You have recently been hired by Goff Communica-tions Inc. (GCI) in the finance area. GCI was founded

Question:

You have recently been hired by Goff Communica-tions Inc. (GCI) in the finance area. GCI was founded 20 years ago by Chris Goff and currently employs over 30,000 workers. GCI is privately owned by Chris and her family and had sales of $8.6 billion last year. GCI provides telecommunication products and services, including wireless, data, Internet, and television, to businesses and households.

GCI’s growth to date has been financed from its profits. Whenever the company had sufficient capital, it would open a new store. Relatively little formal analysis has been used in the capital budgeting process. Chris has just read about capital budgeting techniques and has come to you for help. The company has never attempted to determine its cost of capital, and Chris would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. You have determined that to estimate the cost of capital for GCI, you will use Telus Corporation (T) as a representative company. The following steps will allow you to calculate this estimate:

1. Most publicly traded corporations are required to submit quarterly and annual reports to the Ontario Securities Commission (OSC) detailing their financial operations over the previous quarter and year, respectively. These corporate filings are available on the SEDAR website. Go to www.sedar.com and follow the Search Database link and then the Search for Public Company Documents link. Enter the company name, Telus Corporation, and search for filings made by the company. Find and download the company’s most recent quarterly or annual report. Look on the balance sheet to find the book value of debt and the book value of equity. If you look farther down the report, you should find a section titled either “Long-Term Debt” or “Long-Term Debt and Interest Rate Risk Management” that will list a breakdown of Telus Corporation’s long-term debt.

2. To estimate the cost of equity for Telus, go to www.google.ca/finance and enter “TSE.T,” the ticker symbol for Telus. Follow the various links to find answers to the following questions. What is the most recent stock price listed for Telus? What is the market value of equity, or market capitalization? How many shares of stock does Telus have outstanding? What is the beta for Telus? Now go to www.canpxonline.ca/quotes.php and follow the “Canadian Benchmark Yields” link. What is the yield on 3-month Treasury bills? Using a 7 percent market risk premium, what is the cost of equity for CMG using the CAPM?

3. Go to www.reuters.com and find the list of competitors in the industry. Find the beta for each of these competitors, and then calculate the industry average beta. Using the industry average beta, what is the cost of equity? Does it matter if you use the beta for Telus Corporation or the beta for the industry in this case?

4. You now need to calculate the cost of debt for Telus. Go to www.canpxonline.ca/quotes.php; under the “CanPX Trades” link there will be a table listing outstanding Canadian Corporate bonds. Search for “Telus Corp” in the table and find the YTM for each of Telus Corporation’s bonds. What is the weighted average cost of debt for Telus using the book value weights and the market value weights? Does it make a difference in this case whether you use book value weights or market value weights?

5. You now have all the necessary information to calculate the WACC for Telus. Calculate the WACC for Telus using book value weights and market value weights, assuming Telus has a 35 percent marginal tax rate. Which cost of capital number is more relevant?

6. You used Telus Corporation as a representative company to estimate the cost of capital for GCI. What are some of the potential problems with this approach in this situation? What improvements might you suggest?

Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial... Capital Budgeting
Capital budgeting is a practice or method of analyzing investment decisions in capital expenditure, which is incurred at a point of time but benefits are yielded in future usually after one year or more, and incurred to obtain or improve the... Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may... Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Cost Of Equity
The cost of equity is the return a company requires to decide if an investment meets capital return requirements. Firms often use it as a capital budgeting threshold for the required rate of return. A firm's cost of equity represents the...