Estimating Cost of Debt Capital Assume the December 31, 2010, partial financial statements taken from the...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
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 * %
Expert Answer:
Answer rating: 100% (QA)
Answer The computation is shown below a As it is mentioned that the ATT has market beta o... View the full answer
Related Book For
Posted Date:
Students also viewed these finance questions
-
Muscarella Inc. has the following balance sheet and income statement data: $ 14,000 Accounts payable Other current liabilities 70,000 210,000 Total CL $294,000 Long-term debt 126,000 Common equity...
-
Use Table 1 noted below to answer questions 9 and 10 The table below provides data on the price of hot chocolate the temperature and the number of cups a week
-
Peppers Lockdown produces keys for homes and cars. As Peppers is planning for next year's production, he decided to implement a high-low system to forecast future costs. With total production of...
-
Refer to Data Set 19 in Appendix B, and use the volumes and weights of regular Coke. Does there appear to be a correlation between volume and weight? What else is notable about the arrangement of the...
-
4. Given: f(x)= = 2+1 Find the critical numbers, the intervals on which f(x) is increasing or decreasing, and the local extrema.
-
A Mrs T Hulley is paid monthly. For part of April 19X6 she earns 860 and then goes on maternity leave, her maternity pay for April being 90. She has pay free of tax 320, whilst on the next 250 she...
-
John Fuji (age 37) moved from California to Washington in December 2013. He lives at 468 Cameo Street, Yakima, WA 98901. Johns Social Security number is 571785974 and he is single. His earnings and...
-
On January 2, 2018, Killeen Nurseries Inc. bought 5% of Creasote's capital stock for $103 million. Creasotes's net income for the year ended December 31, 2018, was $133 million. The fair value of the...
-
Are middle-class families more likely than working- class families to maintain contact with kin? Write a paragraph summarizing the results of these tests. a. A sample of middle-class families...
-
Monitoring of Receivables The Russ Fogler Company, a small manufacturer of cordless telephones, began operations on January 1 . Its credit sales for the first 6 months of operations were as follows:...
-
What are the major contingency factors of organizational design? How are they related to each other? Discuss modern examples of each contingency factor.
-
Perfect Products Co. applied for a substantial bank loan from Capitol City Bank. In connection with its application. Perfect engaged William & Co., CPAs, to audit its financial statements. William...
-
Dodd, CPA, audited Adams Company's financial statements for the year ended December 31,19X8. On November 1,19X9, Adams notified Dodd that it was changing auditors and that Dodd's services were being...
-
What are the characteristics of defender, prospector, analyzer, and reactor organizations? What types of environment does each organizational form best fit? What are the unique qualities of a reactor...
-
Kent, CPA, is engaged in the audit of Davidson Corp.'s financial statements for the year ended December 31,19X9. Kent is about to commence auditing Davidson's employee pension expense, but Kent's...
-
In which section of the classified balance sheet would youfind a note payable due in six months? OA. common stock OB. currentassets C. current liabilities OD. noncurrent liabilities 1 answer
-
Find the cross product a x b and verify that it is orthogonal to both a and b. a = (t, 1, 1/t), b = (t 2 , t 2 , 1)
-
The city and highway gas mileages (in miles per gallon) of all cars are described by the histograms in Fig 142 and Fig 143, respectively. Fig. 142 Fig. 143 a. Describe the shapes of the...
-
-3 minus the quotient of 8 and the number Let x be a number. Translate the English phrase or sentence into a mathematical expression. Then evaluate the expression for x = -4.
-
Some 213.9 million pounds of fireworks were used in the United States in 2009, and that amount decreased by about 20.1 million pounds per year until 2013 (Source: American Pyrotechnics Association)....
-
Draw up a consolidated balance sheet as at 31 December 2007 from the following: At the balance sheet date, Child owes Parent 3,200. During the year Parent sold goods which had cost 6,000 to Child for...
-
You are to draw up a consolidated balance sheet as at 31 December 2005 from the following: At the balance sheet date, Son 1 owed Pa and Mum 2,500 and Son 2 1,100, and Pa and Mum owed Son 2 2,100. Pa...
-
You are presented with the following information from the Seneley group of companies for the year to 30 September 2006: Additional information: (a) The authorised, issued and fully paid share capital...
Study smarter with the SolutionInn App