(a) How much interest expense did AT&T incur during 2010?

(b) What is the book value of AT&T's interest-bearing debt at the end of 2010

(c) Estimate AT&T's 2010 pretax cost of debt capital. (Round your answer to one decimal place.)

(d) Estimate AT&T's 2010 effective (that is, average) tax rate from information in its income statement. (Round your answer to one decimal place.)

(e)Using your rounded answer from (c) above, estimate AT&T's 2010 after-tax cost of debt capital. The company's statutory tax rate is: 35% (Round your answer to one decimal place.)

Chapter 12 Homework Cornelius Popoola ACC53:010:565:90-Sean Stein Smith My Subscriptions/My courses/ACC53:010:565:90-Sean Stein Smith/Module 12/Chapter 12 Homework QUESTION 2 Not complete Points out of 11.00 Flag question 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 2010 $ 53,510 Voice 28,315 Data 27,479 Directory Other Total operating revenues Operating expenses 3,935 11,041 124,280 Cost of services and sales 52,263 Selling, general and administrative 33,065 Depreciation and amortization 19,379 Total operating expenses Operating income Other income (expense) Interest expense 104,707 19,573 (3,094) Equity in net income of affiliates 762 Other income, net 897 Total other income (expense) (1,435) Income from continuing operations before income taxes 18,138 Income tax (benefit) expense (1,262) Income from continuing operations 19,400 https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1132678&page=1[4/9/2017 6:03:47 PM] Chapter 12 Homework 779 Income from discontinued operations, net of tax Net income $ 20,179 Consolidated Balance Sheets -- Liabilities and Equity Sections Dollars in millions except per share amounts, December 31 2010 2009 Current liabilities $ 8,196 $ 8,361 Accounts payable and accrued liabilities 19,055 20,260 Advanced billed and customer deposits 4,086 4,170 72 1,681 2,542 2,479 Total current liabilities 33,951 36,951 Long-term debt 58,971 64,720 Deferred income taxes 22,070 23,579 Postemployment benefit obligation 28,803 27,847 Other noncurrent liabilities 12,743 13,226 Total deferred credits and other noncurrent liabilities 63,616 64,652 6,495 6,495 Additional paid-in capital 91,731 91,707 Retained earnings 31,792 21,944 (21,083) (21,260) 2,712 2,678 303 425 111,950 101,989 Debt maturing within one year Accrued taxes Dividends payable Deferred credits and other noncurrent liabilities Stockholders' equity Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2010 and 2009; issued 6,495,231,088 at December 31, 2010 and 2009) Treasury stock (584,144,220 at December 31, 2010 and 593,300,187 at December 31, 2009, at cost) Accumulated other comprehensive income Noncontrolling interest Total stockholders' equity Total liabilities and stockholders' equity Consolidated Statements of Stockholders' Equity -- Excerpts $ 268,488 $ 268,312 2010 Amount in millions except per share amounts, December 31 Shares Amounts Common Stock Balance at beginning of year 6,495 $ 6,495 https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1132678&page=1[4/9/2017 6:03:47 PM] Chapter 12 Homework -- -- 6,495 $ 6,495 Treasury Shares Issuance of shares Balance at end of year Balance at beginning of year (593) $ (21,260) Purchase of shares -- -- Issuance of shares 9 177 (584) (21,083) Retained Earnings Balance at beginning of year $ 21,944 Net income ($3.35 per share) 19,864 Dividends to stockholders ($1,69 per share) (9,985) Other (31) Balance at end of year $ 31,792 Balance at end of year (a) How much interest expense did AT&T incur during 2010? $ 0 million (b) What is the book value of AT&T's interest-bearing debt at the end of 2010? $ 0 million At the beginning of 2010? $ 0 million Average debt for 2010? $ 0 million (c) Estimate AT&T's 2010 pretax cost of debt capital. (Round your answer to one decimal place.) 0 % (d) Estimate AT&T's 2010 effective (that is, average) tax rate from information in its income statement. (Round your answer to one decimal place.) https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1132678&page=1[4/9/2017 6:03:47 PM] Chapter 12 Homework 0 % (e) Using your rounded answer from (c) above, estimate AT&T's 2010 after-tax cost of debt capital. The company's statutory tax rate is: 35% (Round your answer to one decimal place.) 0 % Why is appropriate to use the company's statutory rate for computing its cost of debt capital? Choose all that apply The statutory rate should be used because interest expense is deductible for tax purposes and therefore the after-tax cost of debt should be lower than the pretax cost. Using the effective rate in this case would inflate the true cost of borrowing. We should actually use an average rate using the statutory rate and the effective rate. The effective rate should always be used. Check Previous page Next page Save Answers ASSIGNMENT NAVIGATION 1 2 3 4 7 8 9 10 5 6 Finish attempt ... Copyright 2017 Cambridge Business Publishers , All Rights Reserved | Terms of Use | Privacy Policy | Return Policy | User Guide | Browser Support https://mybusinesscourse.com/platform/mod/quiz/attempt.php?attempt=1132678&page=1[4/9/2017 6:03:47 PM]