MBS546 Cash Flow Analysis and Valuation of Security Assignment Sample

• Subject Code : MBS546
• University : Murdoch University My Assignment Services is not sponsored or endorsed by this college or university.
• Subject Name : Accounting & Finance

Business Finance

1. Download all available financial data for TELSTRA CORPORATION LTD (ASX Code: TLS) from Data Analysis Premium (Murdoch library’s databases).

The data is taken from the FY20 financial performance of TLS, $26.2 billion is the total income on the reported basis, $8.9 billion is the earnings before interest, tax depreciated amortization which is also known as EBITDA, the underlying EBIDTA is $7.4 billion and the NPAT (net profit after tax) is $1.8 billion.

The total dividends of the financial year 20 is 16 per cent per share, $1.9 Bn returned to shareholders, approx. AUD 860 mn bonds issued for strengthen the balance sheet further and $1.8 bn reduction is in underlying in the fixed cost as compared to the financial year 2016 (Pénicaud,2020).

2. Give a brief description of TLS.

TLS stands for Telstra corporation limited. It is an Australian company that deals in telecommunications. The company operates and creates the network of telecommunication and also invoice of the market, access of mobile internet, television pay and other goods and services. TLS is a member of S&P/ASX 20 and it is the largest telecommunication in Australia as per the market share. TLS has a long history in Australia, the company originates along with the Australia Post in the year 1901 and that too as a Postmaster-General's Department upon federation. Previously TLS was the state-owned company and now the TLS is a fully private company. TLS is focusing on the increasing the diversified products and also involves in emerging the technologies. In the year 1946, and in the month of August, the OTC that is overseas telecommunication commission was founded by the act of parliament. OTC inherited various facilities and other resources from the combination of Cable & Wireless and Amalgamated Wireless Australasia Limited (AWA). It had the charge and all the responsibility to carry out services of international telecommunications within the Australia and outside the Australia.

In the year 1992, February, it was merged with the other telecommunication carrier of Australia and this was local Australian carrier, Australian Telecommunications Corporation Limited ("Telecom"). Both were merged to make the Australian and Overseas Telecommunications Corporation Limited (AOTC). The new entity which was formed after merger and acquisition named Telstra corporation limited. It was made for the purpose of international business in the year 1993 and for the purpose of domestic business in the year 1995. In the beginning of the year 1997 and this was finalised in the year 2011, it is the federal government who was starting privatising the firm. the privatisation was done in three phases and all the phases were completed by the the Liberal–National Coalition's Howard Government: the first phase was informally called as "T1" and the price shared was at $3.30, it was done in the year 1997. The second phase was called as T2, the shared price was $7.40, it was followed in the year 1993. The last phase was called as T3 and the price share was $3.60 9 in the year 2006 (Batt, 2017).

3. Explain the purpose of financial statement analysis.

The analysis of financial statement is the process in which the firm’s financial statements has to analyse for the purpose of decision making. It is the external shareholders who use the financial statement to understand the overall condition of the organisation and to analyse the performance of finances and the value of the business in the organisation. The internal part of the firm used this financial statement as a monitoring and supervising tool for managing all the finances in the business. The financial statement of the firm is the record or log of all the important financial information on each aspect of the activities of business. The financial statement can be analysed on the basis of projected performance, current performance and the past performance.

The financial statements are come under the GAAP which is known as Generally accepted accounting principles. According to these principles, the firm requires to create and make the three primary financial statements, the first is the balance sheet, the second is the income statement and the third is the cash flow statements. The government or public firms have strict norms for reporting the financial statements. All the public firms have to follow the principles of GAAP and GAAP needs the accrual accounting. As compare the public firms, the private companies have flexibility in creating their financial statements and they also have options either to use cash accounting or accrual accounting.

There are many techniques that are used in the analysation of the financial statements. Out of all the techniques, three techniques are most important, these are, the horizontal analysis, the ratio analysis and the vertical analysis. The horizontal analysis compares the data in the horizontal way by assessing values of the queue products across one or more years. The vertical analysis observes the vertical influences of all the line products have on other sections of the business and also the proportions of business. Ratio analysis takes the important ration metrics that help in calculating the statistical relationships (Penman, 2016).

4. Analyse the firm’s current operation using its financial statements (i.e. income statement, balance sheet and cash-flow statement). You should also take into account supply and demand factors (i.e. you need to look at the market conditions at both industry and economy levels).

The total expenses of labour is decreased by 23.1 per cent or $1,221 million. The associated cost and the salary is also decreased by $457 mn because of the lower headcounts, the redundancy cost also declined by $485 million because of the level of redundancies in financial year 2019, the labour outsourcing also got reduced by $232 million. The total staff that is full time also gets reduced by 2.7 per cent or the number decreased from 28,959 to 810 because of the COVID-19 pandemic. Total services and goods purchased also gets declined by 0.3 per cent or it decreased from $9,107 to $31 million. There is different cost of goods such as mobile handsets, cellular WIFI broadband modems and other hardware that also decreased from $3,490 million to $281 million or by 7.5 per cent (Pike et al., 2020).

5. Download the S&P/ASX 200 from Yahoo Finance website and calculate the rate of return for S&P/ASX 200.

Rate of return = (final value – initial value) * 100 / initial value

Rate of return= (2.7900-2.7800) * 100 / 2.7800

=0.0100*100 / 2.7800

=0.35 per cent

6. Using the Capital Asset Pricing Model and an appropriate government bond yield as risk-free interest rate and the result from (5) to calculate the required rate of return for TLS.

The capital asset pricing model defines the connection among expected return for assets and the systematic risk, this model is used particularly in stocks. CAPM is used in finance for the securities and for producing the expected returns.

The mathematical formula of CAPM is, Eri =Rf + Bi (Erm-Rf)

Where

Eri represents the expected return of investment

Rf represents risk free rate

Bi represents the beta of the investment

(Erm-Rf) represents the market risk premium

CAPM:

Eri = 9. 5 per cent

Rf = 3 per cent

Bi = 1.3 per cent

(Erm-Rf) = 8 percent – 3 per cent

Eri= 3%+1.3×(8%−3%) = 9.5 per cent

The risk free interest rate is the rate of return that provides the risk with the zero investment. The risk free rate is the rate that helps in representing the interest that an investor would expect from absolutely risk free investment over a specific period of time. It can be calculated by:

yield of the Treasury bond - current inflation rate

7. Use an appropriate dividend valuation model to value Telstra's shares (Hint: use the total dividend figures).

The total dividend figure is 16 per cent per share for the financial year 20.

Dividend discount model is the quantitative method that helps in predicting the price of a firm according to the stock based of the firm’s theory and its current day price is the total amount of all the future dividends payment if given discount according to the present value. All the company’s produces goods and services in order to generate profit.

Future value can be calculated as; present value * (1 + interest rate per cent), this is for one year.

Present value can be calculated as; future value/(1+ interest rate per cent)

Dividend valuation model = EDPS / (CCE – DGR)

EDPS is the expected dividend per share

CCE is the cost of capital equity

DGR is the dividend growth rate

DDM= $2.12/ (0.05-0.02)= $60.67

8. Draw graphs for TLS’s adjusted share price and return (you can use daily, monthly or quarterly return). Compare the company's share price and return with your analyses in questions (6) and (7) above.

9. How does the current pandemic affect Telstra’s growth prospect?

Most of the people in the Australia is working from home to meet the requirements of the business because of the amidst lockdown, the telecommunication services of Australia facing an unprecedented demand of network. Telecommunication company TLS, recently announced that the services of broadband and the usage of mobile phones are increased till 30 Per cent because of the coronavirus crisis. To handle the demand of the network services, TLS has announced that it will hire 1000 new workers to meet all the demands of call centre. Around 5000 applications received by the company for hiring the 1000 new workers (Akca, 2016).

As the company is the largest company in the Australia, the company put on hold that it was planning to have the job cut under the six-month plan for T22. In addition to this, the firm has put forward $500 million capital expenditure into CY2020 from the second half of financial year 2021. Now the demand of network is increased because of the coronavirus and people are unable to meet physically so they attached with their relatives through the mobile phone or through different network. So, the firm planned to use that $500 capital to maximise the capacity of network, incorporating the 5G roll out and if needed then the firm inject more capital into the economy. The firm also founded a Satellite service to offer they connectivity to customers, it also offers the coverage of NBNs throughput satellites in entire Australia. In addition to this, the firm also extend the sponsorships that will going to expire in the year 2020, to provide more certainty to its supporters and partners (Pénicaud, 2015).

Before making announcement about these determinants, the firm declared the access of unlimited data to its customers till the month of April end. Apart from this, the firm also provide extra data of mobile it its business customers and also to the consumers and also extra leaves which are paid to casuals and to employees. The company also distributes $951 million among its shareholders. These are some measures that is taken by the firm to deal with the influence of coronavirus.

• EBITDA Underlying in Between $7.4 billion and $7.9 billion
• Total Income of the firm lying in Between $25.3 billion and $27.3 billion
• Capital expenditure the firm lies in Between $2.9 billion to $3.3 billion
• Restructuring Costs of the firm is $300 million
• Post payment of operating lease of Free cash flow of the firm lies in between $3.3 billion and $3.8 billion(Jan,2019)

10. Use the information and results from your analyses in questions 4-8 above; identify areas of cash flows (i.e. operating, investing and financing) where the firm needs to pay attention to.

There are different areas of cash flow such as sales cost that includes nba payment and other, fixed cost that includes underlying and others, One-off nbn DA and nbn cost to connect, Lease adjustments, restructuring cost and Reported lease adjusted. The firm need to pay attention to Net cash used in investing activities that includes Capital expenditure, and Other investing cash flows (Batt,2017).

11. Suggest relevant investment and financing strategies to improve the firm’s cash flow position.

Cash flow is the total amount of cash and cash equivalents that is being transferred from the business in and out. Analysing the amounts, uncertainty in the cash flow and time are the most basic objectives about the financial reporting. If the cash flow is positive, it means, the liquid assets of the firm are increasing and if the cash flow is negative, it means the firm’s liquid assets are decreasing. Positive cash flow helps in helps in settling down the debts, money can be reinvested the business, the shareholders get the money back, the firm is able to pay the expenses, and also offer a buffer against the future challenges and issues. The company having positive cash flow can avoid all kinds of financial distress. There are some strategies that help in improving the cash flow of the firms,

1. Expanding sales in the market
2. Re-evaluating all the operating expenses.
3. By liquidating the old inventory’
4. To consider a cash back busines card
5. If take out a business loan
6. Increase the prices of the services and products ( Deniz and Cernev, 2017).

12. Justify your recommendation in terms of shareholders’ wealth maximisation

According to various objectives for the concern of business, the wealth maximization of shareholders is the most sustainable and appropriate objective for all the businesses. The wealth maximization of shareholders criterion purports that a firm concern should only consider those decisions that increase the share’s market value of the wealth of shareholder. Share’s market value is treated as an indicator of the effectiveness and efficiency of the company. The finance theory of the wealth maximization of shareholder is the only one substitute for the utility of shareholder. If the company increases the wealth of the shareholder, then the single shareholder uses the wealth to increase his/her individual utility. In simple words, increasing the shareholder wealth, the company is continuously operating towards attaining the increasing the maximising the utility. Even though the criterion has proved to many objectives which was purports earlier, till it does not identify any remarkable use in the industry majority because of its complexity in understanding, application and calculation (Alice, 2015).

References for Cash Flow Analysis and Valuation of Security

Alice,S. E.,2015, Mobile banking and mobile money adoption for financial inclusion, Research in Business and Economics Journal.

Diniz, A and Cernev., 2017, Mobile Money and Payment: a literature review, Proceedings of SIG GlobDev Fourth Annual Workshop, Shanghai, China.

Jan.C. ,2019, Mobile Phone Practices & The Design of Mobile Money Services for Emerging Markets, Mobile money transfer conference.

Pénicaud, C., 2020, State of the Industry: Results from the 2012 Global Mobile Money Adoption Survey. GSMA Mobile Money for the Unbanked.

Chen, C., Hsu, Y., Tung, F., & Lee, M.S. ,2016, “The Influence of Knowledge Workers on Occupational Commitment”. International Journal of Organisational Innovation, 3(2), 262-284.

Butt, S. Z.,2016, “Determinants of innovative work behavior: Organizational and individual characteristics assessment of military leadership” (Unpublished M.Phil. Thesis). National Institute of Psychology, Quaid-i-Azam University, Islamabad.

Batt, R. ,2017,“Managing customer services: Human resource practices, quit rates, and sales growth”. Working paper 00-07. Center for Advanced Human Resource Studies, Cornell University, Ithaca, NY

Akca, A.,2016, “Okul Yöneticilerinin İs Dısı Internet Kullanım (Siber Aylaklık) Davranıslarının Incelenmesi”, Unpublished MBA Thesis, Yıldız Teknik Üniversitesi Sosyal Bilimler Enstitusu, Istanbul, Turkey.

Pénicaud. C.,2016,State of the Industry: Results from the 2014 Global Mobile Money Adoption Survey. GSMA Mobile Money for the Unbanked.

Penman, S.H., 2016, Financial Statement and Security Valuation. Fourth Edition, McGraw-Hill

Peirson, G., Brown, R., Easton, S., Howard, P., and S. Pinder. 2012,Business Finance, 12 th edition. McGraw-Hill, Australia.

Viney, C., 2009,McGrath’s Financial Institutions, Instruments and Markets, 6th edition, McGrawHill, Australia.

Pike, R. And Neale, B. 2020, Corporate Finance and Investment: Decisions and Strategies, 6th edition, Financial Times Prentice Hall, Limited.

Rajiv.L and Ishan.S. 2015, Mobile Money Services - Design and Development for Financial Inclusion, Harward Business School, Working Paper 15-083. July 2015

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