Business Valuation and Analysis of Telstra Corporation Limited

This project report presents a comprehensive financial analysis and valuation of Telstra Corporation Limited. It begins by constructing pro-forma financial statements for Telstra from 2015 to 2018, including income statements and balance sheets, using the provided financial data. The report then implements a valuation procedure using the discount cash flow (DCF) model to estimate the intrinsic value of Telstra's equity. The DCF model utilizes free cash flow projections, growth rate assumptions, and a discount rate to arrive at a valuation. The report includes detailed calculations, tables, and assumptions to support the valuation process. The analysis aims to assess Telstra's financial performance, project its future financial position, and determine its fair value based on the provided financial data and the application of the DCF methodology.

Running head: STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
Business Valuation and Analysis
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
Table of Contents
1. Preparing pro-forma financial statements of Telstra Corporation Limited:................................2
2. Implementing the valuation procedure using discount cash flow model:...................................6
Bibliography:...................................................................................................................................8

2STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
1. Preparing pro-forma financial statements of Telstra Corporation Limited:
Pro-Forma Balance Sheet
Telstra Corporation Ltd
For 2015 to 2018
(all numbers in $million)
REVENUE 2018 2017 2016 2015
Gross sales
$26,01
1
$26,01
3
$25,91
1
$25,52
8
Other income 3,031 2,192 1,139 584
Total revenue
$29,04
2
$28,20
5
$27,05
0
$26,11
2
COST OF SALES
Goods and services purchased $8,758 $7,671 $7,247 $6,845
Total Cost of Goods Sold $8,758 $7,671 $7,247 $6,845
Gross Profit (Loss)
$20,28
4
$20,53
4
$19,80
3
$19,26
7
OPERATING EXPENSES
Labour $5,157 $5,381 $5,041 $4,782
other expenses 4,984 4,506 4,312 3,971
Depreciation and amortization 4,470 4,441 4,155 3,974
Total Selling Expenses
$14,61
1
$14,32
8
$13,50
8
$12,72
7
Finance expense
Finance income 82 138 86 147
Finance cost 631 729 796 846
Share of net (loss)/profit from joint ventures and associated
entities -22 32 15 19
Total Finance Expenses $571 $559 $695 $680
Total Operating Expenses
$15,18
2
$14,88
7
$14,20
3
$13,40
7
Net Income Before Taxes $5,102 $5,647 $5,600 $5,860
Taxes on income 1,573 1,773 1,768 1,746
Net Income After Taxes $3,529 $3,874 $3,832 $4,114

3STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
NET INCOME (LOSS) $3,529 $3,874 $3,832 $4,114
Pro-Forma Balance Sheet
Telstra Corporation Ltd
For 2015 to 2018
(all numbers in $million)
ASSETS 2018 2017 2016 2015
Current Assets
Cash and cash equivalents $629 $938 $3,550 $1,396
Trade and other receivables $5,018 $5,468 $4,737 $4,721
Inventories $801 $893 $557 $491
Derivative financial assets $75 $21 $62 $7
Current tax receivables $6 $11 $8 $9
Prepayments $548 $531 $426 $346
Total Current Assets $7,077 $7,862 $9,340 $6,970
Fixed Assets
Trade and other receivables $1,012 $1,039 $1,293 $1,171
Inventories $19 $29 $29 $32
Investments – accounted for using the equity
method $1,237 $194 $171 $201
Investments – other $36 $292 $394 $137
Property, plant and equipment $22,108 $21,350 $20,581 $20,450
Intangible assets $9,180 $9,558 $9,229 $9,332
Derivative financial assets $1,897 $1,623 $2,180 $1,790
Deferred tax assets $54 $44 $54 $66
Defined benefit asset $250 $142 $15 $296
Total Net Fixed Assets $35,793 $34,271 $33,946 $33,475
TOTAL ASSETS $42,870 $42,133 $43,286 $40,445
LIABILITIES
Current Liabilities
Trade and other payables $4,835 $4,189 $3,948 $4,080
Employee benefits $868 $865 $913 $844

4STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
Other provisions $118 $190 $92 $126
Borrowings $1,635 $2,476 $2,655 $1,496
Derivative financial liabilities $1 $42 $286 $214
Current tax payables $132 $161 $176 $291
Revenue received in advance $1,227 $1,236 $1,118 $1,078
Total Current Liabilities $8,816 $9,159 $9,188 $8,129
Long-term Liabilities
Other payables $65 $70 $66 $74
Employee benefits $157 $160 $169 $147
Other provisions $171 $134 $127 $137
Borrowings $15,316 $14,808 $14,647 $14,138
Derivative financial liabilities $388 $536 $663 $911
Deferred tax liabilities $1,624 $1,539 $1,493 $1,558
Defined benefit liability $7 $6 $4 $4
Revenue received in advance $1,312 $1,161 $1,022 $837
Total Long-term Liabilities $19,040 $18,414 $18,191 $17,806
SHAREHOLDERS' EQUITY
Share capital $4,428 $4,421 $5,167 $5,198
Reserves ($117) ($105) $62 $372
Retained profits $10,716 $10,225 $10,642 $8,533
Non-controlling interests ($13) $19 $36 $407
Total Shareholders' Equity $15,014 $14,560 $15,907 $14,510
TOTAL LIABILITIES & EQUITY $42,870 $42,133 $43,286 $40,445
Telstra Corporation Ltd
Cash Flow Statement
(all numbers in $million)
For the Year Ending 2018 2017 2016 2015
Cash at Beginning of Year 936 3,550 1,396 5,527
Operations
Cash receipts from
Receipts from customers (inclusive of
goods and services tax (GST))
31,90
1
31,28
8
31,16
3
29,52
1
Government grants received 174 235 182 166
Cash paid for

5STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
Payments to suppliers and employees
(inclusive of GST)
-
21,94
8
-
21,99
7
-
21,17
9
-
19,62
1
Net placement of deposits by Autohome
Inc. that are not part of cash equivalents 0 0 -173 0
Income taxes paid -
1,521
-
1,751
-
1,860
-
1,755
Net Cash Flow
from Operations 8,606 7,775 8,133 8,311
Investing
Activities
Cash receipts from
Government grants received 91 0 0 0
Proceeds from sale of property, plant and
equipment 796 679 470 94
Proceeds from sale of business and shares
in controlled entities (net of cash
disposed)
49 0 1,340 1
Proceeds from sale of other investments 24 285 56 3
Distributions received from equity
accounted investments 9 10 82 184
Interest received 65 109 131 167
Proceeds from finance lease principal
amounts 125 104 105 65
Cash paid for
Payments for property, plant and
equipment (3,57
1)
(3,72
5)
(3,05
1)
(2,84
5)
Payments for intangible assets (1,36
1)
(1,59
6)
(1,14
3)
(2,25
7)
Payments for business and shares in
controlled entities (net of cash acquired) (56) (63) (92) (986)
Payments for equity accounted
investments (15) (6) (38) (48)
Payments for other investments (67) (76) (67) (70)
Net Cash Flow
from Investing
Activities
-
3,911
-
4,279
-
2,207
-
5,692
Financing
Activities
Cash receipts from

6STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
Proceeds from borrowings 4,195 4,710 4,987 1,793
Proceeds from sale of controlled entity
shares 0 0 0 333
Other 2 2 6 125
Cash paid for
Repayment of borrowings -
5,148
-
4,571
-
3,954
-
3,413
Repayment of finance lease principal
amounts -120 -131 -101 -47
Share buy-back 0 -
1,502 0 -
1,004
Purchase of shares for employee share
plans -18 -22 -68 -54
Finance costs paid -776 -854 -860 -916
Dividend paid to equity holders of Telstra
Entity
-
3,150
-
3,736
-
3,787
-
3,699
Net Cash Flow
from Financing
Activities
-
5,015
-
6,104
-
3,777
-
6,882
Net Increase in
Cash -320 -
2,608 2,149 -
4,263
Effects of exchange rate changes on cash
and cash equivalents 4 -6 5 132
Cash at End of Year 620 936 3,550 1,396
2. Implementing the valuation procedure using discount cash flow model:
Free Cash Flow Estimate
2018 2017 2016 2015
Net cash from
Operating Activities 8,606.0
7,
775.0
8,1
33.0
8,3
11.0
Capital Expenditures (5,070.0)
(5,4
66.0)
(4,3
91.0)
(6,20
6.0)
Free Cash Flow
(FCF) 3,536.0
2,
309.0
3,7
42.0
2,1
05.0
3 Year Average Free Cash flow 2,923.0
Inputs Cash flow & Present Value Table

7STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
Number of years
considered 5 Sl No Year
Cash
flow
PV of
Cash flow
FCF Growth rate for
first 5 years 1.38% 1
2014 -
15 2,963.38 2,693.98
FCF Growth rate for
last 5 years 0.69% 2
2015 -
16 3,004.32 2,482.91
Terminal Growth
Rate 2.00% 3
2016 -
17 3,045.83 2,288.37
Discount Rate 10% 4
2017 -
18 3,087.90 2,109.08
5
2018 -
19 3,130.56 1,943.83
Intrinsic Value Calculation
Total PV of cash flow 36,302.07 Terminal Year 2018 - 19
Total Debt 16,951.00 Terminal Value 39,914.70
Cash & Cash Balance 629.00
PV of Terminal
Value 24,783.89
Net Debt 16,322.00
Share Capital 4,428.00
Face Value 1.00
Number of Shares 4,428
Share Price 4.51

8STRATEGIC INFORMATION SYSTEMS FOR BUSINESS
Bibliography:
Telstra.com.au. 2019. Telstra - Share price - Investors. [online] Available at:
https://www.telstra.com.au/aboutus/investors/share-price [Accessed 28 May 2019].