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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 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 20182017
Operating revenues
Service $152,345 $145,597
Equipment 18,41114,949
Total operating revenues 170,756160,546
Operating expenses
Equipment 19,78618,709
Broadcast, programming and operations 26,72721,159
Other cost of services (exclusive of depreciation and amortization show separately below)32,90637,942
Selling, general and administrative 36,76535,465
Abandonment of network assets 462,914
Depreciation and amortization 28,43024,387
Total operating expenses 144,660140,576
Operating income 26,09619,970
Other income (expense):
Interest expense (7,957)(6,300)
Equity in net income of affiliates (48)(128)
Other income (expense)- net 6,7821,597
Total other income (expense)(1,223)(4,831)
Income before income taxes 24,87315,139
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 3120182017
Current liabilities
Debt maturing within one year $10,255 $38,374
Accounts payable and accrued liabilities 43,18434,470
Advanced billed and customer deposits 5,9484,213
Accrued taxes 1,1791,262
Dividends payable 3,8543,070
Total current liabilities 64,42081,389
Long-term debt 166,250125,972
Deferred credits and other noncurrent liabilities:
Deferred income taxes 57,85943,207
Post employment benefit obligation 19,21831,775
Other noncurrent liabilities 30,23319,747
Total deferred credits and other noncurrent liabilities 107,31094,729
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)7,6216,495
Additional paid-in capital 125,52589,563
Retained earnings 58,75350,500
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 4,2497,017
Noncontrolling interest 9,7951,146
Total stockholders' equity 193,884142,007
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 1,1261,126
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 371,347
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
0
%
(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
0
%

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