Estimating Cost of Equity Capital and Weighted Average Cost of Capital

The December 31, 2018, partial financial statements taken from the annual report for AT&T Inc. (T ) follow.

Consolidated Statements of Income
Dollars in millions except per share amounts	2018	2017
Operating revenues
Service	$152,345	$145,597
Equipment	18,411	14,949
Total operating revenues	170,756	160,546
Operating expenses
Equipment	19,786	18,709
Broadcast, programming and operations	26,727	21,159
Other cost of services (exclusive of depreciation and amortization show separately below)	32,906	37,942
Selling, general and administrative	36,765	35,465
Abandonment of network assets	46	2,914
Depreciation and amortization	28,430	24,387
Total operating expenses	144,660	140,576
Operating income	26,096	19,970
Other income (expense):
Interest expense	(7,957)	(6,300)
Equity in net income of affiliates	(48)	(128)
Other income (expense) - net	6,782	1,597
Total other income (expense)	(1,223)	(4,831)
Income before income taxes	24,873	15,139
Income tax expense	4,920	(14,708)
Net income	$19,953	$ 29,847

Consolidated Balance Sheets -- Liabilities and Equity Sections
Dollars in millions except per share amounts, December 31	2018	2017
Current liabilities
Debt maturing within one year	$10,255	$38,374
Accounts payable and accrued liabilities	43,184	34,470
Advanced billed and customer deposits	5,948	4,213
Accrued taxes	1,179	1,262
Dividends payable	3,854	3,070
Total current liabilities	64,420	81,389
Long-term debt	166,250	125,972
Deferred credits and other noncurrent liabilities:
Deferred income taxes	57,859	43,207
Post employment benefit obligation	19,218	31,775
Other noncurrent liabilities	30,233	19,747
Total deferred credits and other noncurrent liabilities	107,310	94,729
Stockholders' equity
Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2018 and 2017; issued 7,620,748,598 at December 31, 2018 and 6,495,231,088 at December 31, 2017)	7,621	6,495
Additional paid-in capital	125,525	89,563
Retained earnings	58,753	50,500
Treasury stock (339,120,073 at December 31, 2018 and 355,806,544at December 31, 2017, at cost)	(12,059)	(12,714)
Accumulated other comprehensive income	4,249	7,017
Noncontrolling interest	9,795	1,146
Total stockholders' equity	193,884	142,007
Total liabilities and stockholders' equity	$531,864	$444,097

Consolidated Statements of Stockholders' Equity -- Excerpts	2018
Amount in millions except per share amounts, December 31	Shares	Amounts
Common Stock
Balance at beginning of year	6,495	$ 6,495
Issuance of stock	1,126	1,126
Balance at end of year	7,621	$7,621
Additional Paid-In-Capital
Balance at beginning of year		$ 89,563
Issuance of common stock		35,473
Issuance of treasury stock		(115)
Share-based payments		604
Balance at end of year		$125,525
Retained Earnings
Balance at beginning of year		$50,500
Net income attributable to AT&T ($2.85 per diluted share)		19,370
Dividends to stockholders ($2.01 per share)		(14,117)
Cumulative effect of accounting changes and other adjustments		3,000
Balance at end of year		$ 58,753
Treasury stock
Balance at beginning of year	(356)	$(12,714)
Repurchase of common stock	(20)	(692)
Issuance of treasury stock	37	1,347
Balance at end of year	(339)	$(12,059)

In mid 2019, Yahoo reports that AT&T has a market beta of:	0.76
and that its closing stock price at the end of 2018 was:	$28.54
AT&T's statutory tax rate is:	21%

(a) Explain what AT&Ts market beta of 0.76 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 that the market risk premium equals 5% and that the risk-free rate equals 2.1%. Estimate AT&Ts cost of equity capital using the CAPM model. Round answer to one decimal place.

Answer

%

(c) Footnote 12 of AT&Ts 10-K reports that the market value of its debt is approximately $180.659 billion. Assume that the companys after-tax cost of debt is 3.70%. Using this information, estimate AT&Ts weighted average cost of capital.

Round your computation for the intrinsic value of equity to nearest million; then do not round until your final answer. Round final answer to one decimal place.

WACC = Answer

%