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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
Total operating revenues
127,434
126,723
Operating expenses
Cost of services and sales (exclusive of depreciation andamortization 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
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 atDecember 31, 2012 and 2011; issued 6,495,231,088 atDecember 31, 2012 and 2011)
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 and568,719,202 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
Amount in millions except per share amounts, December 31
Shares
Amounts
Common Stock
Balance at beginning of year
$ 6,495
Issuance of shares
Balance at end of year
Retained Earnings
$25,453
Net income attributable to AT&T ($1.25 per diluted share)
7,264
Dividends to stockholders ($1.77 per share)
(10,196)
(40)
$ 22,841
Treasury Shares
(568)
$(20,750)
Repurchase of common stock
(371)
(12,752)
Issuance of treasury stock
25
614
(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
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