Answer A

This report is being created with a purpose of comparing and analysing the financial data given of the two reputed companies listed in Australian Stock Exchange regarding their performance in share market in the last 3 years. This report will give a brief explanation about the operation and the activities of these companies and the impact of those operations upon shareholders by comparing the data with the average market standard. The discussed topics of these companies in this report are, cost structure, cost of source of the capital, dividend policies, stock price index, risks, WACC value, cost of Equity, Capital Asset pricing model, returns on share, cost of debt, market value of debt etc (Renz, 2016). This report is being analysed by the given data from the reliable sources of the company. The two companies which are taken for this analysis are:-

Telstra Corporation Limited is the largest telecommunications company of Australia which deals with operating telecommunications networks and market voice, mobile, internet access, pay television and other products and services. In the last year, the company had managed to gain a net profit of $3.9 billion and has an employee capacity of over 32000. The company was established in 1993 which was basically a re-branding of Australian and Overseas Telecommunications Corporation (AOTC) which was formed in 1946. The brand Telstra first started to be recognised in the industry since 1995 (Obaidullah, 2017).

TPG Telecom Limited is an Australian telecommunications and IT company that specialises in consumer and business internet services as well as mobile telephone services. As of August 2015, TPG is the second largest internet service provider in Australia and operates the largest mobile virtual network operator. The company was established in 1986 by David and Vicky Teoh. The company provides five ranges of products and services such as internet access, networking, mobile phone service, OEM service and accounting software. The net income of the company was accounted as $171.7 million with a employees capacity of 5,083 (Boczko, 2016).

Stock price index

The stock price index report is prepared to calculate the versatility of the price of shares within a certain period of the year of the operation of the company. The price of the shares is prone to vary every day. It is also uncertain to predict the cost of the shares in every quarter of a same day. Thus the best way to monitor the ups and downs in the share market is to measure the price with proper market index. This index can provide a detailed and comprehensive aspect to the price structure of the shares of any company. As par the daily return statement of the organisations is concerned, the third quarter of 2015 was good in terms of stock price index for both the companies (Doherty et al., 2014). Then in the last quarter of the same year the price index witnessed some fall which continues up to the third quarter of 2016. From the last quarter of 2016, the index witnessed some hike which continues until the second quarter of 2017. Then the index fall again. But from the third quarter of 2017 to the present time, there was a constant stability in the price index which could be observed for both of the companies. But as an average, the index of Telstra Corporation Limited was more profitable than TPG.

Market index

Answer B

Market index indicates the performance of the company in comparison with the other companies that are operating in the same market. A base value of index is taken in order to monitor the probable profit or loss of the company on the basis of that index. The value is just an average which is based on the economic situation of the market within a specific period of time. Apart from just comparing the profits and losses of the companies, the market index also helps to figure out the probable growths of the company and the effectiveness in the operations of the company measured by the financial performance done by it in a period of time (Gitman et al., 2015).

Total Risk

Total risk is calculated by doing the beta analysis of the company. The beta measurement signifies the risks which are involved in the investments done by the shareholders to a specific company. The total risk measurement follows specific rules of thumb which is, the higher the amount of risk involved in an investment, the probability of profits and loss should be higher with that risk. It is very important for the shareholders to consider the probable risks regarding the investment to a company (Cooperman, 2016).

The beta measurement for both of the companies were lower in 2016 and 2018 which means the shareholders faced less risk with high expectation of return upon their investment. But in 2017, the beta index was hiked up a little bit which caused some loses to the shareholders

Systematic risk

Systematic risks denote that all the probable risks involved in the operations of any organisations are being measured in a dignified manner. If the amount of total risks is not being measured in a proper and systematic way, it is very unlikely to forecast the outcome of any investment made by the shareholders.

Unsystematic risk

The unsystematic risk is the measurement of risk which is done in an undignified manner by the company. In this case, the expected outcome from the investments made by the investors or the shareholders cannot be forecasted properly and the scope of measuring the actual growth of the company will be limited. If the amount of risk is being measured unsystematically, it is expected that the shareholders might face a loss upon their investment and furthermore, the shareholders would not be willing to invest or purchase the shares of the company (Haldane, 2014).

WACC

WACC or the weighted average cost of capital in the measurement of the cost percentage that the company is paying to the investors and the borrowers of the company. The WACC is measurement depends on several internal and external sources and statements. Before calculating this, several other calculations have to be done in order to get the final results. The components which are associated with WACC are cost of equity, capital asset pricing model, risk free return, market rate of return, dividend growth model, cost of debt and market value of debt (Gamper et al., 2017). All the components are discussed below:-

Answer C

Cost of Equity:

The equity share holders of the company are basically the owners of the company who gets the share of profits instead of any kind of interest for the purchased share. The cost of equity is being measured by the rate of return that the shareholders expect from the company. The Cost or equity and the cost or retained earnings are portion of the profits that are not being distributed among the shareholders of the company (Rammal, 2015). There are two methods for determining the cost of equity i.e. the Capital Assets Pricing Model (CAPM), Dividend Growth Model and own bond yield plus judgment risk premium method.

The cost of equity for both the companies were decreased in 2018 than the previous year.

Investors and shareholders has to depend on the CAPM or the capital asset pricing model method to evaluate the cost of equity. This model determines the association between return expected from an asset and the systematic risks applied for calculating CAPM is given in the calculation below:

CAPM:  R_E = R_RF + (R_M – R_RF)b

= R_RF + (RP_M)b.

R_E = the cost of equity;

R_RF = the risk free return;

R_M = the expected return from the market;

B = Beta.

Risk free Return

The risk free return is the amount of return which can be gained by investing on a company without any risk. This means that the investor will surely gain the return in the exact same way as the investor expected to get. The interest rate of U.S Treasury bill is regarded as the risk free rate of return for the purpose of calculation.

Market rate of return

The market rate of return is the return that the investor expects for taking the risk of investing in the stock market. The difference between the market rate of return and the risk free rate of return is known as the market risk premium.  This premium return is received by an investor for taking the additional risk of investing in the stock market. From the stock market the rate of return can be calculated by averaging the rate of return (Ursitti et al., 2016).

Dividend growth model

In this method, the cost of equity is calculated by a constant growth. The growth can be derives by multiplying the growth rate and Beta of the company. This is calculated in the understated procedure.

Formula is provided below:

R_E = {[D₀* (1+g)] /P₀} + g

Conclusion

R_E = cost of equity;

D₀ = current year’s dividend;

G = growth rate;

P₀ = current stock price_;

Cost of debt:

Cost of debt is totally a separate investment structure. This is collected by issuing bonds and the debenture of the company which is quoted with the redemption date and premium. The debenture can either be issued at discount, at par or premium. However, it is redeemable only at par and premium. The interest that is obliged by the sub-scripter is to be paid in half yearly or annual instalment. The main feature of the debenture or the debt investment is that it is tax saving for the company. The cost of debt is referred to as the effective rate of interest that the company pays for using the debt capital (Freeman, 2015). The company uses various bonds, debts and loans so the calculation of the cost of debt is essential because it gives an idea of the cost incurred by the company for overall debt financing The cost of debt incurred by the company is calculated by dividing the total interest paid by the company with the total debt.

The cost of debt for both of the companies was reduced in 2018 than 2017, but the percentage of the cost of debt was far higher in TCL than TPG.

Market value of Debt:

Market value of the debt means that some of the debenture and the bonds are listed in the securities exchange; they are transferred in the same manners as the equity share. The market value of the debt means the price of that particular debt is trading on by the total number of debt bonds (Shirvani et al., 2018).

The market value of debt was decreased in TCL in 2018 than the previous year where as the amount of the same was increased in the case of TPG.

Dividend policy:

The dividend policy is the amount of dividend that a company usually pays to the shareholders out of its profits that are earned in a particular year.

Dividend pay-out ratio is the percentage of dividend that the company is paying out of its earnings (Grobys & Äijö 2018).

In terms of dividend pay-out ratio, the percentage of both of the companies had decreased in the successive years. But the ratio of TPG was far better than the TCL.

As far as the report is concerned, it can be noticed that TPG has done a better performance and all the index including the WACC and dividend ratio was in favour of TPG. Thus the investors should consider TPG as their first priority. But according to the portfolio investment method, if the investors wants to invest a huge amount of money, it is not secure anywhere to invest it in just one company regardless how much the index of the company seems profitable (Balasubramanian & Nazer, 2018). The investors should invest some amount of money to the other company also in case any of the companies face any slow down so that the loss can be recoverable.

Conclusion 

As far as the report is concerned, it can be seen that TPG has performed better than TCL in term of last three year. All the measurements have been done to compare the performance of these companies in a distinguished way and as a result, TPG beat TCL with a little but significant margin. Thus, by created this report, the investors can invest their money to the profitable company as indicated in this report.

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