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.
| 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 |
| 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 |
| 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% |
1. Assume the market premium equals: 5.0% and that the risk-free rate equals: 2.5%. Estimate AT&T's cost of equity capital using the CAPM model. (Round to one decimal place.)
2. 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 = ?
intrinsic value of equity = ?
3. 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 = ?