Case Telus

In: Business and Management

Submitted By Klesh
Words 1605
Pages 7
In the case Telus: The Cost of Capital, Barb and Rick have their work cut out for them. It is understandable to be confused when trying to decide what information to include in calculations, or even which calculations are the best to use for that matter. The following is an explanation for Rick and Barb in helping them understand how to calculate the Weighted Average Cost of Capital and how to interpret the results.
When calculating the cost of equity, there are two approaches. First is the dividend growth model approach. The main concern with this approach however is the varying ways to calculate the value of g (for growth) in the dividend growth model equation of P0=D1/[Re-g]. (All following calculations can be found in Exhibit A.)
First in calculating the value of g, you could take a historical average using the calculation $0.30*(1+g)^30=$1.40 and then solve for g. In this equation, the data is derived from Exhibit 3. $0.30 comes from the Common Dividend per share of 1969, and the sum of $1.40 comes from the Common Dividend per share of 2000. G then ,is the average growth rate over the 31 years. It is important to note that the growth rate is to the power of 30 since there are 30 growth periods, in 31 years. This is a common mistake that is easy to make in calculations.
The second way to calculate g is to multiply the retention ratio by the return on equity. The retention ratio is easy enough to calculate given that the case provides the information, dividing retained earnings from Exhibit 1 ($1,563 million) by net income in Exhibit 2 ($461 million) to give us 3.39. The difficultly arises however when trying to calculate the return on equity, which is net income after interest and taxes divided by common shareholders‘ equity. In the case, Rick and Barb have an argument as to wither or not the retained earnings should be included in calculating the total…...

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