Telus needs to calculate the cost of capital from the variety of data given. The cost of capital is determined mostly by how the funds are used rather than where they were obtained from. It relies on the risk of investments Telus involves in, therefore, depending on cost of both equity of debt as described below. Also note that, even though the preferred shares are not attractive to issuers and may not get issued again, it is still on the company’s balance sheet and affect firm’s overall wealth.
We assume that Telus maintains a fixed debt to equity ratio and hence, the calculation will include preferred shares. 5.00 percent of cost in the past cannot be used towards final calculation because it is a book value. Similarly, par values of $25 and $100 are book values and are not considered in our calculation. Even though there is a $4.00 for every $100 par value share went to the underwriter, we decide to neglect that part since it is a small amount compared to the whole. Given: Current yield: 5.90%; Dividend (preferred shares): $4,000,000
Market value of preferred shares
P = D/ Rp
= $4,000,000/ 0.059
Rp = 5.90%
In calculating the cost of equity, we will use the average between the dividend growth model and the CAPM. Since R-squared = 0.13 we know that the correlation is not strong enough and the sole use of the beta given to us will prove unreliable. For this reason, we choose to take the average between the dividend growth model and the CAPM model if possible. Also, as described above, we decide not to count the underwriter fees in our calculation. Barb suggested that all the earnings after the dividends to the preferred shareholders belong to the common shareholder and the yield to the common stock should be the earnings-per-share divided by the market price. We did not agree with him. Although all the earnings after the dividend paid to the preferred shareholders...