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 (3,394) Equity in net income of affiliates 762 Other income, net 897 Total other income (expense) (1,735) Income from continuing operations before income taxes 17,838 Income tax (benefit) expense (1,462) Income from continuing operations 19,300 Income from discontinued operations, net of tax 879 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 $ 4,196 $ 4,361 Accounts payable and accrued liabilities 23,055 24,260 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 at December 31, 2010 and 2009; issued 6,495,231,088 at December 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 and 593,300,187 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 3,394 million (b) What is the book value of AT&T's interest-bearing debt at the end of 2010? $Answer 63,167 million At the beginning of 2010? $Answer 69,081 million Average debt for 2010? $Answer 66,124 million (c) Estimate AT&T's 2010 pretax cost of debt capital. (Round your answer to one decimal place.) Answer 5.1 % (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 %