1.

Introduction
Globalisation has become a significant impact in financial system of one country around the globe. In financial system itself, it contains 2 major financial tools, financial institution and financial market. Financial institution is financial institution is a firm that provide financial service to the community such as commercial bank, insurance companies, credit union, pension fund and other financial firm and financial market is a market that deals with government bond and shares in order to raise fund in a particular company (Parino & Kidwell, 2009, p.28). Generally, all public companies are classified as financial market because they attract investors to make investment due to fund raising activity. In this report, author has chosen Telstra Corporation Limited as a sample of public entities in order to make analysis and estimation about the investment activity in this company. Furthermore, this report will contain 6 parts of analysis and estimation about what will be the best recommendation of making an investment in this public company.

2. Equity Valuation Model

Telstra Corporation Limited is one of the biggest telecommunication companies in Australia. Estimation of investment activity will help the investors to make the best decision and will bring benefit to their side as well as company side. According to the data from fin analysis1, the author decided to use Earning Capitalisation M odel to analyse the intrinsic value to make investing decision for investors. This assumption relies on zero earnings growth and requires the same or equal rates of return and cost of capital. Calculation below will give a better estimation of investment activity in the Telstra Company. According to Fin analysis current data (07/10/2010): Closing price: $2.64 Earnings per Share: 31.3 cents

Fin analysis accessed 07/10/2010, http://www.aspectfinancial.com.au.ezproxy.uow.edu.au/af/company/mainview?ASXCode=TLS

To estimate the cost of equity capital which is often referred as the capitalisation rate as it is the rate at which earnings are capitalised (Brailsford et al, 2006, p.422).

ke = EPS/P o = 0.313/2.64 = 0.1186 Or alternatively, the P/E ration (or multiplier) is P/E = 2.64/0.313 = 8.43 This can be used to obtain the PV, PV = EPS (P/E) 0.313(8.43) = $2.64

ke = cost of equity EPS = Earnings per Share

In the earnings capitalisation model, estimation of earnings level is required to support this model. This model is applied based on zero growth assumption in dividend payment and also constant earnings must take in consideration. The significant reason of choosing ECM as equity is more suitable than other model because this company has experienced zero growth in the past 5 years and has had complete information about earnings per share and P/E ratio. Furthermore, this model is also supported by other varia ble that does not include in the company information that is plowback ratio, which is used to calculate the growth rate. Because the growth rate is zero, so there is no need to calculate plowback ratio in the company information. According to Earnings Capitalisation Model, Brailsford et al (2006, p.423) states that even in the company which adapt zero growth in dividend and assumes that earnings per share is constant, the reported earnings will still be fluctuated that is caused by different method of accounting policy or procedures in Australia. In addition, when current market price is calculated with intrinsic value above, the author can conclude that, current market price, that is $2.66, is trading at premium value because the current market price is slightly higher than intrinsic value above.

3. Macro analysis
Macro analysis of market is an important part in the investing activity. This analysis includes the entire variable in the market that can affect business perfo rmance investors confidence of a particular company. This analysis generally focuses in market activity such as changes in technology, economic fluctuation and also government policy that control the investment activity across the nation. Macro analysis for Telstra Corporation can be looked from economic fluctuation and rapid growth in the technology as well as telecommunication that has become the major part in Australian business system and government. From the past 5 years Australian economic has experienced a great movement especially in 2008 -2009 because in that year, Australian economy suffered a great recession that was caused by global financial crisis in the US. However, for the time being, Australian economic is growing again and according to RBA 2 article, this trend will be much higher than 2009 because based on the data from Reserve Bank Australia, Australian GDP is increasing nearly 4 % higher compare with previous rate. This is because, the demand for telecommunication and technology nowadays has increased rapidly that is caused by globalisation that has triggered global market become a major part in the economic system. Furthermore, inflation and interest rate has been decreasing and increasing respectively that is cause by rapid eco nomic recovery after the great recession. Governance system also influence the performance of this company because new government can have a big different in the economic system and business performance. For example, Australia has elected a new prime mini ster this year and she has brought a huge different in the Australian economic, exchange rate for example, Australian dollar has reached the highest level compare with US dollar and it almost 1 to 1 ratio. As a result of this change, confidence of overseas investors might increase and will make new investment in Australia especially in Telstra. The need of technology and telecommunication can also include as a significant factor that can influence share price and investment activity in this company. This is because as global market increase, technology is the main thing that can support
2

Reserve Bank of Australia accessed on 07/10/2010, www.rba.gov.au

company to survive. As a result of global market, demand of technology and telecommunication will increase and it will lead to an increase in share price and revenue of Telecommunication entity such as Telstra, higher demand means higher revenue as well as higher performance level in this industry level.

4. Industry analysis
Industry analysis can be defined as the valuation of the individual industries in order to give a comparison to make a good decision and allocation of investment. In Australia, there are many telecommunication industries that have a role in business and government system. Telecommunication industries are classified as an important industrial field because it has a huge control among the customers and business environment. These industries are also appertained in a period of stability where generally all the public companies in this sector are obtaining constant (stable) production, revenue and profit. Industry life cycle is stages where views as a model of change in industries over time (Brailsford, 2006, p.471). In stability period, massive productivity in the product classification become more often due to make variation in customer perspective as well as more choices in market competition. For example, Telstra Corporation has developed the next generation Telstra Next IP network and Next G network in order to increase the competition between telecommunication industries. Industry analysis also needs to consider about the prediction of earnings per share and P/E ratio for the particular industry. According to the data from Australian Security Exchange (ASX)3 the average price return of telecommunication industries in current year has dropped by 20.42%. Even though the average price return of telecommunication services have dropped by that amount, Telstras share price does not really have an impact because based on fin analysis data, the share price of Telstra is increasing by $0.02 within a day. Therefore, other resources of data shows that telecommunication industrys EPS growth has dropped by 2.27% in current year and it is expected to be dropped again b y 8.23 in year 1 however this decrease will
3

Australia Stock Exchange accessed on 07/10/2010, http://www.standardandpoors.com/indices/sp-asx200/en/us/?indexId=spausta200audff--p-au----

be recovered in year 2 and increase by 14.46% (fin analysis accessed 09/10/2010). P/E ratio and dividend yield for telecommunication industry will remain stable in 9 and 10 % figure for upcoming years.

5. Qualitative analysis
Qualitative analysis is the stage where the investors have to consider firm specific factors that can have influence in companys share price. Firm specific factors include profitability (EPS growth) estimation, book to market value and equity volatility. According to Brailsford 2006 (p.485), company which posses high book to market value generally would have low profitability (EPS) and low cost of capital. On the other hand company which have high book to market value would have high EPS rate and high cost capital cost as well. In this case, according to Yahoo Finance3, book value per share of Telstra Company is 5.13 and it classified as low book value. Based on the explanation from Brailsford et al (2006, p.485), low book to market value lead to high EPS rate which is 31.3 cents per share and high cost of capital which has been calculated in the first part 11.86 %. High cost of capital means that this share is risky which might have a great expected return on equity. Telstras share is classified as green chip shares because based on Brailsford et al (2006, p.487), green chip shares define as a company that has low equity betas. Telstra Corporation has a company beta only 0.5 and it means that in this figure Telstra Corporation shares can be said classify to green chip shares, even though this company is not small company. Also, the definition of green chip shares typically has a high risk as it mentions in above in correlation with cost capital. Business environment and competition can also be external factors that can affect share valuation in this company. This because external factors such economic condition and other competitors would impact two major components of share valuation, such as revenue and costs. Any changes in the business environment would significantly changes revenue and cost of production. For example, when the trend in the market about high technologies and telecommunication using smart devices, the company will try to reach that market, as a result they must increase advertising cost to get those goals. Same as Telstra, when Iphone 4 th generation came up in the market, Telstra has made new offer about this smart devices in order

to attract consumer interest. As new offer has been made, Telstra Corporation will get more revenue from this new offer and it will increase the earnings of this particular company. Another example, Telstra Corporation is not only telecommunication service in Australia, but there are many telecommunication service companies that can offer the same offer to customers. TPG telecom, for example, they also provide the same offer in telecommunication industries with Telstra, it can be said rivals in the current market industry. New entrants into the marketplace also consider as external factors that can aff ect the companys performance because generally new comers will have a really great offer of a particular product in low prices. Using SWOT analysis can also b e used in determining qualitative analysis of a particular company which in this case is Telstra Corporation. Telstra Corporation has strength in product quality and networking service if compare to other telecommunication industry and also Telstra has a strong brand name among customers especially government because Telstra is the most reliable telecommunication service in Australia. However, among its strength, Telstra Corporation has a weakness that generally arises from competitor strength such as TPG telecom offer internet package to the customers with lower price. It makes TPG internet service is popular among average customers. However, to tackle this weakness, Telstra has developed possible strategies by offering special package and discount for specific product and for reliability network. Opportunities of Telstra are coming from government sector because government sector need reliable telecommunication system that is offered by Telstra Corporation in order to enabling the firm to enhance its growth. Moreover, the last SWOT analysis is threat that typically the opposite of opportunities. Threat s can occur from external environment such as changes in government regulation and economic condition that force the company to changes their strategies to tackle threats. Therefore, investors must consider about how the firm establish their strategy to combine their strength and opportunities in order to tackle their weakness and threats from external environment.

6. Quantitative analysis
In this part, a quantitative analysis will be assessed using financial ration from financial statement of Telstra Corpora tion and it will be compared with the previous data that has been calculated by company. The author will use several ratios analysis in order to calculate appropriate financial ratios in this particular company. Return on Asset (ROA) is the first ratios analysis that is used for calculating how efficient the firm use its resources to generate profit (Brailsford et al, 2006, p.525). For Telstra Corporation, the calculation of ROA as follows: ROA = net (operating) profit/total asset Based on that formula, we can calculate ROA using the data from Fin analysis (UOW database) The entire figure is in million dollars Operating profit after tax = net profit after tax + [interest expenses*(1-corporate tax)] = 3883 + [1,030.0*(0.7)] =4,604 Total asset = total asset outside equity interest = 39282 (57) = 39225 ROA = 4604/39225 = 11.74% ROA is an important ratios for considering an investment in a particular company because ROA is also known as return of investment rate, in other words when investors want to make a new investment, they have to know how much return that they will get according to ROA. In addition, ROA gives the investors some ideas about how effectively the company is converting the money to invest in order to generate profit, higher ROA is better, because the company earn more money in less investment. Return on Equity (ROE) is also significant ratios analysis in considering new investment in a public company. ROE indicates the rate of return achieved by the firms managers on the capital invested by shareholders. In other words, return on equity measures a corporation's profitability by revealing how much profit a company

generates with the money shareholders have invested . ROE for Telstra Corporation can be calculated as follows: ROE = net profit after preference dividend/ordinary shareholders equity Net profit after pref. Dividend = 3,883 Shareholders equity = 13,008 - 57.00 =12,951 ROE = 3883/12951 = 30% The author chose ROE ratios as quantitative analysis because ROE is a key measurement of companys performance that relates to how well managers are managing fund invested in shareholders to generate profit. There is a relationship between ROE and cost capital in determining long run value for a public company. After calculating ROA and ROE, we can make an analysis based on previous data from appendix 1&2, from the past 5 years, ROE of Telstra Company has a significant dropped in June 2006 by 4%, however T elstra Corporation has succeeded to recover that drop and in June 2008, ROE reached 30.72%. However, during 2009 and 2010, ROE has decreased from 32.80% to 30%, this is because the cost of capital for 2010 is quite high and make this share is more risky fr om the perspective of investors. Fluctuation of Return on Asset in this company is quite stable, even though there is a decrease in ROA in 2010, from 11.96% in June 2009 to 11.74% in 2010. This trend is caused by revenue that this company earns has dropped if compare with revenue in 2009 that might a result of new comers in telecommunication industry that offer a good option in price and new product.

7. Recommendation
After all the analysis of Telstras shares, according all the data that we have been calculated, Telstra shares has quite high of cost of capital if compare with their rival TPG telecom in the same industry. High cost of capital means that this share is more risky and has high return. Share price of this share is also increasing day by day even though not significant increase, but still can make profit for investors. Based on that, author recommend investors to buy ordinary share with short holding period because using short holding period are often generating advantages of profitable opportunities in the high movement of shares. In other words, less risk averse investor sell it in the short term to generate profit. Another reason why less averse investors should sell this shares in the short term time because according to calculation of share price in the first part, therefore, this company shares is worth to sell as this share is trading at premium value that can bring a benefit to the investors.

8. References
Australia Stock Exchange accessed on 07/10/2010, http://www.standardandpoors.com/indices/sp -asx200/en/us/?indexId=spausta200audff --p-au---Brailsford, T, Heaney, R & Bilson, C 2006, Investment Concept and Application, Cengage Learning, Australia. Fin analysis accessed 07/10/2010, http://www.aspectfinancial.com.au.ezproxy.uow.edu.au/af/company/mainview?A SXC ode=TLS Fin analysis accessed 07/10/2010, http://www.aspectfinancial.com.au.ezproxy.uow.edu.au/af/company/mainview?ASXC ode=TPM Parino, R & Kidwell, D, S 2009, Fundamentals of Corporate Finance , John Wiley & Sons, Inc, United States of America. Reserve Bank of Australia accessed on 07/10/2010, www.rba.gov.au Telstra Corporation Ltd 2010, accessed 07/10/2010, http://www.telstraenterprise.com/Pages/Home.aspx Yahoo finance 2010, accessed 07/10 /2010, http://au.finance.yahoo.com/q/ks?s=TLS.AX