Question
Estimating Cost of Equity Capital and Weighted Average Cost of Capital The December 31, 2012 partial financial statements taken from the annual report of AT&T
Estimating Cost of Equity Capital and Weighted Average Cost of Capital The December 31, 2012 partial financial statements taken from the annual report of AT&T (T) follow.
Operating revenues | ||
Wireless service | $ 59,186 | $ 56,726 |
Data | 31,798 | 29,560 |
Voice | 22,619 | 25,126 |
Directory | 1,049 | 3,293 |
Other | 12,782 | 12,782 |
Total operating revenues | 127,434 | 126,723 |
Operating expenses | ||
Cost of services and sales (exclusive of depreciation and amortization show separately below) | 55,215 | 54,836 |
Selling, general and administrative | 41,079 | 41,382 |
Impairment of intangible assets | -- | 2,910 |
Depreciation and amortization | 18,143 | 18,377 |
Total operating expenses | 114,437 | 117,505 |
Operating income | 12,997 | 9,218 |
Other income (expense): | ||
Interest expense | (3,444) | (3,535) |
Equity in net income of affiliates | 752 | 784 |
Other income, net | 134 | 249 |
Total other income (expense) | (2,558) | (2,502) |
Income from continuing operations before income taxes | 10,439 | 6,716 |
Income tax (benefit) expense | 2,900 | 2,532 |
Income from continuing operations | 7,539 | 4,184 |
Income from discontinued operations, net of tax | -- | -- |
Net income | $ 7,539 | $ 4,184 |
Current liabilities | ||
Debt maturing within one year | $ 3,486 | $ 3,453 |
Accounts payable and accrued liabilities | 20,911 | 19,956 |
Advanced billed and customer deposits | 3,808 | 3,872 |
Accrued taxes | 1,026 | 1,003 |
Dividends payable | 2,556 | 2,608 |
Total current liabilities | 31,787 | 30,892 |
Long-term debt | 66,358 | 61,300 |
Deferred credits and other noncurrent liabilities: | ||
Deferred income taxes | 28,491 | 25,748 |
Post employment benefit obligation | 41,392 | 34,011 |
Other noncurrent liabilities | 11,592 | 12,694 |
Total deferred credits and other noncurrent liabilities | 81,475 | 72,453 |
Stockholders' equity | ||
Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2012 and 2011; issued 6,495,231,088 at December 31, 2012 and 2011) | 6,495 | 6,495 |
Additional paid-in capital | 91,038 | 91,156 |
Retained earnings | 22,481 | 25,453 |
Treasury stock (913,836,325 at December 31, 2012 and 568,719,202 at December 31, 2011, at cost) | (32,888) | (20,750) |
Accumulated other comprehensive income | 5,236 | 3,180 |
Noncontrolling interest | 333 | 263 |
Total stockholders' equity | 92,695 | 105,797 |
Total liabilities and stockholders' equity | $ 272,315 | $270,442 |
Common Stock | ||
Balance at beginning of year | 6,495 | $ 6,495 |
Issuance of shares | -- | -- |
Balance at end of year | 6,495 | $ 6,495 |
Retained Earnings | ||
Balance at beginning of year | $25,453 | |
Net income attributable to AT&T ($1.25 per diluted share) | 7,264 | |
Dividends to stockholders ($1.77 per share) | (10,196) | |
Other | (40) | |
Balance at end of year | $ 22,841 | |
Treasury Shares | ||
Balance at beginning of year | (568) | $(20,750) |
Repurchase of common stock | (371) | (12,752) |
Issuance of treasury stock | 25 | 614 |
Balance at end of year | (914) | $(32,888) |
In early 2013, Yahoo reports that AT&T has a market beta of: | 0.66 |
and that its closing stock price at the end of 2012 was: | $33.71 |
AT&T's statutory tax rate is: | 37% |
1.Assume the market premium equals: 5.0%and that the risk-free rate equals: 2.5%.Estimate AT&T's cost of equity capital using the CAPM model. (Round to one decimal place.)
2.Footnote 9 of AT&T's 10-K reports that the market value of its debt approximately $81.31 billion. Calculate the company's intrinsic value of debt and equity.
intrinsic value of debt = ?
intrinsic value of equity = ?
3.Assume that AT&T's after tax cost of debt is 3.25%. 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 = ?
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