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	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	(2,994)
Equity in net income of affiliates	762
Other income, net	897
Total other income (expense)	(1,335)
Income from continuing operations before income taxes	18,238
Income tax (benefit) expense	(1,162)
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 31	2010	2009
Current liabilities
Debt maturing within one year	$ 7,196	$ 7,361
Accounts payable and accrued liabilities	20,055	21,260
Advanced billed and customer deposits	4,086	4,170
Accrued taxes	72	1,681
Dividends payable	2,542	2,479
Total current liabilities	33,951	36,951
Long-term debt	58,971	64,720
Deferred credits and other noncurrent liabilities
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
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)	6,495	6,495
Additional paid-in capital	91,731	91,707
Retained earnings	31,792	21,944
Treasury stock (584,144,220 at December 31, 2010 and593,300,187 at December 31, 2009, at cost)	(21,083)	(21,260)
Accumulated other comprehensive income	2,712	2,678
Noncontrolling interest	303	425
Total stockholders' equity	111,950	101,989
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	9	177
Balance at end of year	(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

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

million (b) What is the book value of AT&T's interest-bearing debt at the end of 2010? $Answer million At the beginning of 2010? $Answer million Average debt for 2010? $Answer million (c) Estimate AT&T's 2010 pretax cost of debt capital. (Round your answer to one decimal place.) Answer% (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.) Answer% (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.) Answer% Why is appropriate to use the company's statutory rate for computing its cost of debt capital? Choose all that apply Answeryesno The effective rate should always be used. Answeryesno 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. Answeryesno Using the effective rate in this case would inflate the true cost of borrowing. Answeryesno We should actually use an average rate using the statutory rate and the effective rate.

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