Question

Estimating Cost of Equity Capital and Weighted Average Cost of Capital

The December 31, 2015, partial financial statements taken from the annual report for AT&T Inc. (T ) follow.

Consolidated Statements of Income
Dollars in millions except per share amounts	2015	2014
Operating revenues
Service	$ 131,677	$ 118,437
Equipment	15,124	14,010
Total operating revenues	146,801	132,447
Operating expenses
Equipment	19,268	18,946
Broadcast, programming and operations	11,996	4,075
Other cost of services (exclusive of depreciation and amortization show separately below)	35,782	37,124
Selling, general and administrative	32,954	39,697
Abandonment of network assets	--	2,120
Depreciation and amortization	22,016	18,273
Total operating expenses	122,016	120,235
Operating income	24,785	12,212
Other income (expense):
Interest expense	(4,120)	(3,613)
Equity in net income of affiliates	79	175
Other income (expense) - net	(52)	1,581
Total other income (expense)	(4,093)	(1,857)
Income before income taxes	20,692	10,355
Income tax expense	7,005	3,619
Net income	$ 13,687	$ 6,736

Consolidated Balance Sheets -- Liabilities and Equity Sections
Dollars in millions except per share amounts, December 31	2015	2014
Current liabilities
Debt maturing within one year	$ 7,636	$ 6,056
Accounts payable and accrued liabilities	30,372	23,592
Advanced billed and customer deposits	4,682	4,105
Accrued taxes	2,176	1,091
Dividends payable	2,950	2,438
Total current liabilities	47,816	37,282
Long-term debt	118,515	75,778
Deferred credits and other noncurrent liabilities:
Deferred income taxes	56,181	38,436
Post employment benefit obligation	34,262	37,079
Other noncurrent liabilities	22,258	17,989
Total deferred credits and other noncurrent liabilities	112,701	93,504
Stockholders' equity
Common stock ($1 par value, 14,000,000,000 authorized atDecember 31, 2015 and 2014; issued 6,495,231,088 atDecember 31, 2015 and 2014)	6,495	6,495
Additional paid-in capital	89,763	91,108
Retained earnings	33,671	31,081
Treasury stock (350,291,239 at December 31, 2015 and1,308,318,131 at December 31, 2014, at cost)	(12,592)	(47,029)
Accumulated other comprehensive income	5,334	8,061
Noncontrolling interest	969	554
Total stockholders' equity	123,640	90,270
Total liabilities and stockholders' equity	$ 402,672	$296,834

 

Consolidated Statements of Stockholders' Equity -- Excerpts	2015
Amount in millions except per share amounts, December 31	Shares	Amounts
Common Stock
Balance at beginning of year	6,495	$ 6,495
Issuance of stock	--	--
Balance at end of year	6,495	$ 6,495
Additional Paid-In-Capital
Balance at beginning of year		$ 91,108
Issuance of treasury stock		(1,597)
Share-based payments		252
Change related to acquisition of interests held by noncontrolling owners		--
Balance at end of year		$ 89,763
Retained Earnings
Balance at beginning of year		$31,081
Net income attributable to AT&T ($2.37, $1.24 and $3.42 per diluted share))		13,345
Dividends to stockholders ($1.89, $1.85 and $1.81 per share)		(10,755)
Balance at end of year		$ 33,671
Treasury stock
Balance at beginning of year	(1,308)	$(47,029)
Repurchase of common stock	(8)	(278)
Issuance of treasury stock	966	34,715
Balance at end of year	(350)	$(12,592)

In mid 2016, Yahoo reports that AT&T has a market beta of:	0.34
and that its closing stock price at the end of 2015 was:	$34.41
AT&T's statutory tax rate is:	35%

(a) Explain what AT&T’s market beta of 0.34 implies regarding its stock price volatility

It implies that the stock of AT&T is a very stable stock.

It implies that the stock of AT&T is a very volatile stock.

It implies that the stock of AT&T moves the same as the market index.

(b) Assume that the market risk premium equals 5% and that the risk-free rate equals 2.5%. Estimate AT&T’s cost of equity capital using the CAPM model. Round answer to one decimal place.
Answer%

(c) Footnote 10 of AT&T’s 10-K reports that the market value of its debt is approximately $131.701 billion. Assume that the company’s after-tax cost of debt is 2.49%. Using this information, estimate AT&T’s weighted average cost of capital.

Round your computation for the intrinsic value of equity to nearest million; then do not round until your final answer. Round final answer to one decimal place.
WACC = Answer%

Answer 1

(a)

(b)

(c)