TELUS Corporation Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

TELUS Corporation Case Study Solution

The justification for TELUS downgrade:

The following are justified reasons for TELUS downgrade:

The general outlook of the telecom industry was not up to the mark after the scandal portrayed by world com telecommunication, by this scenario the economy faces slowdown and causes credit rating agencies to get critical in determining the rating of the companies with respect tocreditworthiness.
The public debt that has been raised by TELUS was not a good move that they have obtained to replace the short-term debt borrowed to finance Clearnet.
The declaration made by TELUS was not fulfilled by the company to maintain its total net debt to capital i.e. 50 % as per the stated figures, during 2002, the debt percentage of total capital has increased to 58.6 %. It means that they have failed to maintain the intended target of debt/capital ratio.
The company has faced many cash flows issues, challenges that havebeen faced by the company including the difficulty level in obtaining bank credit facility, the cash flows after interest taxes and dividend are not sufficient enough to repay the marginal debts.
Loads of debt obtained by the company to enhance the fiber optic network did not work well, the project did not provide benefits but increases their debt/capital ratio.
The ultimate reduction in EBITDA had also made the decisions easy for the agency; the EBITDA was continuously on decreasing trend.

Question no. 2:

The amount calculated in the excel sheets represents the amount of debt that can be reduced by issuing 30 million shares at discount of 6.25, the current market price is taken at 8 per share, and the discount is calculated. The proposed action of issuing shares on discount would not be able to relax the debt burden of the company, the shares i.e. the total 30 million shares that have been issued on discount of 6.2 % will eventually decrease the debt burden by 225.7 million approx. issuing 30 million shares at the discounted price would not contribute to ensuring the proposed venture of the company.

The question no 3:

The target for attaining less than 3 times debt to EBITDA ratio would not be achieved following the scenario proposed to McFarlane, the ratio is not less than 3 in 2003 and also the target is not achieved in 2004 as well. in order to make the ratio as per the criteria and requirement of the company the proposed scenario should be followed as described in question number 5 (refer excel sheets).

Question no. 4:

The EPS calculated on the basis of pro forma figures, after reducing the debt and using the proceeds of equity to retire bond is 1.54. (Refer excel sheets).

TELUS Corporation Harvard Case Solution & Analysis

Question no. 5:

The proposed action that should be taken by Mc Farlane is described in the excel calculation. By following that action plan, the debt of the company will be reduced, and the company will eventually get established and on a targeted 50% debt/ total capital ratio of after the year 2004, the proposed plan and assumptions taken are described below:

The share market price should increase by 25%, to ensure this company should make efforts to improve its operational activities and general performance.
The common shares must be not less than 30%.
There should be net income increment up to 5% every year to deal with the debt crises.
There should be additional 20 millions of shares issue per year, either by any stock option scheme or any public offering, this would make the company be in a stable condition.
The liquidity criteria can also be fulfilled by issuing additional shares and starting some new ventures.
The WACC taken is assumed.
The change in free cash flows would be negative during the years 2002 and 2003, eventually change in free cash flows will become positive, and the debt burden will decrease, this will make the ratio of debt/capital up to 50% in the financial year 2004.

Additionally, another option that is available to the company is merger option. They can go for the merger with such a company that is not financially leveraged; it would eventually neutralize the debt effect between the two, making the credit ratings of the company better...................

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