LO3 D12-46. Estimating Cost of Debt Capital The December 31, 2018, partial financial statements taken from the annual report for AT&T Inc. follow. AT 2018 2017 $152,345 18,411 170,756 $145,597 14,949 160,546 19,786 26,727 18,709 21,159 Consolidated Statements of Income Dollars in millions Operating revenues Service ... Equipment Total operating revenues Operating expenses Cost of revenues Equipment.... Broadcast, programming and operations Other cost of revenues (exclusive of depreciation and amortization shown separately below) Selling, general and administrative... Asset abandonments and impairments Depreciation and amortization ... Total operating expenses. Operating income... Other income (expense) Interest expense... Equity in net income (loss) of affiliates. Other income (expense)-net Total other income (expense). Income before income taxes Income tax (benefit) expense. Net income 32,906 36,765 46 28,430 144,660 26,096 37,942 35,465 2.914 24,387 140,576 19,970 (7,957) (48) 6,782 (1,223) 24,873 4,920 $ 19,953 (6,300) (128) 1,597 (4,831) 15,139 (14,708) $ 29,847 2018 2017 $ 10,255 43,184 5,948 1,179 3,854 $ 38,374 34,470 4,213 1.262 3,070 81,389 125,972 64,420 166,250 Consolidated Balance Sheets-Liabilities and Equity Sections Only Dollars in millions except per share amounts, December 31 Current liabilities Debt maturing within one year Accounts payable and accrued liabilities Advanced billings and customer deposits Accrued taxes.... Dividends payable Total current liabilities. Long-term debt.. Deferred credits and other noncurrent liabilities Deferred income taxes ....... Postemployment benefit obligation. . Other noncurrent liabilities .... Total deferred credits and other noncurrent liabilities.. Stockholders' equity Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2018 and December 31, 2017: issued 7,620,748,598 at December 31, 2018 and 6,495,231,088 at December 31, 2017) Additional paid-in capital.. Retained earnings Treasury stock (339,120,073 at December 31, 2018 and 355,806,544 at December 31, 2017, at cost). Accumulated other comprehensive income. Noncontrolling interest .. Total stockholders' equity. Total liabilities and stockholders' equity. 57,859 19,218 30,233 107,310 43,207 31,775 19,747 94,729 7,621 125,525 58,753 6,495 89,563 50,500 (12,059) 4,249 9,795 193,884 $531,864 (12,714) 7,017 1,146 142,007 $444,097 2018 Shares Amount 6,495 1,126 7,621 $ 6,495 1,126 $ 7,621 Consolidated Statements of Stockholders' EquityExcerpts Dollars and shares in millions except per share amounts Common stock Balance at beginning of year. Issuance of stock ... Balance at end of year Additional paid-in capital Balance at beginning of year Issuance of common stock Issuance of treasury stock Share-based payments Balance at end of year. Retained earnings Balance at beginning of year Net income attributable to AT&T ($2.85 per diluted share)... Dividends to stockholders ($2.01 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 $ 89,563 35,473 (115) 604 $125,525 $ 50,500 19,370 (14,117) 3,000 $ 58,753 (356) (20) 37 (339) $(12,714) (692) 1,347 $(12,059) Required a. How much interest expense did AT&T report during 2018? b. What is the book value of AT&T's interest-bearing debt at the end of 2018? At the beginning of 2018? c. Estimate AT&T's 2018 pretax cost of debt capital. d. Estimate AT&T's 2018 effective (that is, average) tax rate from information in its income statement. e. Estimate AT&T's 2018 after-tax cost of debt capital. The company's assumed statutory tax rate is 21%. Which tax rate, the statutory rate or the effective rate, is appropriate for computing its cost of debt capital? LO3 D12-46. Estimating Cost of Debt Capital The December 31, 2018, partial financial statements taken from the annual report for AT&T Inc. follow. AT 2018 2017 $152,345 18,411 170,756 $145,597 14,949 160,546 19,786 26,727 18,709 21,159 Consolidated Statements of Income Dollars in millions Operating revenues Service ... Equipment Total operating revenues Operating expenses Cost of revenues Equipment.... Broadcast, programming and operations Other cost of revenues (exclusive of depreciation and amortization shown separately below) Selling, general and administrative... Asset abandonments and impairments Depreciation and amortization ... Total operating expenses. Operating income... Other income (expense) Interest expense... Equity in net income (loss) of affiliates. Other income (expense)-net Total other income (expense). Income before income taxes Income tax (benefit) expense. Net income 32,906 36,765 46 28,430 144,660 26,096 37,942 35,465 2.914 24,387 140,576 19,970 (7,957) (48) 6,782 (1,223) 24,873 4,920 $ 19,953 (6,300) (128) 1,597 (4,831) 15,139 (14,708) $ 29,847 2018 2017 $ 10,255 43,184 5,948 1,179 3,854 $ 38,374 34,470 4,213 1.262 3,070 81,389 125,972 64,420 166,250 Consolidated Balance Sheets-Liabilities and Equity Sections Only Dollars in millions except per share amounts, December 31 Current liabilities Debt maturing within one year Accounts payable and accrued liabilities Advanced billings and customer deposits Accrued taxes.... Dividends payable Total current liabilities. Long-term debt.. Deferred credits and other noncurrent liabilities Deferred income taxes ....... Postemployment benefit obligation. . Other noncurrent liabilities .... Total deferred credits and other noncurrent liabilities.. Stockholders' equity Common stock ($1 par value, 14,000,000,000 authorized at December 31, 2018 and December 31, 2017: issued 7,620,748,598 at December 31, 2018 and 6,495,231,088 at December 31, 2017) Additional paid-in capital.. Retained earnings Treasury stock (339,120,073 at December 31, 2018 and 355,806,544 at December 31, 2017, at cost). Accumulated other comprehensive income. Noncontrolling interest .. Total stockholders' equity. Total liabilities and stockholders' equity. 57,859 19,218 30,233 107,310 43,207 31,775 19,747 94,729 7,621 125,525 58,753 6,495 89,563 50,500 (12,059) 4,249 9,795 193,884 $531,864 (12,714) 7,017 1,146 142,007 $444,097 2018 Shares Amount 6,495 1,126 7,621 $ 6,495 1,126 $ 7,621 Consolidated Statements of Stockholders' EquityExcerpts Dollars and shares in millions except per share amounts Common stock Balance at beginning of year. Issuance of stock ... Balance at end of year Additional paid-in capital Balance at beginning of year Issuance of common stock Issuance of treasury stock Share-based payments Balance at end of year. Retained earnings Balance at beginning of year Net income attributable to AT&T ($2.85 per diluted share)... Dividends to stockholders ($2.01 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 $ 89,563 35,473 (115) 604 $125,525 $ 50,500 19,370 (14,117) 3,000 $ 58,753 (356) (20) 37 (339) $(12,714) (692) 1,347 $(12,059) Required a. How much interest expense did AT&T report during 2018? b. What is the book value of AT&T's interest-bearing debt at the end of 2018? At the beginning of 2018? c. Estimate AT&T's 2018 pretax cost of debt capital. d. Estimate AT&T's 2018 effective (that is, average) tax rate from information in its income statement. e. Estimate AT&T's 2018 after-tax cost of debt capital. The company's assumed statutory tax rate is 21%. Which tax rate, the statutory rate or the effective rate, is appropriate for computing its cost of debt capital