25.00
30.00
35.00
40.00
45.00
50.00
55.00
60.00
65.00
Price Movement of Telstra and all ordinaries All Ordinaries
Telstra
Date (Monthly)
Share Price

13
Section 4.2: Report that present the description on price movement Telstra Stock to all
Ordinaries Index- Insight of Correlation and Volatility of the stock
On the basis of calculation made and through analyzing the graph it was found that there
has been negative correlation between stock prices and All Ordinaries Index prices. The stock
line of Telstra has been situated below the Index price line in the graph. The calculation of
correlation between the price movements of stock price and Index price shows that they are
correlated with each other by -0.80. It means when the index price goes up the stock price falls
and vice versa. So it can be said that when the index price increase by 1 basis point than stock
price will fall by 0.80 basis points (Higgins, 2012).
In order to test the volatility there is need to calculate the standard deviation and
coefficient of variation that will provide volatility in the returns of Telstra and All Ordinaries.
Test of Volatility
Monthly Telstra
All
Ordinaries
Date
Stock
Return
Index
Return
30/04/2016 -0.54% -2.52%
31/05/2016 3.78% 6.28%
30/06/2016 -8.84% -2.03%
31/07/2016 2.62% -0.08%
31/08/2016 -3.86% -2.22%
30/09/2016 1.41% 1.85%
31/10/2016 0.99% 3.94%
30/11/2016 -1.96% -0.77%
31/12/2016 -3.60% 1.52%
31/01/2017 -3.32% 2.48%
28/02/2017 -5.08% 0.74%
31/03/2017 4.27% -3.13%
30/04/2017 -2.27% 0.05%
31/05/2017 -4.65% 0.17%

14
30/06/2017 -10.49% 0.04%
31/07/2017 0.91% -0.54%
31/08/2017 1.43% 4.03%
30/09/2017 -3.11% 1.35%
31/10/2017 5.83% 1.82%
30/11/2017 1.10% -0.34%
31/12/2017 -8.72% -0.48%
31/01/2018 -3.30% -4.06%
28/02/2018 1.27% 3.45%
31/03/2018
Standard Deviation or
Volatility 0.043 0.025
Average Mean -1.57% 0.50%
Coefficient of variation -2.73 4.99
In order to test the volatility in returns provided by stock and index, standard deviation is
used as the best measure. Standard deviation itself does provide the exact position of volatility so
there is need to calculate the coefficient of variation. If coefficient of variation is greater than 1 it
means stock returns are highly volatile and in case if coefficient of variation is less than 1 or
negative than it means stock return are less volatile. On the basis of calculation it has been found
that stock return of Telstra are very less volatile and it has less risk return tradeoff. On the other
hand All Ordinaries has coefficient of variation of 4.99 that clearly indicates return provided by
it is highly volatile and it also provide better return with very high risk (Elton, Gruber, Brown,
and Goetzmann, 2009).
Part 5: Research Regarding the Financial or Business Publications
Telstra and Microsoft Partnership for Delivering Cloud Voice Services in Australia
The company has launched Telstra Calling for Office 365 for developing a partnership
with Telstra and Microsoft and providing voice calling services from the Microsoft cloud. The
program has been launched with the initiative of making it easier for the customers to connect

15
through providing them interactive apps such as video conferencing and broadcast capabilities
(Telstra and Microsoft partner to deliver cloud voice services in Australia, 2018).
Telstra muru-D program invests in the future of human mobility
Telstra is seeking to invest in the development of new aircraft technology in order to
completely transform the transport facilities and proving to be largely beneficial for the people in
the event of occurrence of emergency conditions. As such, the company is actively involved in
the development of a world-leading Verti-plane that is regarded to be an aircraft that flies
efficiently in comparison to a helicopter and plane (Telstra Media Release, 2018).
Launching of Telstra Go Repeater
The company has also recently made announcement regarding the launching of its Go
Repeater that is attributed to be an intelligent antenna solutions specifically designed for
improving mobile coverage for regional customers. The company has incurred an investment of
about $2.2 billion for the development of its regional mobile network (Telstra launches Telstra
Go Repeater, 2018).
Acquisition of UK Based Technology Company 85
Telstra has announced the acquisition of Company 85, that is recognized as UK based
technology service business and a leader in providing data centre , workspace and cloud security
services. The acquisition is meant specifically for promoting the growth in the technology
service business of Telstra. It will provide a new opportunity to Telstra for reaching to new
customers and promoting its international expansions (Telstra Media Release, 2017).
Acquisition of VMtech
Telstra has also recently announced its acquisition of VMtech, that a leading Sydney
based professional and managed service provider having competency in delivery and
management of hybrid cloud, connectivity and security solutions. The acquisition is mainly
undertaken by the company for reaching its strategic objective of increasing the growth of its
network applications and services business in Australia and at international level (Telstra Media
Release, 2017).

16
Part 6: Use of CAPM model to estimate the required rate of return of Telstra Corporation
Section 6.1: Identification of Beta of Telstra Corporation
In order to find the beta of Telstra the publish beta on Reuters has been taken. The beta of
Telstra as published on Reuters is 0.64 (Reuters, 2018).
Section 6.2: Application of CAPM Model
Formula used in CAPM model: Risk Free rate + Beta* Market risk Premium
Required Rate of Return of Telstra
Risk Free rate of Return
(Given) 4%
Market risk premium (Given) 6%
Beta of company (Reuters) 0.64
Required Rate of Return
7.84
%
Section 6.3: Discussion on whether Telstra is good for the conservative investment
Conservative investment refers to investor’s strategy that helps in preservation of capital
and minimizing the overall risk through using diversified and balanced portfolio. The diversified
and balanced portfolio consisting of blue chip companies, large cap stock, government bonds and
corporate bonds are regarded as conservative investment. Telstra Corporation belongs to top 10
highly traded companies of Australia and it falls under the blue chips companies (Blue Chip
Companies, 2018). So Telstra can be regarded as the conservative investment for investors as it
has been providing regular returns in from of dividend and increase in share price (FIRER,
2012).
Part 7: Identification of Weighted average cost of capital
Section 7.1: Application of WACC
Formula to estimate the WACC:

17
Point that should be taken into consideration while calculating the WACC:
 In order to compute the WACC there is find out the sources of finances used by Telstra to
fund the assets. Telstra has mainly used equity and debt capital as the major source of
finance.
 Value of equity capital has been taken on its market value of $ 33,895.90 million
(Reuters, 2018).
 Value of debt has been taken on book value as it is possible to find out the market value
of debt capital. Value of debt is $ 17,284.00 million
 Cost of Equity has been taken as required rate of return as computed in CAPM section
above.
 Cost of debt is given in the annual report of Telstra and for year 2017 the cost of debt is
5.10% which is subject to tax rate of 30% (Brigham and Houston, 2012)
Calculation of WACC
Capital Amount Weights Rate BT Rate AT Weighted Cost
(in million $) Tax Rate 30%
Debt Part $ 17,284.00 33.77% 5.10% 3.57% 1.21%
Equity
Part $ 33,895.90 66.23% 7.84% 7.84% 5.19%
Total $ 51,179.90 100.00%
WACC 6.40%

18
Section 7.2: Impact on higher rate of WACC on the prospective investment projects of
Telstra
As WACC provides the rate at which company finance its funds either through equity
capital or form debt capital. In order to collect funds to finance the prospective investments,
management at Telstra have to either make funds from debt source of capital or from equity
source of capital. Telstra have to pay $ 0.0640 per year for each dollar it takes form market or
equity shareholders. In case company have higher WACC than the actual return than perhaps
company is losing the value and there might be efficient returns available elsewhere in the
market. Overall it can be said that higher WACC will lead to higher payment of interest and
dividends as compared to actual return earned by the company (Deegan, 2013).
8. Capital Structure of Telstra Corporations Limited
Section 8.1: Optimal Capital Structure
The capital structure of the firm indicates the proportion of debt and equity sources of
finances maintained for conducting its business activities. The cost pfd bet of Telstra Corporation
Ltd is significant lower as compared with the equity cost indicating that the company must
incorporate the sue of higher proportion of debt in its capital structure (Borio, 2014). The debt
ratio of the company calculated for the financial years 2016 & 2017 has revealed that it has the
long-term debt on the company has increased from 0.42 to 0.44. Thus, as the company is using
more debt in its capital structure which indicates that it has maintained an optimal capital
structure which will cost significantly lower for the company (Telstra: Annual Report, 2017).
Section 8.2: Impact on Gearing Ratio
There is an increased in the long-term debt capital employed by the company as proceeds
from borrowings in the year 2017 are $4,710 million while repayment is $4,571 million only.
This indicates that the company is utilizing debt in capital structure for financing its business
activities. This can be regarded as good for the company as cost of debt is lower so it will have a
positive impact on its profitability position (Telstra: Annual Report, 2017).

19
Part 9: Dividend Policy
The company has adopted major changes in its dividend policy of paying almost 100 per
cent of the profits earned. The company at present has maintained an ordinary payout ratio of 70
to 90 per cent as per its global competitors. The company is also emphasizing to pay fully
franked dividend to its shareholders from the financial year 2018. The company expects total
dividend to be 22 per cent per share fully franked that includes both ordinary and special
dividends. The dividend policy maintained by the company aims at provided consistent return to
shareholders and also ensuring its long-term growth as per its strategic objective (Telstra: Annual
Report, 2017).
Part 10: Recommendation Report
Letter to Client,
Telstra Corporation Limited has maintained a strong corporate governance structure. The
board members carries out their roles and responsibilities in an efficient manner as reflected from
its ownership-governance structure. The major shareholders of the company are individual
business entities and thus the board members do not possess any shareholding in the company.
Also, the recent news reading the company have reflected its potential of future growth as it is
involved in taking new business initiative and acquiring new companies for promoting its
potential growth.
This is to inform you that financial performance of Telstra has average financial position
during the last two years. It can be said because ratio analysis clearly depicts that financial
position and financial performance has not up to the mark during the last two years. Liquidity
position of the Telstra has been reduced in year 2017 as compared to year 2016 that indicates
that there has been reduction in the current assets as compared to current liabilities. Company
maintains very high debt equity ratio that depicts higher percentage of debt capital as compared
to equity capital. There was major reduction in times interest earned ratio that shows that ability
of company to pay the interest on debt capital has been reduced. Overall profitability position has
been decline in year 2017 as compared to year 2016 (Brealey, Myers and Marcus, 2007).

20

21
References
Annual Report 2017. Telstra Corporation. [Online]. Available at:
https://www.telstra.com.au/content/dam/tcom/about-us/investors/pdf-e/Annual-Report-2017.PDF
[Accessed on: 22 May, 2018].
Blue Chip Companies. 2018. Australia blue chips Australian Securities Exchange. [Online].
Available at: https://www.bluechiplist.com/blue-chip-stocks/australia-blue-chips/ [Accessed on:
22 May, 2018].
Borio, C., 2014. The financial cycle and macroeconomics: What have we learnt?. Journal of
Banking & Finance, 45, pp.182-198.
Brealey, R., Myers, S.C. and Marcus, A.J., 2007. Fundamentals of Corporate Finance. Mc Graw
Hill, New York.
Brigham, F., and Houston.J. 2012. Fundamentals of financial management. Cengage Learning.
Deegan, C., 2013. Financial accounting theory. McGraw-Hill Education Australia.
Elton, E.J., Gruber, M.J., Brown, S.J., and Goetzmann, W.N. 2009. Modern Portfolio Theory
and Investment Analysis. John Wiley & Sons.
FIRER, C. et al. 2012. Fundamentals of Corporate Finance. 5th Edition. Berkshire.McGraw-Hill
Companies, Inc.
Glajnaric, M., 2016. The importance of dividend paying stocks. Equity, 30(2), p.6.
Higgins, R. C., 2012. Analysis for financial management. McGraw-Hill/Irwin.
Reuters. 2018. Telstra Corporation. [Online]. Available at:
https://www.reuters.com/finance/stocks/overview/TLS.AX [Accessed on: 22 May, 2018].
Telstra and Microsoft partner to deliver cloud voice services in Australia. 2018. [Online].
Available at: https://www.telstra.com.au/aboutus/media/media-releases/Telstra-and-Microsoft-
partner-to-deliver-cloud-voice-services-in-Australia [Accessed on: 22 May 2018].

22
Telstra launches Telstra Go Repeater. 2018. [Online]. Available at:
https://www.telstra.com.au/aboutus/media/media-releases/Telstra-launches-Telstra-Go-Repeater-
coverage-solution-designed-for-regional-customers [Accessed on: 22 May 2018].
Telstra Media Release. 2017. [Online]. Available at:
https://www.telstra.com.au/aboutus/media/media-releases/Telstra-acquires-leading-hybrid-cloud-
service-provider-VMtech [Accessed on: 22 May 2018].
Telstra Media Release. 2017. [Online]. Available at:
https://www.telstra.com.au/aboutus/media/media-releases/Telstra-acquires-UK-based-
technology-services-provider-Company85 [Accessed on: 22 May 2018].
Telstra Media Release. 2018. [Online]. Available at:
https://www.telstra.com.au/aboutus/media/media-releases/Telstras-muru-D-program-investing-
in-the-future-of-human-mobility [Accessed on: 22 May 2018].
Yahoo Finance. 2018. ALL ORDINARIES (^AORD). [Online]. Available at:
https://finance.yahoo.com/quote/%5EAORD/history?
period1=1459449000&period2=1525113000&interval=1mo&filter=history&frequency=1mo
[Accessed on: 22 May, 2018].
Yahoo Finance. 2018. Telstra Corporation Limited (TLS.AX). [Online]. Available at:
https://au.finance.yahoo.com/quote/TLS.AX/history?
period1=1459449000&period2=1525113000&interval=1mo&filter=history&frequency=1mo
[Accessed on: 22 May, 2018].