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Financial Accounting of Companies


Contents Question 1: Major factors that influence the privatization of Telstra.. 2 (a)     To reduce Government Debts and Interest Payments. 2 (b)     To Fund Environmental & Wildlife Project...Read More


~Posted on Mar 2018

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Contents Question 1: Major factors that influ...

Contents

Question 1: Major factors that influence the privatization of Telstra.. 2

(a)     To reduce Government Debts and Interest Payments. 2

(b)     To Fund Environmental & Wildlife Projects. 2

(c)      To Reduce Monopoly in Telecommunication Industry. 2

(d)     To Promote Technology Advancement 2

(e)      To Increase Efficiency. 2

Question 2: Reason for choosing Installment-Payment and Book-Building Method along with its drawbacks. 2

Reason for choosing Installment-Payment and Book-Building Method.. 2

(i)    Installment-Payment Approach.. 3

(ii)       Book-Building Approach.. 3

Drawbacks of Installment-Payment and Book-Building Approach.. 3

(i)    Installment-Payment Method.. 3

(ii)       Book-Building Method.. 4

Question 3:  Differentiation of Telstra 1 and Telstra 2 share issue strategy. 4

References. 5

 

 


 

Question 1: Major factors that influence the privatization of Telstra

(a) To reduce Government Debts and Interest Payments

The Australian Government was under financial pressure due to the economic crises in the region and the government believes that the potential privatization will generate substantial funds which would help them to pay-off their debts and ease the financial burden of the country. Further, the government also believes that privatization will improve the quality of decision because of the lack of political interference in decision making process (Quiggin, 1996).

(b) To Fund Environmental & Wildlife Projects

The Coalition Government was much more concerned about the environmental influences and wildlife projects which increased their interest to privatize the company. The privatization of Telstra generated A$8 billion, out of which A$1 billion were used to fund environmental and wildlife projects. It will improve the living standard of the country and motivates their peoples that they are living in a healthy environment (Quiggin, 1996).

(c) To Reduce Monopoly in Telecommunication Industry

One of the fundamental aspects of the privatization of Telstra was to reduce the monopoly in telecommunication industry and to promote a perfect competition.  It will not only reduce the prices of the offered product but will also enhance the quality of service as well. Further, the government also believes that it will bring foreign investments which will boost economy and generate employment opportunities (Whitfield & Dexter, 1992).

(d) To Promote Technology Advancement

The subscribers believed that the new entrants will bring new technology and expertise which will enhance customer service and helps company to compete across the globe. The government believes that new technology will save time, promote convenience and encourage corporate & normal consumers to operate in an efficient manner (Whitfield & Dexter, 1992).

(e) To Increase Efficiency

The government believes that the operations of Telstra were not conducted in an efficient manner due to excessive political involvement and privatization would resolve this issue and enable the company to operate in an efficient manner. Further, they also believe that the potential privatization will convert the inefficient monopolies to competitive market through reduction of substantial expenses and investment in profit making projects (Whitfield & Dexter, 1992).

Question 2: Reason for choosing Installment-Payment and Book-Building Method along with its drawbacks

Reason for choosing Installment-Payment and Book-Building Method

The basic objective of Commonwealth Government behind using installment-payment and book-building approach for the issue of shares are to attract potential investors and to determine the exact price of the share. Some of the reasons for using the respective approach are given below.

(i)           Installment-Payment Approach

(a) Cost-Effective Approach

Installment-payment is a cost effective approach where investors are initially entitled to pay only small portion of current share price and the remaining portion will be paid at later date (Schmidt, 1996).  Telstra selected an initial installment of A$1.95 per share followed by final payment of A$1.35 per share. This will ease the buying capacity of the subscriber.

(b) High Dividend-Yield

Installment-payment enables shareholders to receive full dividend at the cost of partial investment which attracts potential investors and encourages them to invest in the company (Schmidt, 1996).

(c) No Underlying Obligation

Investors in Installment-payment approach are not entitled to make final payment at the expiry which limits their losses to the initial payment. Further, the shares are liquidate in nature and traded in stock exchange where investors can sale before its maturity.

(ii)          Book-Building Approach

(a) Transparency in Pricing

In a book-building approach, the issuer sets a range of prices within which the potential investors are requested to bid. Such range is based on the value of company and trading pattern of comparable entities which will help potential investors to appropriately determine the exact price of the enterprise (Schmidt, 1996).

(b) Investor’s Participation in Price Finding Mechanism

In a public offering, it is very difficult to analyze the appropriate price of the enterprise but book-building approach helps to get an exact price of the enterprise (Schmidt, 1996). It involves the analysis of different potential investors which have exerted different assumptions to determine the actual price of enterprise.

(c) Low Cost and Less Time Taking Strategy

Book-building is a relatively less costly and low time taking strategy which would tend the Australian Government to easily access the funds at low cost (Chong and Galdo, 2002).

Drawbacks of Installment-Payment and Book-Building Approach

(i)           Installment-Payment Method

(a) Artificial Demand

Installment- Payment method artificially increases the demand of the shares when the company is about to announce dividend and reduces the share price when the final installment is due. It restricts shareholders to analyses the exact value of the enterprise (Chong and Galdo, 2002).

(b) The Price may be over valued

The installment payment method is used to attract the potential investors to pay in installments. The accumulated price of the share may be overvalued but it may seem reasonable due to first installment and dilute the decision of potential shareholder (Ferner and Colling, 1991).

(ii)          Book-Building Method

(a) Limits Control towards Small Number of Shareholders

Book-Building method targets limited audience which restricts the control towards limited number of shareholders. In order to avoid this, the Australian government exerts excessive restrictions on the allocation of shares to ensure that control is diverted among excessive shareholders. It limits the maximum allocation to single shareholder to 2% of total issued shares and limits the foreign investment to 11.67% of available shares.

(b) Restricted Analysis in Determining Share Value

The Book-Building process requests small number of institutional investors to bid within limited range set by the company. It restricts the pricing analysis towards limited number of shareholders and raises difficulty in determining the actual price of enterprise.

Question 3:  Differentiation of Telstra 1 and Telstra 2 share issue strategy

Telstra 1 share issue strategy achieves a tremendous success which helped both the general public and Commonwealth Government. Funds raised from the share issue strategy were used to pay-off government debts and to fund the environment and wild life projects. Telstra privatization removes the regulatory measures on telecom industry which attracted foreign investments and tends them to implement them a radical structure change which improves the efficiency of telecom industry (Quiggin, 1996).

Telstra 2 share issue strategy did not obtained that success as it had been achieved in Telstra 1 share issue because the company was facing increased competition from new entrants which significantly affected the share price of the company. Further, the company had also invested in some poorly performing projects which threatened the desired results from the investment (Quiggin, 1996).

The pattern of outcome was not consistent in the share issue process. Telstra was previously a single dominating telecom company in Australia which attracted the potential buyers in Telstra 1 share issue strategy but as long as new entrants entered into market, it eliminates the dominancy of the company and attract potential buyers towards other companies in the industry.


 





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