School of Economics, Finance and Marketing Master of Finance
BAFI 3257 – Corporate Financial Management
ASSESSMENT TASK 3 – INDIVIDUAL ASSIGNMENT
Semester 1 – 2021
Marks
- This assignment is marked out of 100 and contributes 50% to the overall assessments.
Due Date
- Your report must be submitted via Turnitin/Canvas by 11:59 PM (Melbourne time) on the due date Friday 11th June 2021.
- Late submissions where special consideration has not been granted will be penalised. Please go through the course guide to understand the implications.
Submission Instructions
- Go to the following link to download RMIT’s Assignment Cover Sheet, fill in your details and attach it to the front page of your Word document. https://www.rmit.edu.au/students/student-essentials/forms/assessment-forms
- Save a PDF version of your document with file name saved in the following format: StudentID_BAFI3257.pdf (e.g., S1234567_BAFI3257.pdf).
- Upload the PDF file to the Turnitin/Canvas submission link.
Objective
In this assignment, you are required to apply techniques and concepts acquired in this course to analyse and provide justified recommendations to assist corporate financial managers in making a range of financial decisions given the current market conditions.
The assignment also provides students the opportunity to work independently, facilitate self- improvement and take responsibility for the quality of their individual work, as well as develop work-ready skills using Refinitiv Eikon database, one of the most comprehensive finance databases that is widely used by industry practitioners.
The assignment is a case study which involves a telecommunications and technology company
– Telstra Corporation Limited (ASX: TLS).
Scenarios
Today is 3rd May 2021.
You are an analyst at a renowned equity advisory firm, Aussie Finance Consulting (AFC). The executive management of AFC has assigned you a task to carry out a special project for its client Telstra Corporation Ltd (TLS), which requires preparing a business report. This report will be presented to AFC executive management and the senior management of TLS.
Telstra Corporation Limited is a telecommunications and technology company. Its principal activity is to provide telecommunications and information services for domestic and international customers. It operates through four segments: Telstra Consumer and Small Business, Telstra Enterprise, Networks and IT(N&IT) and Telstra InfraCo. Telstra Consumer and Small Business is a provider of telecommunication products, services and solutions across mobiles, fixed and mobile broadband, telephony and Pay Television and digital content to the consumer and small business customers in Australia. Telstra Enterprise is engaged in the sales and contract management for medium to large business and government customers in Australia and globally. N&IT is engaged in the overall planning, design, engineering architecture and construction of Telstra networks, technology and information technology solutions. Telstra InfraCo is the provider of a wide range of telecommunication products and services.
Requirements
You are required to consult the management of TLS on the following aspects:
Part 1. Dividend policy (30 marks)
On the 14th October 2020, you read the following news about the company:
“Telstra to review whether 16¢ dividend is sustainable Financial Review; Australia; 14 October 2020.
Telstra will review its dividend ratio policy to protect the payout of 16¢ a share, as it seeks to save its reputation as one of the most reliable income stocks on the Australian Securities Exchange.
Shareholder frustration brimmed over at the company’s first-ever virtual annual general meeting, where chairman John Mullen was grilled on Telstra’s plummeting share price, which over the last five years has fallen from well over $6 to under $3.
Over that time, shareholders have watched as their annual dividends almost halved, as the encroaching NBN blasted billions out of the telecom giant’s profits. Earnings projections released in August suggest that this downward trend will continue…”
Download the full article here.
On the 11th February 2021, TLS announced an interim dividend of 8 cents, fully franked.
(a) Research market reaction to the dividend announcement
- Evaluate the company’s share price performance on the announcement day. Necessary data can be collected from Eikon.
- Evaluate the performance of the overall market on the same day
- Measure the abnormal return on the announcement day. Use market-adjusted return (which is the difference between stock return and market return) as the measure of abnormal return.
- Construct a measure of cumulative abnormal return for the period [0,1] which includes the announcement day and the day after.
(b) Evaluate your findings
- How did the market react to the announcement? Is it a positive or negative reaction?
- Why did the market react that way? Is the reaction consistent with the signalling, clientele effect, and/or agency cost hypotheses?
(c) Recommend, with reasons, how much Telstra should pay for its final dividend of the 2021 financial year
Part 2. Seasoned Equity Offering (20 marks)
The company would like to raise money for future investment and is considering a rights issue. Every existing shareholder will be sent one right per share of stock that he or she owns.
The management has worked out two alternative plans. In the first plan, the company will require five rights to purchase one share at a price of $3.490 per share. In the second plan, each right gives the holder the right to purchase one share at $0.698 per share. Note that the company’s current share price (on the 3rd May 2021) is $3.490.
Evaluate the two plans and recommend which plan the company should choose.
- How much money will each plan raise? (Assume the rights issue is successful)
- What will the share price be after the rights issue? (Assume perfect capital markets)
- Which plan is more likely to raise the full amount of capital?
Part 3. Equity Valuation and Mergers and Acquisition. (45 marks)
The company’s senior management is considering an acquisition. TPG Telecom Ltd (TPG) has been identified as a target.
(a) Examine the acquisition and its potential sources of synergy
- Provide an overview of the target company’s history and business operations
- What is the current share price of the target firm? How is the share price performance in the last two years?
- Identify the type of the acquisition with reasons
- Identify the potential sources of synergy from this acquisition
(b) Estimate the intrinsic value of the target company’s stock using the discounted free cash flow model
- Collect financial data from Eikon to compute the four-year average of the following ratios: (i) EBIT/Sales, (ii) Property, Plant, and Equipment/Sales, (iii) Depreciation/Property, Plant, and Equipment, (iv) Net Working Capital/Sales. Note that Net Working Capital = Current Assets – Current Liabilities.
- Forecast future sales. Assume that next year’s sale is $5,520m, the expected annual growth rate for the future years 1-5 is 5.0%, and the long-term growth rate after year 5 is 2.5%.
- Use the average ratios computed in the first step to forecast future EBIT, property, plant, and equipment, depreciation, and net working capital.
- Estimate the free cash flows for the next five years and the terminal value. Assume that the applicable corporate tax rate is 30% and the company’s WACC is 9%.
- Estimate the company’s enterprise value and the value of its stock.
(c) Perform relative valuation to ascertain the valuation of the target company’s stock.
- Compare valuation multiples of the firm with the industry average.
- Is the company undervalued or overvalued according to these multiples?
- Discuss the potential challenges of using multiples to value a company
(d) Evaluate methods of M&A payments and recommend the price range
- Assuming that the projected synergies are $4.58 billion, and Telstra uses cash to pay for the acquisition, what is the maximum price for each share of the target firm and still generate a positive NPV?
- What is the maximum exchange ratio TLS could offer in a stock swap and still generate a positive NPV?
Part 4. Business Report Overall Quality (5 marks)
Students are expected to present this assignment as a business report to both AFC and TLS executive management. The report must be of a standard commonly expected in the commercial world in relation to grammatical correctness, fluency, and style. This report needs:
- Page numbering
- Informative heading and sub-headings
- Numbered sections
- Executive summary
- Table of contents
- Reference list
The reference style to be used is Harvard style referencing. RMIT guide to referencing can be found
Your main report will a maximum of 2,000 words excluding appendix and will be professionally presented. A concise, relevant, and visually appealing report is essential for business communication.
Regarding the calculations, whilst you need to present your final work in tables in the main body of your report, all subsidiary calculations need to be provided in an appendix. You need to provide detailed steps (e.g. formulae) that lead to the final answers. Correct final answers alone will not earn full marks. Also, annotate your appendix so that the examiners can understand your work.
Please round off your values to 4 decimal places for interest rates and two decimal places for amounts, e.g. 0.0659 or 6.59%, and $10,369.78.
All assessment of numerical work is marked consequentially. So, you will be awarded marks for all correct calculations and procedures.
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