Estimating Cost of Debt Capital Assume the December 31, 2010, partial financial statements taken from the...

 

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Estimating Cost of Debt Capital Assume the December 31, 2010, partial financial statements taken from the annual report for AT&T (T) follow. Consolidated Statements of Income Dollars in millions Operating revenues Wireless service Voice Data Directory Other Total operating revenues Operating expenses Cost of services and sales Selling general and administrative Depreciation and amortization Total operating expenses Operating income Other income (expense) Interest expense Equity in net income of affiliates Other income, net Total other income (expense) Income from continuing operations before income taxes Income tax (benefit) expense Income from continuing operations Income from discontinued operations, net of tax Net income Current liabilities Debt maturing within one year Accounts payable and accrued liabilities Advanced billed and customer deposits Accrued taxes Dividends payable Total current liabilities Long-term debt Deferred credits and other noncurrent liabilities Deferred income taxes 2010 Accumulated other comprehensive income Noncontrolling interest Total stockholders' equity Total liabilities and stockholders' equity $53,510 28,315 27,479 3.935 11,041 124,280 52,263 33,065 19,379 104,707 19,573 Consolidated Balance Sheets -- Liabilities and Equity Sections Dollars in millions except per share amounts, December 31 (3.094) 762 897 (1,435) 18,138 (1,262) 19,400 779 $ 20,179 Postemployment benefit obligation Other noncurrent liabilities Total deferred credits and other noncurrent liabilities Stockholders' equity Common stock ($1 par value, 14,000,000,000 authorized atDecember 31, 2010 and 2009: issued 6,495.231,088 atDecember 31, 2010 and 2009) Additional paid-in capital Retained earnings Treasury stock (584,144,220 at December 31, 2010 and 593,300,187 at December 31, 2009, at cost) 2010 2009 $ 8.196 19.055 $ 8.361 20,260 4,086 4,170 72 1.681 2.542 2,479 33.951 36.951 58,971 64,720 22,070 28.803 12.743 63.616 23.579 27.847 13,226 64.652 6,495 6,495 91,731 91,707 31,792 21,944 (21,083) (21,260) 2.712 2.678 425 303 111,950 101,989 $ 268,488 $ 268,312 Consolidated Statements of Stockholders' Equity-Excerpts Amount in millions except per share amounts, December 31 Shares Amounts Common Stock Balance at beginning of year Issuance of shares Balance at end of year Treasury Shares Balance at beginning of year Purchase of shares Issuance of shares Balance at end of year Retained Earnings Balance at beginning of year Net income ($3.35 per share) Dividends to stockholders ($1.69 per share) Other Balance at end of year In early 2011, Yahoo reports that AT&T has a market beta of and that its closing stock price at the end of 2010 was: AT&T's statutory tax rate is: 2010 6,495 6,495 $6.495 0.65 $30.38 35% $ 6,495 (593) $ (21.260) 9 177 (584) (21,083) $ 21,944 19.864 (9.985) (31) $ 31,792 (a) Explain what AT&T's market beta implies regarding its stock price volatility. It implies that the stock of AT&T is a very volatile stock. O It implies that the stock of AT&T is a very stable stock. ✔ It implies that the stock of AT&T moves the same as the market index. (b) Assume the market premium equals: 5.2% and that the risk-free rate equals: 3.1% Estimate AT&T's cost of equity capital using the CAPM model. (Round to one decimal place.) 3.3 % (c) Footnote 8 of AT&T's 10-K reports that the market value of its debt approximates its book value of $67,167 million. Assume that AT&T's after tax cost of debt is 2.81%. Using this information, estimate AT&T's weighted average cost of capital. Round your computation for the intrinsic value of equity to nearest million; then do not round until your final answer. Round final answer to one decimal place. WACC = 0 * % Estimating Cost of Debt Capital Assume the December 31, 2010, partial financial statements taken from the annual report for AT&T (T) follow. Consolidated Statements of Income Dollars in millions Operating revenues Wireless service Voice Data Directory Other Total operating revenues Operating expenses Cost of services and sales Selling general and administrative Depreciation and amortization Total operating expenses Operating income Other income (expense) Interest expense Equity in net income of affiliates Other income, net Total other income (expense) Income from continuing operations before income taxes Income tax (benefit) expense Income from continuing operations Income from discontinued operations, net of tax Net income Current liabilities Debt maturing within one year Accounts payable and accrued liabilities Advanced billed and customer deposits Accrued taxes Dividends payable Total current liabilities Long-term debt Deferred credits and other noncurrent liabilities Deferred income taxes 2010 Accumulated other comprehensive income Noncontrolling interest Total stockholders' equity Total liabilities and stockholders' equity $53,510 28,315 27,479 3.935 11,041 124,280 52,263 33,065 19,379 104,707 19,573 Consolidated Balance Sheets -- Liabilities and Equity Sections Dollars in millions except per share amounts, December 31 (3.094) 762 897 (1,435) 18,138 (1,262) 19,400 779 $ 20,179 Postemployment benefit obligation Other noncurrent liabilities Total deferred credits and other noncurrent liabilities Stockholders' equity Common stock ($1 par value, 14,000,000,000 authorized atDecember 31, 2010 and 2009: issued 6,495.231,088 atDecember 31, 2010 and 2009) Additional paid-in capital Retained earnings Treasury stock (584,144,220 at December 31, 2010 and 593,300,187 at December 31, 2009, at cost) 2010 2009 $ 8.196 19.055 $ 8.361 20,260 4,086 4,170 72 1.681 2.542 2,479 33.951 36.951 58,971 64,720 22,070 28.803 12.743 63.616 23.579 27.847 13,226 64.652 6,495 6,495 91,731 91,707 31,792 21,944 (21,083) (21,260) 2.712 2.678 425 303 111,950 101,989 $ 268,488 $ 268,312 Consolidated Statements of Stockholders' Equity-Excerpts Amount in millions except per share amounts, December 31 Shares Amounts Common Stock Balance at beginning of year Issuance of shares Balance at end of year Treasury Shares Balance at beginning of year Purchase of shares Issuance of shares Balance at end of year Retained Earnings Balance at beginning of year Net income ($3.35 per share) Dividends to stockholders ($1.69 per share) Other Balance at end of year In early 2011, Yahoo reports that AT&T has a market beta of and that its closing stock price at the end of 2010 was: AT&T's statutory tax rate is: 2010 6,495 6,495 $6.495 0.65 $30.38 35% $ 6,495 (593) $ (21.260) 9 177 (584) (21,083) $ 21,944 19.864 (9.985) (31) $ 31,792 (a) Explain what AT&T's market beta implies regarding its stock price volatility. It implies that the stock of AT&T is a very volatile stock. O It implies that the stock of AT&T is a very stable stock. ✔ It implies that the stock of AT&T moves the same as the market index. (b) Assume the market premium equals: 5.2% and that the risk-free rate equals: 3.1% Estimate AT&T's cost of equity capital using the CAPM model. (Round to one decimal place.) 3.3 % (c) Footnote 8 of AT&T's 10-K reports that the market value of its debt approximates its book value of $67,167 million. Assume that AT&T's after tax cost of debt is 2.81%. Using this information, estimate AT&T's weighted average cost of capital. Round your computation for the intrinsic value of equity to nearest million; then do not round until your final answer. Round final answer to one decimal place. WACC = 0 * %

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Answer The computation is shown below a As it is mentioned that the ATT has market beta o... View the full answer