TELUS CORPORATION

COST OF CAPITAL
ANALYSIS REPORT
ASSIGNMENT 1
APS1016 - Financial Management for Engineers
25 October 2023, University of Toronto

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

EXECUTIVE SUMMARY

OVERVIEW METHODS AND RESULTS

This report is an analysis of TELUS Our calculations of cost use book value
Corporation’s current state of capital for debt and market values for equity
costs and financing based on data and preferred shares. Short term debt
snippets from the company’s 2000 is also used in cost of debt calculations
annual report and case study material due to its prominence Telus’s capital
provided by Richard Ivey School of structure (among other reasons). The
Business. Capital Asset Pricing Model (CAPM) is
employed in calculating the cost of
This study is conducted to understand equity.
and calculate the Weighted Average
Cost of Capital (WACC) for Telus and its As of the end of fiscal year 2000, Telus
Debt to Equity ratio and use these has an after-tax cost of debt of 4.01%
metrics to analyze whether their and a cost of equity of 9.65% (all in
current cost structure is optimal or if market value). The WACC is found to be
they need to make a change to minimize 7.34%, which we also consider to be the
risks and improve the financial health of RRR (or investor’s premium).
their company.
Telus currently has a debt-to-equity
OBJECTIVES ratio of 3:2, a debt-to-EBITDA ratio of
10.1, and an interest coverage ratio of
➔ To calculate the Weighted Average 3.12. This implies the current capital
Cost of Capital (WACC). structure is relatively optimal, with a
➔ To determine how much of a healthy debt-to-equity ratio and low
premium investors demand for this risk of bankruptcy.
stock.
➔ To determine the proportion of CONCLUSION
capital each party has invested in
the company. It is advisable for Telus to issue debt in
➔ To analyze whether the company’s moderation, but avoid increasing debt
current capital structure is optimal. by too much to reduce risk of not being
➔ To calculate the company’s current able to pay them (given current
required rate of return on debt. earnings). Telus may also consider
aiming for an internal rate of return
(IRR) of around 8% to increase its
enterprise value considering its WACC.

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

TABLE OF CONTENTS

TABLE OF CONTENTS...........................................................................................................2
1. CORPORATE PROFILE...................................................................................................... 3
2. BOOK VALUE CAPITAL COSTS AND WEIGHTS............................................................. 4
2.1. COST OF DEBT, EQUITY, AND PREFERRED SHARES...........................................4
2.1.1. COST OF DEBT................................................................................................. 4
2.1.2. COST OF EQUITY............................................................................................. 6
2.1.3. COST OF PREFERRED SHARES.................................................................... 7
2.2. WEIGHT OF DEBT, EQUITY, AND PREFERRED SHARES...................................... 8
2.2.1. CURRENT CAPITAL STRUCTURE OF TELUS................................................ 8
2.2.2. WEIGHTS USED FOR WACC CALCULATIONS............................................... 8
2.3. WACC CALCULATION................................................................................................9
3. MARKET VALUE CAPITAL COSTS AND WEIGHTS.......................................................10
3.1. COST OF DEBT, EQUITY, AND PREFERRED SHARES.........................................10
3.1.1. COST OF EQUITY........................................................................................... 10
3.1.2. ALTERNATIVE COST OF EQUITY.................................................................. 11
3.1.3. COST OF PREFERRED SHARES.................................................................. 12
3.2. WEIGHT OF DEBT, EQUITY, AND PREFERRED SHARES.................................... 12
3.3. WACC CALCULATION..............................................................................................14
4. COST AND STRUCTURE ANALYSIS.............................................................................. 15
4.1. DEBT TO EQUITY RATIO.........................................................................................15
4.2. ABILITY TO HANDLE OUTSTANDING DEBT.......................................................... 15
4.3. REQUIRED RATE OF RETURN............................................................................... 16
5. CONCLUSION................................................................................................................... 18
6. REFERENCES...................................................................................................................19

DISCLAIMER

This report is created by students of University of Toronto: Camille Guerin, Dimas

Widjanarko, Jeremy Young, Neil Punjani, and Priya Jadav, for group assignment #1 of the Fall
2023 course APS1016 (“Financial Management for Engineers”)–instructed by Prof. Babu
Gajaria–to be submitted for grading. This report is made to portray, but is NOT, a professional
evaluation by a certified expert.

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

1. CORPORATE PROFILE

TELUS Corporation is a leading Canadian telecommunications company. They provide

a full range of communications products and services that connect Canadians to the
world. In Western Canada, they are the leading full-service provider of a wide array of
data, IP, voice and wireless services to both businesses and consumers. They also
provide national wireless service to both businesses and consumers.

In Central and Eastern Canada, they are expanding by focusing on advanced business
solutions that involve data and the Internet. Their strategic intent is to unleash the
power of the Internet to deliver the best solutions to Canadians at home, in the
workplace and on the move.

In 2000, they generated $6.4 billion in revenues and further strengthened their
national position by purchasing QuébecTel, a full-service telecommunications provider
in Québec, and Clearnet Communications Inc., a national digital wireless company.

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

2. BOOK VALUE CAPITAL COSTS AND WEIGHTS

A company’s book value is the amount of the company according to its books as
reflected on its financial statements. It is determined from a company's balance sheet
and includes all of the company's tangible assets, including its inventory, investments,
equipment, and real estate. After that, liabilities (such as loans, taxes, and other debts)
and intangible assets (such as patents, copyrights, and intellectual property) are
subtracted.

The Weighted Average Cost of Capital (WACC) is a measure of the average rate that
Telus pays to finance its assets. “Weighted” in this case means each rate contributes
only as much as their relative proportion to the overall capital structure. Calculating
WACC requires us to find the cost of debt, the weight of debt, the cost of equity, and the
weight of equity, using the following general formula:

𝑊𝐴𝐶𝐶 = (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡) + (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦)

+ (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠)

This equation can also be expressed, in this case, as:

(𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡)(𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡) + (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦)(𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦) + (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑃𝑆)(𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑃𝑆)

𝑊𝐴𝐶𝐶 = 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠

Where PS is preferred shares. This type of stock is equity, although often behaves like
debt (and so can be included into either cost of debt or equity). For the purposes of this
case, we decided to discriminate it to better understand its impact relative to the total
capital.

The following sections will cover all variables in detail.

2.1. COST OF DEBT, EQUITY, AND PREFERRED SHARES

2.1.1. COST OF DEBT

The cost of debt in this case is the weighted average interest rate of debt, excluding
debt with no interest. From the company balance sheet (Exhibit 1), we find that Telus
owes the following liabilities:

1. Account payable and accrued liabilities*

2. Short-term obligations

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

3. Other short-term liabilities**

4. Long-term debt
5. Other long-term liabilities

From the transcript in the case study, Rick mentions that current liabilities excluding
short term obligations are mostly trade credit, or in the case of the balance sheet,
accounts payable and accrued liabilities (1). We can infer that this liability consists of
mostly deferred payments and therefore has no interest.*

Another liability of note would be other short-term liabilities (5). This may be taxes
due, but we otherwise do not have enough information to discern whether this has
interest at all and to what end. In addition, it has comparatively little value (small
weight), so we can safely assume this liability carries no interest.**

The short-term obligations (2), as can be inferred from the transcript, include mostly
commercial papers. The footnote of the balance sheet says these notes carry an
average interest rate of 5.86%. Its value from the balance sheet is $5,033 mil. We must
include this along with long-term debt as well, considering the high proportion of short
term obligations in Telus’ liabilities. This suggests that Telus actively uses short-term
debt to finance their projects and hence it must be used in our WACC calculations.

Due to the lack of information on other long-term liabilities (5), we decided to

combine this value with the long-term debt (4) and assume they have similar
characteristics as well as the same interest rate. This interest is the current average
yield of outstanding Telus bonds which, according to the transcript, is 8.81%–or 9.31%
after allowing underwriting fees. We will however, use the value without underwriting
fees (8.81%), and add them back in after we deduct the tax from the total cost of debt.
We will include brokerage costs into this addition . Keep in mind that although we have
information on the coupon rate of Telus bonds (11%), we forego this to use the current
yield instead since it’s a more current and relevant metric. The book values for these
debts are $3,047 and $281 mil, respectively.

The weighted average interest rate of debt can therefore be found through the
following formula, after excluding liabilities that carry no interest:

(𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆𝑇 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛𝑠)(𝑅𝑎𝑡𝑒 𝑜𝑓 𝑆𝑇 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛𝑠) + (𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐿𝑇 𝑑𝑒𝑏𝑡)(𝑅𝑎𝑡𝑒 𝑜𝑓 𝐿𝑇 𝑑𝑒𝑏𝑡)

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑆𝑇 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛𝑠 + 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐿𝑇 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛𝑠
(5033)(0.0586)+(3047+281)(0.0881)
= 5033+3047+281
= 0.07034

Where ST and LT are short-term and long-term, respectively. This gives us a value of
7.03% as the cost of debt (before tax). Assuming all these debts are tax-deductible, we
can use the following formula to deduct tax from our cost of debt:

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

𝐶𝑂𝐷 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 = 𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 * (1 − 𝑡𝑎𝑥 𝑟𝑎𝑡𝑒)

Where the tax rate is found through dividing the income taxes by earnings before taxes,
non-controlling interest, and goodwill amortization. Both these values are available in the
income statement (Exhibit 2)–which are $496 mil and $990 mil, respectively–and so:

496
𝐶𝑂𝐷 𝑎𝑓𝑡𝑒𝑟 𝑡𝑎𝑥 = 0. 07034 * (1 − 990
) = 0. 03510

Giving us an after-tax cost of debt of 3.51%. We can assume that underwriting and
brokerage costs add 0.5% to this value, resulting in a final cost of debt of 4.01%.

2.1.2. COST OF EQUITY

The cost of equity represents the return Telus' investors expect to earn while holding
the company's stock, considering the associated risks. It signifies the cost to Telus of
utilizing equity capital for operations and new projects.

Various methods can calculate the cost of equity, such as Capital Asset Pricing Model
(CAPM), , Dividend Discount Model (DDM), or the Earnings Capitalization Rate Model
(E/P ratio). These approaches consider factors like expected dividends, dividend
growth, market risk, and the company's beta (systematic risk).

In Telus' context, opting for CAPM is rational. Telus reinvests significantly in network
expansion and technology, leading to irregular dividend payments. The telecom
sector's risk and volatility, due to regulation, technology, and competition, make
CAPM's market sensitivity (Beta) vital.

Although CAPM is preferable to use, it does not pertain to obtaining book cost of
equity. This is because the variables used in its formula are all based on the market
environment, and are not strictly values from accounted documents. To calculate the
book value, using the Dividend Growth Model is more appropriate.

Dividend Growth Model (Gordon Growth Model): This model offers simplicity and is
linked to fundamental metrics. It's ideal for long-term investors and stable
dividend-paying companies. It's based on the relationship between expected dividends,
the current stock price, and the constant growth rate of dividends (g). The formula is:

𝐷1 𝐷0*(1+𝑔)
𝑟 = 𝑃0
+ 𝑔= 𝑃0
+𝑔

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

Dividend per Share One Year from Current Time (D1): This represents the expected
dividend payment per share in the upcoming year. It's calculated using D0 (common
dividend per share from 2000) and the expected constant growth rate of dividends (g)
plus 1. In the Telus case this value equals $1.40/share.

𝐷1 = 𝐷0 * (1 + 𝑔) = (1. 40) * (1 + 𝑔)

Current Stock Price (P0): This is the market price of the company's stock, often based
on historical data, and influenced by factors like the company's performance and
market conditions. In this case, we have access to the historical price at which the
company's stock was traded in 2000 which is $41.55/share.

Expected Constant Growth Rate of Dividends (g): It's the rate at which a company is
anticipated to increase its dividend payments. 'g' is vital for the valuation formula and
can be calculated in the following way:

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑔 = 𝑅𝑂𝐸 * 𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 = ( 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 ) * (1 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜)

Where ROE is the return on equity, found through the net income divided by the
market value of equity (number of shares times current price per share). Putting in the
numbers found in Exhibit 3:

461 1.4
𝑔 = ( 6348 ) * (1 − 22.1
) = 0. 06802

Giving us a g of 6.80%. Entering this value to the formula:

(1.4)*(1+0.06802)
𝑟 = 22.1
+ 0. 06802 = 0.1357

Gives us a cost of equity of 13.57%.

Note: Retained earnings will not be a part of our cost of equity, as the cost associated
with them is mostly opportunity and implicit cost and does not have a fixed interest
associated with them like dividends do.

2.1.3. COST OF PREFERRED SHARES

The book value of cost of preferred shares is calculated by:

𝑃𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 𝑑𝑖𝑣𝑖𝑑𝑒𝑛𝑑 $4 𝑚𝑖𝑙𝑙𝑖𝑜𝑛

𝐶𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
= $70 𝑚𝑖𝑙𝑙𝑖𝑜𝑛
= 0. 05714

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

Dividend of preferred shares and value of preferred shares can be found in the balance
sheet and income statement. Including an additional 0.5% to the cost of preferred
shares to account for brokerage costs, the cost of preferred shares is 6.21%

2.2. WEIGHT OF DEBT, EQUITY, AND PREFERRED SHARES

2.2.1. CURRENT CAPITAL STRUCTURE OF TELUS

Currently Telus’s capital structure is financing their projects with debt, equity and
preferred shares. The proportion of these three sources of capital used by Telus can be
obtained through the data provided in the balance sheet.

The proportion of debt used by Telus can be obtained by the following formula:

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡
𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
5033+3047+281+1326+310
= 16415
= 0. 6090

The proportion of preferred shares can be obtained by the formula:

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠

𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
70
= 16415
= 0. 004264

And lastly, the proportion of equity used by Telus in their capital structure can be found
using this formula:

𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
4785 + 1563
= 16415
= 0. 3867

Based on the above we see that currently Telus is financing its projects with 60.90%
debt, 38.67% equity and 0.4264% preferred shares, according to book values.

2.2.2. WEIGHTS USED FOR WACC CALCULATIONS

The previous section covers the weights of debts, equities and preferred shares based
on Telus’ current financing strategy. However, in order to calculate the weights of
debts, equities and preferred shares to be used in our calculation of the book value of
WACC, there are some important changes that must be made:

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

1. The numerator for each debt, equity and preferred shares must only include the
values associated with the sources that have a cost of debt, equity and
preferred shares associated with them respectively. This is highlighted in
sections 2.1.1, 2.1.2, and 2.1.3.
2. The denominator hence must be the sum of the debts, equities and preferred
shares associated with the values that have a cost associated with them.

The weights for our calculation of the book value of WACC are shown below:

𝑆ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑜𝑏𝑙𝑖𝑔𝑎𝑡𝑖𝑜𝑛𝑠 + 𝐿𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡 + 𝑂𝑡ℎ𝑒𝑟 𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠
𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑃𝑆 𝑤𝑖𝑡ℎ 𝑎𝑠𝑠𝑜𝑐𝑖𝑎𝑡𝑒𝑑 𝑐𝑜𝑠𝑡𝑠

5033 + 3047 + 281

= 13216
= 0. 6326

𝑃𝑆
𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑃𝑆 = 𝑇𝑜𝑡𝑎𝑙 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑃𝑆 𝑤𝑖𝑡ℎ 𝑎𝑠𝑠𝑜𝑐𝑖𝑎𝑡𝑒𝑑 𝑐𝑜𝑠𝑡𝑠
70
= 13216 = 0. 005296

𝐶𝑜𝑚𝑚𝑜𝑛 𝑠ℎ𝑎𝑟𝑒𝑠
𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑏𝑜𝑜𝑘 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑃𝑆 𝑤𝑖𝑡ℎ 𝑎𝑠𝑠𝑜𝑐𝑖𝑎𝑡𝑒𝑑 𝑐𝑜𝑠𝑡𝑠

4785
= 13216
= 0. 3621

Where PS is preferred shares. Hence, we see that the weights of debt, preferred
shares and equity that we will use for our WACC calculation are 63.26%, 0.53% and
36.21%, respectively. To conclude, these are the weight of book values that have an
associated cost with them.

2.3. WACC CALCULATION

Having all the variables quantified, the WACC can simply be found through revisiting
the following formula:

𝑊𝐴𝐶𝐶 = (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡) + (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦)

+ (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠)

= (0. 0401)(0. 6326) + (0. 1357)(0. 3621) + (0. 06214)(0. 005296) = 0. 07483

The book WACC is therefore 7.48 %.

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

3. MARKET VALUE CAPITAL COSTS AND WEIGHTS

The company’s market value is commonly referred to as its market capitalization and is
the value that the investment community gives to a particular equity or business. It is
the price one would pay to acquire all the company’s outstanding shares at the market
price. If the book value is higher than the market value, it can mean an undervalued
stock. If the book value is lower, it can mean an overvalued stock.

3.1. COST OF DEBT, EQUITY, AND PREFERRED SHARES

In the case of Telus, we assume that the cost of debt aligns for both book values and
market values. This assumption is valid when a company hasn't repurchased or issued
additional debt, and when interest rates or dividend rates are fixed, with no active
secondary market trading.

However, it's important to note that specific values are missing for the calculation of
these new estimates. We also need to keep in mind that we do not have sufficient (or
reliable) information to properly calculate the market cost of debt.

3.1.1. COST OF EQUITY

The market cost of equity can be found through CAPM. CAPM benefits from available
stock market data, simplifying its application. For Telus, a dynamic telecom player,
operating in a competitive environment, CAPM proves the most versatile and
industry-appropriate method.

The cost of common equity can be calculated as follows:

𝐾𝑐𝑒 = 𝑅𝑓 + 𝛽(𝑅𝑚 + 𝑅𝑓)

Risk-Free Rate (Rf): The risk-free rate is typically represented by the yield on
government bonds. It's the return an investor can earn with no risk of losing their
investment. It is displayed in exhibit 5 where we choose the geometric average annual
return of long-term government bonds. in Canada over the period 1926 to 2000,
which is 6.00%.

Choosing the geometric average for Telus' WACC calculations is driven by the need to
account for the compounding of investment returns. It accurately captures how

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

returns accumulate over time, making it better suited for estimating the cost of capital,
especially in the context of long-term investment decisions.

Given our assumption that all Telus shares are in the Canadian market, we utilize
Canadian government bonds as our reference for risk-free returns. This is because
government bonds are widely recognized for their low-risk nature, particularly for
long-term projects.

Beta (β): Beta measures the stock's sensitivity to market movements. It indicates how
much the stock's returns tend to move in relation to the overall market. For this Telus
case, the beta value of 0.75 and its corresponding R-squared value of 0.13 are given to
us on page 3.

Market Return (Rm): The market return represents the expected return on the overall
market. In this case we take the equities (market) geometric average annual returns in
Canada of 10.2%, displayed in exhibit 5. This choice is justified similarly as for risk-free
rate. We are using geometric and Canadian values following the same assumptions as
when we determined the risk-free rate.

𝐾𝑐𝑒 = (0. 06) + (0. 75) * (0. 102 + 0. 06) = 0. 09150

Adding assumed brokerage charges of 0.5%, we get a cost of equity of 9.65%.

3.1.2. ALTERNATIVE COST OF EQUITY

Alternatively, we may also calculate the market cost of debt using the same formula as
the book cost of debt–through using the dividend growth formula, where:

𝐷1 𝐷0*(1+𝑔)
𝑟 = 𝑃0
+ 𝑔= 𝑃0
+𝑔

Expected Constant Growth Rate of Dividends (g): It's the rate at which a company is
anticipated to increase its dividend payments. 'g' is vital for the valuation formula and
can be calculated in two ways:
➔ By averaging the value of dividends per share (DPS) over the past 31 years using
Exhibit 3 (where DPS of common stock is displayed), we find a g equal to
0.05227, or 5.23%.
➔ Using the following formula:

𝑁𝑒𝑡 𝑖𝑛𝑐𝑜𝑚𝑒
𝑔 = 𝑅𝑂𝐸 * 𝑅𝑒𝑡𝑒𝑛𝑡𝑖𝑜𝑛 𝑟𝑎𝑡𝑖𝑜 = ( 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 ) * (1 − 𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑝𝑎𝑦𝑜𝑢𝑡 𝑟𝑎𝑡𝑖𝑜)

11
TELUS COST OF CAPITAL ANALYSIS REPORT 2001

Where ROE is the return on equity, found through the net income divided by
the market value of equity (number of shares times current price per share).
Putting in the numbers found in Exhibit 3:

461 1.4
𝑔 = ( 287 * 41.55 ) * (1 − 41.55
) = 0. 07017

Giving us a g of 7.02%.

Using the g value of 5.23% for instance, we can use the formula:

(1.4)*(1+0.05227)
𝑟 = 41.55
+ 0. 05227 = 0.08773

Giving us a cost of equity of 8.77%.

However, we might not want to use this cost due to the following reasons (given that
we already have a value through CAPM):
➔ It assumes constant and perpetual dividend growth, which may not apply to
Telus.
➔ The dividend growth model does not account for the inherent risks associated
with the company–unlike CAPM–which is a very important metric to miss.
➔ It is debatable whether the r in the dividend growth model should be the WACC
or simply the cost of equity, since dividends tend to depend on the company’s
debt.

3.1.3. COST OF PREFERRED SHARES

Market value of cost of preferred shares can be found in the transcript of the case.
Based on the transcript, the preferred shares had a yield of 5.90% at the time of the
case. Additionally, 0.5% should be added to the 5.90% to account for brokerage costs.
Therefore, the market value cost of preferred shares is 6.40%.

3.2. WEIGHT OF DEBT, EQUITY, AND PREFERRED SHARES

The weight of debt, equity, and preferred shares varies when calculating book values
versus market values. However, the underlying formulas remains the same:

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡

𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦

𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠

𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠

The market value of debt can be calculated with the following formula:

( )
1
1−
(1+𝑘𝑑)
𝑡
𝐹𝑉
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝐶 * 𝑘𝑑
+ 𝑡
(1+𝑘𝑑)

Where C is the total interest expense, kd is the cost of debt, t is weighted average
maturity of short and long-term debts in years, and FV is the total book value of short
and long-term debts.

The equation above uses the cost of debt and weighted average time to maturity of
bonds to bring the future value of debt to present market value of debt.

Based on information provided in the case, the interest expense is $317 million, total
book value of short and long-term debts is $8,361 million. Cost of debt was based on
the book value for cost of debt, 4.01%.

The weighted average time to maturity for debts was calculated assuming a time to
maturity of 1 year for short-term debt, and time to maturity for long-term debts as 15
years, based on information provided in the case.

𝑠ℎ𝑜𝑟𝑡 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡

𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑖𝑚𝑒 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 = 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
* (1 𝑦𝑟.)
𝑙𝑜𝑛𝑔 𝑡𝑒𝑟𝑚 𝑑𝑒𝑏𝑡
+ 𝑡𝑜𝑡𝑎𝑙 𝑑𝑒𝑏𝑡
* (15 𝑦𝑟𝑠.)
5033
𝑊𝑒𝑖𝑔ℎ𝑡𝑒𝑑 𝑎𝑣𝑒𝑟𝑎𝑔𝑒 𝑡𝑖𝑚𝑒 𝑡𝑜 𝑚𝑎𝑡𝑢𝑟𝑖𝑡𝑦 = 8361
* (1 𝑦𝑟.)
3047+281
+ 8361
* (15 𝑦𝑟𝑠.) = 6. 573 𝑦𝑟𝑠.

Weighted average time to maturity, t, is therefore calculated as 6.57 years. Based on

the information above, the market value of debt is calculated as:

( )
1
1−
(1+0.0401)
6.573
8361
𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 = 317 * 0.0401
+ 6.573 = 8257. 25
(1+0.0401)

The subsequent calculated value provides a market value of debt of $8,257.25 million.

Market value of equity can be calculated by multiplying the price per common share
by the number of outstanding common shares:

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑃𝑟𝑖𝑐𝑒 𝑝𝑒𝑟 𝑠ℎ𝑎𝑟𝑒 * 𝑛𝑢𝑚𝑏𝑒𝑟 𝑜𝑓 𝑜𝑢𝑡𝑠𝑡𝑎𝑛𝑑𝑖𝑛𝑔 𝑠ℎ𝑎𝑟𝑒𝑠

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

Based on information provided in the balance sheet and data on Telus stock, the price
per share at the end of the year 2000 was $41.55 and the number of outstanding
shares was $287 mil. Therefore, the market value of equity is $11,925 mil.

Similarly, market value of preferred shares is calculated by multiplying the price per
preferred shares by the number of outstanding preferred shares. However, this
information is not provided in the case. Therefore, the book value of preferred shares,
$70 mil, will be used.

Using the values of debt, equity, and preferred shares, we can calculate their respective
weights:

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡

𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
8257.25
= 8257.25+11924.85+70
= 0. 4077

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦

𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 = 𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
11924.85
= 8257.25+11924.85+70
= 0. 5888

𝑀𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠

𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝑚𝑎𝑟𝑘𝑒𝑡 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦, 𝑙𝑖𝑎𝑏𝑖𝑙𝑖𝑡𝑖𝑒𝑠, 𝑎𝑛𝑑 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠
70
= 8257.25+11924.85+70
= 0. 003456

Based on the above we see that currently Telus is financing its projects with 40.77%
debt, 58.88% equity and 3.46% preferred shares, according to market values.

3.3. WACC CALCULATION

Having the cost and weight of debt, equity, and preferred shares quantified, the WACC
can simply be found through revisiting the following formula:

𝑊𝐴𝐶𝐶 = (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑑𝑒𝑏𝑡) + (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦)

+ (𝐶𝑜𝑠𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠 * 𝑊𝑒𝑖𝑔ℎ𝑡 𝑜𝑓 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠ℎ𝑎𝑟𝑒𝑠)
= (0. 0401 * 0. 4077) + (0. 0965 * 0. 5888) + (0. 064 * 0. 003456) = 0. 07339

Therefore, the WACC, based on a mix of book values and market values, is 7.34%

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TELUS COST OF CAPITAL ANALYSIS REPORT 2001

4. COST AND STRUCTURE ANALYSIS

The WACC, in addition to the financial statements provided by the company and the
case study material, provides good insight into the company’s capital which will be
detailed in the following subsections.

4.1. DEBT TO EQUITY RATIO

The debt-to-equity ratio of Telus Corporation as of the closing of fiscal year 2000 is
60.90% to 38.67%, or roughly 3:2, from the following formula:

𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 5033+3047+281+1326+310

𝐷/𝐸 𝑟𝑎𝑡𝑖𝑜 = 𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑒𝑞𝑢𝑖𝑡𝑦
= 6348
= 1. 575

Hence, the majority of Telus Corporation is currently financed through debt to the
degree of approximately 1.5 times the shareholder’s equity.

Although the ideal debt-to-equity ratio depends on the industry, market, and various
other factors, a ratio of 3:2 is commonly considered a healthy balance. Debt is known
to be generally less costly than equity because it is tax-deductible (which in the case of
Telus, actually dropped the cost of debt from 7.03% to 3.51% (excluding brokerage
charges), or roughly half its original value), whereas the cost of equity is 9.65%, more
than two times the cost of debt.

Telus could increase its proportional debt to reduce the WACC (and generate more
retained earnings), however, at the risk of not being able to pay its liabilities. This
subject is discussed in detail in the next subsection.

4.2. ABILITY TO HANDLE OUTSTANDING DEBT

The debt-to-EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) ratio
and the ICR (Interest Coverage Ratio) indicates how much of a buffer zone Telus has
between having enough earnings to pay off their debt and not being able to at all. The
debt-to-EBITDA ratio is found through:

𝑇𝑜𝑡𝑎𝑙 𝑣𝑎𝑙𝑢𝑒 𝑜𝑓 𝑑𝑒𝑏𝑡 5033+3047+281+1326+310

𝐷/𝐸𝐵𝐼𝑇𝐷𝐴 𝑟𝑎𝑡𝑖𝑜 = 𝑉𝑎𝑙𝑢𝑒 𝑜𝑓 𝐸𝐵𝐼𝑇𝐷𝐴
= 990*
= 10. 10

Note that in this case, we use earnings before taxes, non-controlling interest, and goodwill
amortization as EBITDA*, shown to be $990 mil. The debt-to-EBITDA ratio of Telus is

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currently 10.1, meaning it will hypothetically take Telus more than 10 fiscal years to
pay off its liabilities given they have consistent earnings and no new debt. Generally
speaking, a ratio below 3.0 (or 5.0 at most) is considered acceptable. Telus currently
has an unhealthy debt-to-EBITDA ratio, indicating that its earnings may be too low.
On its own, however, this ratio is not conclusive.

A more important metric, the ICR, is generally found through:

𝐸𝐵𝐼𝑇 990*
𝐼𝐶𝑅 = 𝐼𝑛𝑡𝑒𝑟𝑒𝑠𝑡 𝑒𝑥𝑝𝑒𝑛𝑠𝑒
= 317
= 3. 12

Where, in this case, the interest expense is taken from the income statement to be
$317 mil. We also use the earnings before taxes, non-controlling interest, and goodwill
amortization as the EBIT. This changes the formula in the way that amortization is now
taken into account.* However, the general idea still stands.

Telus has an ICR of 3.12, indicating that the company has enough profit to pay its
annual obligations 3 times over, and so it has a moderately high ability to service its
debt, and is not at risk of bankruptcy. An ICR of at least 2 is generally considered the
minimum acceptable amount, given the company has consistent earnings. Despite
having a high debt-to-EBITDA ratio, the ICR implies that Telus is, in fact, capable of
paying its debts.

To minimize WACC (and get more capital), Telus may consider increasing debt, which
according to what Barb said in the transcript, will most likely happen next year (to the
count of $30 mil). It is, however, not advisable for large sums of debt, considering the
company’s ICR does not leave much room to increase the interest expense. Decreasing
the ICR to 2.0, for instance, would mean Telus’ earnings cannot drop to half by the end
of next year, or it will not be able to pay interest.

All things considered, the current capital structure of Telus is relatively optimal. Its
debt to equity ratio is healthy, and although increasing debt might decrease the cost of
capital, it may pose too much risk in terms of maintaining enough earnings to pay off
debt.

4.3. REQUIRED RATE OF RETURN

Semantically, the “required rate of return” (RRR)–or the premium demanded by

investors–can be viewed from multiple angles. It may be seen as the minimum rate of
return the company needs to achieve to maintain its value. In this case, the required
rate of return is the WACC. Telus’ enterprise value stays the same if it manages to pay
its debts and meet the return expectations of both its creditors and shareholders.

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This means if Telus’ internal rate of return (IRR) is higher than the WACC (which we’ve
established to be 6.05%), the company is growing. If it is lower, it is shrinking. However,
this does not mean the company defaults or fails to pay its investors, it simply means
their value decreases (and possibly their ability to make profit as well).

𝐼𝑅𝑅 ≥ 𝑅𝑅𝑅 = 𝑊𝐴𝐶𝐶

Whether Telus grows matters more to its internal parties than investors. Given the IRR
is the same as the WACC, shareholders for instance, would still receive their expected
dividends (if any), and creditors would be paid without the company making
compromises. However, a decrease in company value is still cause of concern in the
way that it may affect the company’s ability to pay dividends and debt in the future.

This is why for all intents and purposes, Telus should target an IRR of higher than its
WACC to increase its value, for instance, a value around 8%.

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5. CONCLUSION

The costs of capital can be summarized using the following table:

Cost of Debt Cost of Equity Cost of PS*** WACC

Book Value 4.01% 13.57% 6.21% 7.48%

Market Value 4.01%* 9.65%** 6.40% 7.34%

*We are under the assumption that costs of debt are the same (or very similar) between book and market values
**Using CAPM (we also calculated different costs of equity with Dividend Growth)
***PS = Preferred shares

With the following weights:

Weight of Debt Weight of Equity Weight of PS

Book Value 60.90% 38.67% 0.43%

Market Value 40.77% 58.88% 3.46%

One important observation is how the debt-to-equity ratio is vastly different between
the book value and market value, for two possible reasons; (1) we do not have enough
information on the maturity dates of debts to factor into its total market value, and (2)
the market value of equity is very high (around $11,925 mil, almost twice the book
value of equity).

Using book values, with Telus’ current debt-to-equity ratio of around 3:2 and an ICR of
3.12, the company has a moderate amount of room to reduce its capital costs. It is
advisable for the company to issue debt in moderation, but avoid increasing debt by
too much to reduce risk of not being able to pay them (given current earnings).

With a WACC of around 7%, Telus may also consider aiming for an internal rate of
return (IRR) of around the 8%-10% range or more to increase its enterprise value.

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6. REFERENCES

1. Telus: Cost of Capital - Ivey case, Richard Ivey School of Business, The
University of Ontario
2. Stephen A. Ross, Randolph W. Westerfield, Bradford D. Jordan, Gordon S.
Roberts - Fundamentals of Corporate Finance-McGraw-Hill Ryerson (2013)
3. BusinessInsider.com - Book Value vs Market Value
4. Investopedia.com - Market Value and it's importance
5. Wikipedia.com - Telus Corporation
6. “Market Value of Debt.” Corporate Finance Institute, 13 Oct. 2023,
corporatefinanceinstitute.com/resources/fixed-income/market-value-of-debt/.

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