Question

You are considering the purchase one Telstra Ltd share on 1 July 2017. You will purchase the share on the ASX.

a)      Use the Yahoo7 Finance website to find the beta for Telstra.

b)      You will need a proxy for return on the market. To get this, calculate the return on the ASX 200 index for the year ended 30 June 2017. Use the Yahoo7 Finance website to collect the ASX 200 data. Show your workings.

c)      You will need a proxy for the risk-free rate. Use the RBA website to find the return on a two year Government Bond on 30 June 2017. Show your workings.

d)     Calculate the discount rate for your Telstra share. Show your workings.

e)      Use the ASX website to identify the payment date and amounts of the most recent two dividends.

f)       You expect that dividends during your holding period will be the same as those you have received since you purchased the share. You will sell the share on 30 June 2018 and expect to receive $3.050 (ignore transaction costs). Using the discount rate you calculated earlier, what price would you have been willing to pay for your share? Show all workings for your calculations.

g) Use the Yahoo7 Finance website to find the market price for your Telstra share at close of trading on 30 June 2018. Compare this with your calculated price for a share and decide if you would purchase the share on 1 July 2017 or not. Explain why you would (or would not) purchase Telstra on 1 July 2017.

h)      Using a P/E multiple of 11 and the most recent annual earnings per share for Telstra, calculate the price of your Telstra share. Use the most recent annual report for Telstra to identify earnings per share. You can obtain the Telstra annual report from the ‘announcements’ section of the ASX website to locate. Show all workings for your calculations.

Based on this price, would you purchase a Telstra share on 13 August 2018? Explain how you made this decision.

Answer 1

(a) Telstra Beta = 0.66 ("Data taken from Reuters")

(b) ASX 200 Value at end of June,2016 = 5246.6 and ASX 200 Value at end of June,2017 = 5721.5

Annual Return Rate = (5721.5 - 5246.6) / 5246.6 = 0.090516 or 9.0516 % ("Data taken from Google Finance")

(c) Two Year Government Bond Yield(Rate) = 1.98 % ("Data taken from Bloomberg")

(d) Discount Rate or Required Return Rate for Telstra shares can be calculated using the Capital Asset Pricing Model given below:

Expected Return Rate = Risk-Free Rate + Beta x (Market Return - Risk-Free Rate)

Risk-Free Rate is proxied by the two year Australian Government Bond Rate and the Market Return is proxied by the ASX 200 annual returns.

Therefore, Discount Rate for Telstra = 1.98 + 0.66 x (9.0516 - 1.98) = 6.647256 % or 6.65 % approximately

NOTE: Please raise separate queries for solutions to the remaining sub-parts.