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 (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

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 $ 8,196 $ 8,361

Accounts payable and accrued liabilities 19,055 20,260

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?

$

million

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

$

million

At the beginning of 2010?

$

million

Average debt for 2010?

$

million

(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.)

%