Accounting Question

Introduction

There are 100 marks available for this assignment.

For Assignment 3, you will estimate the weighted average cost of capital of a publicly traded company: Telus. Although you must use the most recent stock market data, you should use the 2021 Annual Report for the financial statement information. You are required to follow the instructions outlined below and produce a written report that begins with an executive summary of your findings, which should be no more than one page long.

Within your executive summary, discuss the reasonability of your estimate. In your report, after your one-page executive summary, provide all the specific data that you used to determine the Telus weighted average cost of capital. You can copy this into your Word document from Excel. Be sure to use a basic copy/paste and do not copy as a picture. This allows your instructor to provide feedback. Clearly label your calculations.

Carefully watch the video tutorial from Module 6 before completing this assignment. Do not forget to properly reference all your sources and clearly justify any assumptions.

Make sure to clearly explain your work so that your Open Learning Faculty Member can give feedback. You may get partial marks, even if your final answer is incorrect. You will submit a single Word document for this assignment, please review the

Submission Guidelines

.

Instructions

To estimate the cost of capital, you will need to estimate the cost of equity for Telus using the capital asset pricing model. Because data on preferred shares can be difficult to find, you can ignore them for the purposes of this assignment. You need to estimate beta yourself, not just look it up. Show the calculations in your document.

To estimate the risk-free rate, go to the Bank of Canada website and use an average of the current 10-year bond rates. Use 6% as a risk premium, and use the current Telus market capitalization. You will need to use the 2021 Telus financial statements to calculate the pre-tax cost of debt, the tax rate, the after-tax cost of debt, and the value of debt.

1
Telus Financial Analysis
Assignment 1
FNCE2121
Aug. 19, 2024
2
Telus Financial Analysis
Step 2: Calculate the following ratios for the 2021 and 2020 fiscal years. You must
clearly show the calculations and should not download pre-calculated ratios from
another source. Once your ratios are complete, please copy the ratios from your
spreadsheet to your Word document. Use a basic copy/paste so that you can get
feedback on your answers. Do not copy as a picture. (35 marks)
Financial Ratios
Formula
2021
2020
0.6082 0.7920
Current Ratio
current assets/current liabilities
44
41
0.5540 0.7231
Quick Ratio
(current assets- Inventory)/current liabilities
Times Interest
Earnings Before Interest and Taxes
Earned
(EBIT)/Interest Expense
Accounts receivable
Net Credit Sales/ Average Accounts
turnover
Receivable
Average collection
period
92
16
3.9511 3.3540
57
54
6.8674 7.1637
89
71
53.148 50.950
365/Accounts Receivable Turnover
97
82
0.3779 0.3803
Asset turnover
Net Sales/Average Total Assets
43
14
0.1781 0.1605
Gross profit margin
Gross Profit/Net Sales
2
12
3
0.0983 0.0814
Net profit margin
Net Income/Net Sales
89
85
0.6653 0.7095
Total debt ratio
Total Liabilities/Total Assets
96
65
0.0372 0.0310
Return on assets
Net Income/ Average Total Assets
1
12
0.1186 0.1083
Return on equity
Net Income/ Average Shareholders’ Equity
29
36
Step 3: Perform a three-stage DuPont analysis. Once you have calculated the DuPont
ratio, provide a written analysis of each section. Tie your analysis into specific accounts
and changes from one year to the next. Note that stating “The ratio increased” is not an
analysis. (15 marks)
Financial
Ratio
Formula
2021
2020
Net Profit
Margin
Net Income/Net Sales
0.098389 0.081485
Net Sales/Average Total
Asset Turnover
Assets
0.377943 0.380314
Equity Multiplier Total Assets/Total Equity
2.988605 3.443109
ROE
0.111133 0.106701
4
In 2020, the Return on Equity (ROE) was 10.67%; in 2021, it was 11.11%. The gain,
while tiny, is indicative of the favorable effect of an elevated Net Profit Margin,
counterbalancing the marginal decrease in Asset Turnover and the decrease in financial
leverage (Equity Multiplier). The increase in ROE indicates that, mostly as a result of
increased profitability, the company was more successful in producing returns for its
shareholders in 2021 as opposed to 2020.
According to the DuPont analysis, the company’s profitability (Net Profit Margin) has
improved, which will increase ROE in 2021. Nonetheless, the decline in Equity Multiplier
and Asset Turnover points to a marginally less effective use of the company’s assets
and a more cautious application of financial leverage. In order to keep increasing
shareholder returns, the corporation might concentrate on optimizing asset utilization
going forward and carefully managing its capital structure.
Step 4: Comment on any areas of strength or weakness of the company based on your
results of Steps 2 and 3 above. Make sure to look not just at absolute levels, but also at
trends over time. Again, be specific. Set up your analysis under the categories of
solvency, liquidity, profitability, and asset management. Within each category, discuss
why each ratio improved or worsened. (30 marks)
I.
Solvency
Total Debt Ratio: Trend: From 0.7096 in 2020 to 0.6654 in 2021, the total debt ratio
fell.
5
Strength: The company’s danger of insolvency is decreased by this decline in the debt
ratio, which shows a reduction in financial leverage. Less reliance on debt reduces
interest costs and the chance of financial trouble, which makes it a positive.
Weakness: Conversely, a smaller debt ratio can indicate that the business isn’t making
the most of its financial leverage to boost returns on equity. If the company’s cautious
stance has prevented it from taking advantage of growth prospects, that could be
viewed as a possible vulnerability.
Times Interest Earned:
Trend: From 3.35 times in 2020 to 3.95 times in 2021, the ratio increased.
Strength: The company is better positioned to satisfy its interest obligations, as
evidenced by the improvement in the Times Interest Earned ratio, which also shows
enhanced earnings capacity in comparison to interest expenses. This indicates that the
business can afford to pay off its debt.
Weakness: Despite the positive gain, the absolute level (3.95 times) may be viewed as
relatively low, suggesting that the company may not have enough cash on hand to meet
interest costs in the event of a decline in earnings.
II.
Liquidity
Current Ratio:
Trend: In 2020, the Current Ratio was 0.7920; in 2021, it was 0.6082.
Weakness: This decrease shows that there is less capacity to pay short-term
obligations with short-term assets. A current ratio that is less than one indicates
6
possible liquidity problems, which would make it difficult for the business to pay its
short-term debts. This would be a serious shortcoming.
Strength: This could not always be a bad sign if the decline in the current ratio was the
result of superior working capital management, such as faster asset conversion to cash
or higher inventory turnover.
Quick Ratio:
Trend: Between 2020 and 2021, the Quick Ratio fell from 0.7231 to 0.5541.
Weakness: The lower Quick Ratio confirms the current ratio’s concerns about liquidity.
The business might have trouble paying its immediate debts, especially if goods can’t
be sold off immediately.
Strength: Although it is on the lower side, the ratio stays above 0.5, indicating that there
is still a respectable quantity of liquid assets to pay liabilities.
III.
Profitability
Gross Profit Margin:
Trend: From 16.05% in 2020 to 17.81% in 2021, the gross profit margin grew.
Strength: The rise in gross profit margin is unquestionably a sign of stronger pricing
power or increased manufacturing efficiency. This development may indicate that the
business is more successfully controlling its cost of products sold, which could result in
increased profitability.
7
Weakness: The business needs to make sure that this progress is long-lasting. The
margin may eventually drop if transient variables like price increases were the primary
cause of the increase.
Net Profit Margin:
Trend: In 2021, the Net Profit Margin increased to 9.84% from 8.15% in 2020.
Strength: A larger net profit margin denotes improved overall profitability, which means
that after deducting all costs, the business is keeping more of its sales revenue. This is
a trend toward improvement in efficiency and cost control.
Weakness: If revenue growth slows down, the company will need to maintain or further
enhance this margin in order to secure long-term profitability.
Return on Assets (ROA):
Trend: In 2020, the ROA was 3.10%; in 2021, it was 3.72%.
Strength: The increase in ROA indicates that the business is making better use of its
resources to turn a profit. This rise is positive because it shows improved profitability
and asset management.
Weakness: The company could do better in terms of obtaining larger returns from its
assets, as the ROA is currently somewhat low.
Return on Equity (ROE):
Trend: From 10.83% in 2020 to 11.86% in 2021, the ROE grew.
8
Strength: The company’s capacity to make more money from shareholders’ equity is
reflected in the greater ROE, which is encouraging to investors and a crucial sign of
profitability.
Weakness: The company’s lower financial leverage (as shown by the lower Equity
Multiplier) shows that it is taking a more conservative strategy, which might limit
prospective profits even though the ROE has increased.
IV.
Asset Management
Accounts Receivable Turnover:
Trend: In 2020, the ratio was 7.16 times; in 2021, it was 6.87 times.
Weakness: The company’s ability to collect payments from consumers may be
compromised by the decline in accounts receivable turnover, thereby causing a
negative impact on cash flow. This is a drawback since delayed collections may result in
problems with liquidity.
Strength: Despite the modest fall, the ratio remains relatively robust, indicating that the
company is managing its receivables adequately.
Average Collection Period:
Trend: From 50.95 days in 2020 to 53.15 days in 2021, the Average Collection Period
grew.
Weakness: Since it is taking longer to turn sales into cash, the lengthier collection
period suggests a possible problem with receivables management. This is a serious
weakness that could put a pressure on the business’s working capital.
9
Strength: It might not be totally bad if the extended credit terms given to important
clients were the result of a strategy choice to improve sales, but this would require close
observation.
Asset Turnover:
Trend: Between 2020 and 2021, the asset turnover ratio dropped little from 0.3803 to
0.3779.
Weakness: The company’s ability to generate sales from its assets appears to be
declining, as indicated by the minor reduction in asset turnover. This could point to a
vulnerability such as underutilization of assets or slower sales growth in comparison to
asset growth.
Strength: The ratio is steady, indicating that although there is a small inefficiency, it is
not yet a significant issue. To stop this trend, the business may need to concentrate on
increasing sales or making the best use of its assets.
Step 5: Explain whether there would be any difference to your analysis if you were an
investor or if you were the CFO. How would the data quality differ in those two roles?
(20 marks)
The profitability ratios (Net Profit Margin, ROE, ROA) and solvency ratios (Total Debt
Ratio, Times Interest Earned) would be the main areas of interest for an investor. The
capacity of the business to yield returns on their investments as well as its overall
financial stability are of importance to investors. Investors depend on data that is made
available to the public, including market analysis, annual reports, and financial
10
statements. While data quality is important, investors might not have access to the
same information as internal stakeholders. To evaluate possible returns and risks,
investors may concentrate on trends and comparisons with peers in the industry. In the
role of CFO, the emphasis would be broader and include asset management,
profitability, solvency, and liquidity. Ensuring the financial stability and long-term growth
of the company is the responsibility of the CFO. More in-depth internal data, such as
cash flow projections, operational data, and KPIs with an eye toward the future, is
available to the CFO. Proactive financial management and deeper analysis are made
possible by this access.
The CFO would take a more comprehensive approach, considering all facets of the
company’s financial health and acting to correct any shortcomings, while the investor
would concentrate more on profitability and return on investment. Both jobs would study
the same financial data.