Solution-Discuss weighted average cost of capital

Discuss weighted average cost of capital

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Reference no: EM131807221

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 = ?

Reference no: EM131807221

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Discuss weighted average cost of capital

Reference no: EM131807221

Reference no: EM131807221

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