Telascase

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“Calculate and make a recommendation on how Telus should employ their cost of capital."

Introduction:

In introducing this case the basic problem do be solved deals with determining the cost of capital within the organization of Telus. Barb Williams and Rick Thomas both managers from service firms, were attending a business seminar when given an assignment to calculate the cost of capital for Telus. They were given basic data including balance sheets, income statement, data on Telus common stock, market index, and average annual returns in North America capital markets. This information was given to them in order to calculate the cost of capital within the company and to make a recommendation on how to employ their cost of Capital. In order to determine the actual cost of capital, various steps need to be taken in finding out cost of debt, equity, preferred shares in order to determine the overall weighted average cost of capital (WACC) within the company.

What is WACC?

Weighted average cost of Capital is defined as a calculation of a firm’s cost of capital in which each category of capital is properly weighted. All capital resources are used in determining this cost which includes common stock, preferred stock, bonds and any other long term debt. Calculating overall WACC.

Use of short and Long term debt

When calculating the cost of debt for this case, it is necessary to take into account both the long and short term components of Telus’ financing via debt. Although case exhibit 1 states that Telus’ short-term obligations will be expiring after one year, it is reasonable to assume that Telus will be engaging in further short-term financing based on the company’s historical financing methods: using a mix of long and short-term debt financing. Based on a weighted average calculation of the cost of debt, we found its cost to be 7.2% (before tax). The 9.31% represents the yield on Telus’ long-term bonds while taking into account the fees paid to an...
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