Mobile Telephony Cellular Service Essay

Pages: 10 (2630 words)  ·  Bibliography Sources: 20  ·  File: .docx  ·  Level: College Senior  ·  Topic: Business

SAMPLE EXCERPT . . .
4 million.

Half of all phone connections in UK are now wireless.

75% of UK households have access to a wireless phone.

UKs send 154 million text messages per day.

Each year, UKs place more than 6 million calls to 9-1-1 or emergency numbers from their mobile phones.

Wireless revenues in UK totalled £16.9 billion in 2009.

Wireless market sector revenues are the largest component (41%) of total telecommunications revenues

REQUIRED RETURN, RISK, CAPM

The Capital Asset Pricing Model (CAPM) is an economic model for valuing stocks, securities, derivatives and/or assets by relating risk and expected return. CAPM is based on the idea that investors demand additional expected return (called the risk premium) if they are asked to accept additional risk.

The CAPM model says that this expected return that these investors would demand is equal to the rate on a risk-free security plus a risk premium. If the expected return does not meet/beat the required return, the investors will refuse to invest and the investment should not be undertaken.

The CAPM formula is:

Expected Security Return = Riskless Return + Beta x (Expected Market Risk Premium)

or:

r = Rf + Beta x (RM - Rf)

Where:

- r is the expected return rate on a security;

- Rf is the rate of a "risk-free" investment, i.e. cash;

- RM is the return rate of the appropriate asset class.

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Beta is the overall risk in investing in a large market, like the New York Stock Exchange. Beta, by definition equals 1, 00000 exactly. Market Beta is considered 1.

Each company also has a Beta. A company's Beta is that company's risk compared to the Beta (Risk) of the overall market. Beta measures the volatility of the security, relative to the asset class.

Calculation of Beta:

Beta was calculated beta by using the market return and the return of stocks.

Return on stock % = ((Ending price -- Beginning Price) / beginning price)*100

Essay on Mobile Telephony Cellular Service Was Assignment

Market risk was calculated with a data of the S&P/TSX for the duration of 5 years. The standard deviation of the return of S&P/TSX over the time period is the market risk ?m . The covariance of the market return and the stock return was found out for the each individual stock. Stock beta was calculated from the covariance of market return and individual stock return and the market risk ?m. The formula for the beta is, I = COV i, M / ?m2

The calculations of the co variances and beta are shown in the table

VODAFONE

O2

ROGERS

BETA

0.389

0.469

0.53

Refer to Appendix 3 for calculation of beta

Calculation of Required rate of Return:

The required rate of return of the stock is calculated by CAPM. The risk free rate used was a 5-Year Treasury Note rate. The market return was the average of the return of S&P/TSX from 2005 to 2010 i.e return of the market over a 5-year time period.

Risk Free rate = 3.07%

Market return = 8.40%

The required rate of return for the each firm was found to be

VODAFONE

O2

ROGERS

Required Rate of Return

5.15%

5.57%

5.91%

Refer to appendix 3

STOCK VALUATION

In financial markets, there are several methods used to calculate theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally potential market prices. The most theoretically sound stock valuation method, called income valuation or the discounted cash flow (DCF) method, involves discounting of the profits (dividends, earnings, or cash flows) the stock will bring to the stockholder in the foreseeable future, and a final value on disposition. The estimated stock price was calculated using a constant growth rate model. The growth rate for each individual firm was calculated using ROE dividend payout ratio model and EPS growth rate over the past 5 years. The estimated stock price of the individual stocks was calculated using the formulae

P0 = D1 / (Rs-g)

D1 = expected dividend after 1 year.

Rs = expected rate of return on individual stock.

g = Growth rate of the dividend.

P0 = Expected value of the stock.

VODAFONE

O2

ROGERS

Estimated Price

£45.09

£32.52

£36.51

Refer to Appendix 4

COST OF CAPITAL

The cost of capital is the cost of a company's funds (both debt and equity), or, from an investor's point-of-view "the expected return on a portfolio of all the company's existing securities. It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. The cost of capital determines how a company can raise money (through a stock issue, borrowing, or a mix of the two). This is the rate of return that a firm would receive if it invested in a different vehicle with similar risk.

WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances. A firm's WACC is the overall required return on the firm as a whole and, as such, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers.

The Cost of debt was calculated using a AAA rated corporate bonds of the individual firms. The cost of equity is the expected return on the individual stock calculated using CAPM. The WACC of the three firms was found out to be

VODAFONE

O2

ROGERS

Cost of Capital

4.21%

3.95%

3.00%

Refer to appendix 5

CAPITAL STRUCTURE

A mix of a company's long-term debt, specific short-term debt, common equity and preferred equity. The capital structure is how a firm finances its overall operations and growth by using different sources of funds. Debt comes in the form of bond issues or long-term notes payable, while equity is classified as common stock, preferred stock or retained earnings. Short-term debt such as working capital requirements is also considered to be part of the capital structure. A company's proportion of short- and long-term debt is considered when analyzing capital structure. When people refer to capital structure they are most likely referring to a firm's debt-to-equity ratio, which provides insight into how risky a company is. Usually a company more heavily financed by debt poses greater risk, as this firm is relatively highly levered. The capital structure for the companies being evaluated are shown below.

VODAFONE

O2

Long-Term Debt

6,090,000

10,299,000

Debt due in 5 yrs

14,40,000

4,786,000

Total Debt

6,234,000

15,085,000

Preferred Stock

1,00,000,000

2,770,000

Common Stock

7,554,000

12,741,000

Appendix 1

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