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
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 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 |
In early 2011, Yahoo reports that AT&T has a market beta of: | 0.65 |
and that its closing stock price at the end of 2010 was: | $29.38 |
AT&T's statu tory tax rate is: | 35% |
(a) Explain what AT&T's market beta implies regarding its stock price volatility.
It implies that the stock of AT&T is a very stable stock.
It implies that the stock of AT&T is a very volatile stock.
It implies that the stock of AT&T moves the same as the market index.
(b) Assume the market premium equals: 5.0% and that the risk-free rate equals: 3.1% Estimate AT&T's cost of equity capital using the CAPM model. (Round to one decimal place.) Answer% (c) Footnote 8 of AT&T's 10-K reports that the market value of its debt approximates its book value. Calculate the company's intrinsic value of debt and equity. Intrinsic value of debt = $Answer million Intrinsic value of equity = $Answer million (Round to the nearest million.) Assume that AT&T's after tax cost of debt is 2.81%. Using this information and your rounded answers from above and from part (b), estimate AT&T's weighted average cost of capital. (Do not round until your final answer. Round to one decimal place.) WACC = Answer%
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