Corporate Financial Management Assignment PDF

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Q1. Collect the data from “Yahoo Finance” and answer the following questions (using the instructions given in the next page): a) Collect the market price index (All Ordinaries), Share price for a company (as per instructions given in page 2) and display the data for two sub-periods (Period 1: June 2014 to February 2016; Period 2: February 2016 to October 2017) separately in a table Sub Period 1: June 2014 to February 2016

Sub Period 2: February 2016 to October 2017

b) Calculate the return of share prices and market return (from market price index). Display the calculated returns along with the risk free rate of return (given in a separate excel file) in a table for two sub periods. Calculate and tabulate,

and

c) Calculate the mean, standard deviation, variance and correlation coefficient for

. and

separately (for two sub-periods in a table-see next page) and comment on the result.

Period 1; (rj-Rf) Average = -0.3616

SD = 4.0926 Variance= 16.7500 Correlation Coefficient = 0.5486

(RM-RF) Average= 0.3285 and SD = 4.5662 Variance= 20.8503 Correlation Coefficient = 0.5486

Period 2: (rj-RF) Average= 0.7643 SD = 2.4474 Variance= 5.9898 Correlation Coefficient = 0.3863 (RM-RF) Average = -1.5647 SD = 4.2777 Variance = 18.2983 Correlation Coefficient = 0.3863 In Period 1 June 2014 to October 2016, both monthly (rj-RF) and (rm- Rf)’s average and standard deviation gave a higher volatility and are not reliable compared to period 2 as the higher the SD is, the less consistent the prices are. Both Variances have high positives which means there is a potential effect the company’s performance can be impacted by higher sales or costs being purchased by customers. The market portfolio risk premium in period 2 is becoming closer to zeros, this means that it is slowly becoming reliable and having lower volatility. The correlation coefficient being positive means that for every positive increase in one variable, there is a positive increase of a fixed proportion in the other. The absolute value of the correlation coefficient gives the relationship strength. The larger the number, the stronger the relation between variables. However Period 2 correlation coefficient has decreased from 0.5486 to 0.3863 from Period 1. This shows that the relationship has weaken.

d) Estimate beta

for your selected company for the two sub-periods.

Period 1 beta: 0.6121 Period 2 beta: 0. 6751

E) Explain the value of beta that you have calculated Beta measures the stock risks in relation to the overall market. As both periods beta of stock is lower than one, then it shown that there is lower level of risk and volatility as compared to the stock market. This means lower beta stocks are generally considered less risky but has also have low returns later. In period 1, a beta of 0.6121 indicates that stocks gain in 0.6121 points for every point that index gained as well for period 2 of 0.6751. In summary, there is less risk but there is also less returns. These betas serve as indicators for volatility in the market. f) Provide a brief description of the company. Telstra Corporation Limited (Telstra) is a telecommunications and technology company that was founded in 1 July 1975. Its main service it provides is telecommunications and information services for customers domestic and international. In Australia, Telstra provides 17.7 million retail mobiles services, 3.6 million

broadband services fixed services and 4.9 million retail fixed voice services. They are known to have an international presences across 20 nations. Telstra have provided their services businesses, governments, individuals and communities. The company however is very famous for providing basic access services to homes and business which enable them to make local or long distance calls, internet services and mobile calls. G) The beta is a financial indicator that measure the likelihood of a price of a stock/security will change in relation to the movement in the market price. The estimated value of beta is different for two sub periods because a result of different movements of the stock returns in response to the market. In period 1 and period 2, both stock beta indicates a low response as compared to the stock market. Period 2 beta increased slightly higher because of multiple factors such as the nature of the business, financial and operational leverages etc. Nature of Business – The beta value of a firm can depend on the kind of products and service it offers and its relationship with the overall macro-economic environment. Telstra is a telecommunications company which performs high based on the company providing services to customers international. This allows the company to possess cyclical stocks and have potential to contain high stock or low stick betas. Cyclical stocks are those whose business performance is correlated with the economic activities. Hence if the economy is in recession, then the stocks exhibit poor results. Whereas if the economic activities are on high growth. However, Telstra can be affected by economic activities but considering how the business does not completely rely on providing service on international customers. However, they are still affected. Operating leverage: The greater the proportion of fixed costs in the cost structure of the business, the higher the beta. Telecommunications required an immense fixed cost to operate. Examples: high wages pay rates, environmental cost and Equipment. Financial leverage: The more debt a firm takes on, the higher the beta will be of the equity in that

business. Debt creates a fixed cost, interest expenses which will all increase exposure to market risks.

Bilbography: Finance.yahoo.com, TLS.AX Historical Prices | Yahoo Finance, viewed 21 September 2018 https://finance.yahoo.com/quote/TLS.AX?p=TLS.AX

Jyoti Singh, 2018, Beta Coefficient | Calculate Beta in Excel (Forumula, Examples), Learn Investment Banking: Financial Modeling Training Courses Online, https://www.wallstreetmojo.com/beta-coefficient-calculate/, viewed 22/09/18 Theme by: Theme Horse Powered by : WordPress, 2018, Correlation coefficient: Simple Definition, Easy Steps, http://www.statisticshowto.com/probaility-and-statistics/correlationcoefficient-formula/, viewed 24/9/2018 Telstra Limited AU,About US | Our Company, viewed 24/9/2018 https://www.telstra.com.au/aboutus/our-company Evan Tarver, Updated August 23, 2018 — 5:23 PM EDT | How does debt affect a company's beta?, viewed on 24 September 2018 https://www.investopedia.com/ask/answers/051315/how-does-debt-affect-companys-beta.asp...