Question
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
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% |
(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: __%
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