Telus
Telus: The Cost of Capital
Business 3019
Synopsis
Two managers attending an executive education course attempt to develop a cost of capital estimate for a leading telecommunications company, Telus The two managers are somewhat confused about the costs of various sources of capital, the calculation of the overall cost of capital and the appropriate use of the hurdle rate
What Does Cost of Capital Mean?
Cost of capital is what it will cost the firm, on the margin, today, to secure its financial resources for further growth.
• Cost of capital must reflect current capital market conditions (current required returns) • Cost of capital must also reflect the optimal relative proportions of debt and equity the firm will use in the long run and which (the capital structure) consciously reflects a proportion that will maximize the value of the firm.
Why is it important to calculate the Cost of Capital?
Cost of capital is used in two basic ways:
• Ex Ante - As a hurdle rate – the minimum acceptable rate of return on proposed projects…ideally any projects undertaken by the firm, should offer an expected return that is greater than the cost of capital …the greater the better (ie. the value of the firm will rise by accepting projects whose IRR’s exceed the WACC…the higher the IRR…the greater the increase in the value of the firm. • Ex Post – after the fact, the WACC can be used to evaluate management performance. If ROA does not exceed WACC, then management either has incorrectly chosen negative NPV projects, or they have been incapable of realizing the potential of positive NPV projects…either way…management has not performed to expectations.
How Often Should You Calculate the Cost of Capital?
Usually a new WACC should be calculated with each new round of investment projects Annually, in order to conduct management evaluation.
Proportionately, How has Telus Financed Assets in the Past?
Really, the
Business 3019
Synopsis
Two managers attending an executive education course attempt to develop a cost of capital estimate for a leading telecommunications company, Telus The two managers are somewhat confused about the costs of various sources of capital, the calculation of the overall cost of capital and the appropriate use of the hurdle rate
What Does Cost of Capital Mean?
Cost of capital is what it will cost the firm, on the margin, today, to secure its financial resources for further growth.
• Cost of capital must reflect current capital market conditions (current required returns) • Cost of capital must also reflect the optimal relative proportions of debt and equity the firm will use in the long run and which (the capital structure) consciously reflects a proportion that will maximize the value of the firm.
Why is it important to calculate the Cost of Capital?
Cost of capital is used in two basic ways:
• Ex Ante - As a hurdle rate – the minimum acceptable rate of return on proposed projects…ideally any projects undertaken by the firm, should offer an expected return that is greater than the cost of capital …the greater the better (ie. the value of the firm will rise by accepting projects whose IRR’s exceed the WACC…the higher the IRR…the greater the increase in the value of the firm. • Ex Post – after the fact, the WACC can be used to evaluate management performance. If ROA does not exceed WACC, then management either has incorrectly chosen negative NPV projects, or they have been incapable of realizing the potential of positive NPV projects…either way…management has not performed to expectations.
How Often Should You Calculate the Cost of Capital?
Usually a new WACC should be calculated with each new round of investment projects Annually, in order to conduct management evaluation.
Proportionately, How has Telus Financed Assets in the Past?
Really, the