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 $2010$

Operating revenues

Wireless service $ $53,510$

Voice $28,315$

Data $27,479$

Directory $3,935$

Other $11,041$

Total operating revenues $124,280$

Operating expenses

Cost of services and sales $52,263$

Selling, general and administrative $33,065$

Depreciation and amortization $19,379$

Total operating expenses $104,707$

Operating income $19,573$

Other income $($expense$)$

Interest expense $(3,194)$

Equity in net income of affiliates $762$

Other income, net $897$

Total other income $($expense$)(1,535)$

Income from continuing operations before income taxes $18,038$

Income tax $($benefit$)$ expense $(1,362)$

Income from continuing operations $19,400$

Income from discontinued operations, net of tax $779$

Net income $ $20,179$

Consolidated Balance Sheets $--$ Liabilities and Equity Sections

Dollars in millions except per share amounts, December $3120102009$

Current liabilities

Debt maturing within one year $ $9,196$ $ $9,361$

Accounts payable and accrued liabilities $18,05519,260$

Advanced billed and customer deposits $4,0864,170$

Accrued taxes $721,681$

Dividends payable $2,5422,479$

Total current liabilities $33,95136,951$

Long$-$term debt $58,97164,720$

Deferred credits and other noncurrent liabilities

Deferred income taxes $22,07023,579$

Postemployment benefit obligation $28,80327,847$

Other noncurrent liabilities $12,74313,226$

Total deferred credits and other noncurrent liabilities $63,61664,652$

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 $2009)6,4956,495$

Additional paid$-$in capital $91,73191,707$

Retained earnings $31,79221,944$

Treasury stock $(584,144,220$ at December $31,2010$ and$593,300,187$ at December $31,2009,$ at cost$)(21,083)(21,260)$

Accumulated other comprehensive income $2,7122,678$

Noncontrolling interest $303425$

Total stockholders' equity $111,950101,989$

Total liabilities and stockholders' equity $ $268,488$ $ $268,312$

Consolidated Statements of Stockholders' Equity $--$ Excerpts $2010$

Amount in millions except per share amounts, December $31$ Shares Amounts

Common Stock

Balance at beginning of year $6,495$ $ $6,495$

Issuance of shares $----$

Balance at end of year $6,495$ $ $6,495$

Treasury Shares

Balance at beginning of year $(593)$ $ $(21,260)$

Purchase of shares $----$

Issuance of shares $9177$

Balance at end of year $(584)(21,083)$

Retained Earnings

Balance at beginning of year $ $21,944$

Net income $($$$3\mathrm{.}35$ per share$)19,864$

Dividends to stockholders $($$$1,69$ per share$)(9,985)$

Other $(31)$

Balance at end of year $ $31,792$

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

$Answer $1$

million

$($b$)$ What is the book value of AT&T$\text{'}$s interest$-$bearing debt at the end of $2010?$

$Answer $2$

million

At the beginning of $2010?$

$Answer $3$

million

Average debt for $2010?$

$Answer $4$

million

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

Answer $5$

$\%$

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

Answer $6$

$\%$

$($e$)$ Using your rounded answer from $($c$)$ above, estimate AT&T$\text{'}$s $2010$ after$-$tax cost of debt capital. The company's statutory tax rate is: $33\%($Round your answer to one decimal place.$)$

Answer $7$

$\%$

Why is appropriate to use the company's statutory rate for computing its cost of debt capital? Choose all that apply

Answer $8$

Using the effective rate in this case would inflate the true cost of borrowing.

Answer $9$

We should actually use an average rate using the statutory rate and the effective rate.

Answer $10$

The effective rate should always be used.

Answer $11$

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.