Valuation of British Telecom 1984

Methodology

We used the DCF method to value BT. This is based on the fact that BT is a relatively stable business with cash flows that can be forecast and a terminal value that can be easily calculated. We did not find the use of comparables a valid choice as these numbers could be grossly misleading due to differences in geographic location of the companies, level of gearing, and capital employed.

Estimating value of the company

To calculate the WACC, we made the following assumptions:

• Market premium is 5%

• Tax rate is 35%

• D/E = 50% (Lecture Note 4, part 2.2, Table, BT Proposed, market gearing)

o D/V = 4/12 = 33.3% ; E/V = 8/12 = 66.7%

• βa = 0.75 (from the literature )

• Risk free rate = 10.6% (from the case: rate at which government is able to borrow)

We found the use of a beta from the literature to be more accurate than the beta of a comparable,