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Estimating Cost of Equity Capital and Weighted Average Cost of Capital The December 3 1 , 2 0 1 8 , partial financial statements taken
Estimating Cost of Equity Capital and Weighted Average Cost of Capital
The December 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
Operating revenues
Service $ $
Equipment
Total operating revenues
Operating expenses
Equipment
Broadcast, programming and operations
Other cost of services exclusive of depreciation and amortization show separately below
Selling, general and administrative
Abandonment of network assets
Depreciation and amortization
Total operating expenses
Operating income
Other income expense:
Interest expense
Equity in net income of affiliates
Other income expense net
Total other income expense
Income before income taxes
Income tax expense
Net income $ $
Consolidated Balance Sheets Liabilities and Equity Sections
Dollars in millions except per share amounts, December
Current liabilities
Debt maturing within one year $ $
Accounts payable and accrued liabilities
Advanced billed and customer deposits
Accrued taxes
Dividends payable
Total current liabilities
Longterm debt
Deferred credits and other noncurrent liabilities:
Deferred income taxes
Post employment benefit obligation
Other noncurrent liabilities
Total deferred credits and other noncurrent liabilities
Stockholders' equity
Common stock $ par value, authorized at December and ; issued at December and at December
Additional paidin capital
Retained earnings
Treasury stock at December and at December at cost
Accumulated other comprehensive income
Noncontrolling interest
Total stockholders' equity
Total liabilities and stockholders' equity $ $
Consolidated Statements of Stockholders' Equity Excerpts
Amount in millions except per share amounts, December Shares Amounts
Common Stock
Balance at beginning of year $
Issuance of stock
Balance at end of year $
Additional PaidInCapital
Balance at beginning of year $
Issuance of common stock
Issuance of treasury stock
Sharebased payments
Balance at end of year $
Retained Earnings
Balance at beginning of year $
Net income attributable to AT&T $ per diluted share
Dividends to stockholders $ per share
Cumulative effect of accounting changes and other adjustments
Balance at end of year $
Treasury stock
Balance at beginning of year $
Repurchase of common stock
Issuance of treasury stock
Balance at end of year $
In mid Yahoo reports that AT&T has a market beta of:
and that its closing stock price at the end of was: $
AT&Ts statutory tax rate is:
a Explain what AT&Ts market beta of 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 and that the riskfree rate equals Estimate AT&Ts cost of equity capital using the CAPM model. Round answer to one decimal place.
Answer
c Footnote of AT&Ts K reports that the market value of its debt is approximately $ billion. Assume that the companys aftertax cost of debt is 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
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