Estimating Cost of Equity Capital and Weighted Average Cost of Capital
The December 31, 2012 partial financial statements taken from the annual report of AT&T (T) follow.
|
Consolidated Statements of Income
|
|
Dollars in millions except per share amounts
|
2012
|
2011
|
|
Operating revenues
|
|
|
|
Wireless service
|
$ 59,186
|
$ 56,726
|
|
Data
|
31,798
|
29,560
|
|
Voice
|
22,619
|
25,126
|
|
Directory
|
1,049
|
3,293
|
|
Other
|
12,782
|
12,782
|
|
Total operating revenues
|
127,434
|
126,723
|
|
Operating expenses
|
|
|
|
Cost of services and sales (exclusive of depreciation and
amortization show separately below)
|
55,215
|
54,836
|
|
Selling, general and administrative
|
41,079
|
41,382
|
|
Impairment of intangible assets
|
--
|
2,910
|
|
Depreciation and amortization
|
18,143
|
18,377
|
|
Total operating expenses
|
114,437
|
117,505
|
|
Operating income
|
12,997
|
9,218
|
|
Other income (expense):
|
|
|
|
Interest expense
|
(3,444)
|
(3,535)
|
|
Equity in net income of affiliates
|
752
|
784
|
|
Other income, net
|
134
|
249
|
|
Total other income (expense)
|
(2,558)
|
(2,502)
|
|
Income from continuing operations before income taxes
|
10,439
|
6,716
|
|
Income tax (benefit) expense
|
2,900
|
2,532
|
|
Income from continuing operations
|
7,539
|
4,184
|
|
Income from discontinued operations, net of tax
|
--
|
--
|
|
Net income
|
$ 7,539
|
$ 4,184
|
|
Consolidated Balance Sheets -- Liabilities and Equity Sections
|
|
Dollars in millions except per share amounts, December 31
|
2012
|
2011
|
|
Current liabilities
|
|
|
|
Debt maturing within one year
|
$ 3,486
|
$ 3,453
|
|
Accounts payable and accrued liabilities
|
20,911
|
19,956
|
|
Advanced billed and customer deposits
|
3,808
|
3,872
|
|
Accrued taxes
|
1,026
|
1,003
|
|
Dividends payable
|
2,556
|
2,608
|
|
Total current liabilities
|
31,787
|
30,892
|
|
Long-term debt
|
66,358
|
61,300
|
|
Deferred credits and other noncurrent liabilities:
|
|
|
|
Deferred income taxes
|
28,491
|
25,748
|
|
Post employment benefit obligation
|
41,392
|
34,011
|
|
Other noncurrent liabilities
|
11,592
|
12,694
|
|
Total deferred credits and other noncurrent liabilities
|
81,475
|
72,453
|
|
Stockholders' equity
|
|
|
|
Common stock ($1 par value, 14,000,000,000 authorized at
December 31, 2012 and 2011; issued 6,495,231,088 at
December 31, 2012 and 2011)
|
6,495
|
6,495
|
|
Additional paid-in capital
|
91,038
|
91,156
|
|
Retained earnings
|
22,481
|
25,453
|
|
Treasury stock (913,836,325 at December 31, 2012 and
568,719,202 at December 31, 2011, at cost)
|
(32,888)
|
(20,750)
|
|
Accumulated other comprehensive income
|
5,236
|
3,180
|
|
Noncontrolling interest
|
333
|
263
|
|
Total stockholders' equity
|
92,695
|
105,797
|
|
Total liabilities and stockholders' equity
|
$ 272,315
|
$270,442
|
|
Consolidated Statements of Stockholders' Equity -- Excerpts
|
2012
|
|
Amount in millions except per share amounts, December 31
|
Shares
|
Amounts
|
|
Common Stock
|
|
|
|
Balance at beginning of year
|
6,495
|
$ 6,495
|
|
Issuance of shares
|
--
|
--
|
|
Balance at end of year
|
6,495
|
$ 6,495
|
|
|
|
|
|
Retained Earnings
|
|
|
|
Balance at beginning of year
|
|
$25,453
|
|
Net income attributable to AT&T ($1.25 per diluted share)
|
|
7,264
|
|
Dividends to stockholders ($1.77 per share)
|
|
(10,196)
|
|
Other
|
|
(40)
|
|
Balance at end of year
|
|
$ 22,841
|
|
|
|
|
|
Treasury Shares
|
|
|
|
Balance at beginning of year
|
(568)
|
$(20,750)
|
|
Repurchase of common stock
|
(371)
|
(12,752)
|
|
Issuance of treasury stock
|
25
|
614
|
|
Balance at end of year
|
(914)
|
$(32,888)
|
|
In early 2013, Yahoo reports that AT&T has a market beta of:
|
0.66
|
|
and that its closing stock price at the end of 2012 was:
|
$33.71
|
|
AT&T's statutory tax rate is:
|
37%
|
QUESTION:
Footnote 9 of AT&T's 10-K reports that the market value of its debt approximately $81.31 billion. Calculate the company's intrinsic value of debt and equity.
Intrinsic value of debt = $Answer
million
Intrinsic value of equity = $Answer
million (Round to the nearest million.)
Assume that AT&T's after tax cost of debt is 3.25%. Using this information and your rounded answers from above and from part (b), estimate AT&T's weighted average cost of capital. (Do not round until your final answer. Round to one decimal place.)
WACC = Answer