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Estimating Cost of Equity Capital and Weighted Average Cost of Capital

The December $31,2018,$ 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 $20182017$

Operating revenues

Service $$152,345$ $$145,597$

Equipment $18,41114,949$

Total operating revenues $170,756160,546$

Operating expenses

Equipment $19,78618,709$

Broadcast, programming and operations $26,72721,159$

Other cost of services $($exclusive of depreciation and amortization show separately below$)32,90637,942$

Selling, general and administrative $36,76535,465$

Abandonment of network assets $462,914$

Depreciation and amortization $28,43024,387$

Total operating expenses $144,660140,576$

Operating income $26,09619,970$

Other income $($expense$)$:

Interest expense $(7,957)(6,300)$

Equity in net income of affiliates $(48)(128)$

Other income $($expense$)-$ net $6,7821,597$

Total other income $($expense$)(1,223)(4,831)$

Income before income taxes $24,87315,139$

Income tax expense $4,920(14,708)$

Net income $$19,953$ $ $29,847$

Consolidated Balance Sheets $--$ Liabilities and Equity Sections

Dollars in millions except per share amounts, December $3120182017$

Current liabilities

Debt maturing within one year $$10,255$ $$38,374$

Accounts payable and accrued liabilities $43,18434,470$

Advanced billed and customer deposits $5,9484,213$

Accrued taxes $1,1791,262$

Dividends payable $3,8543,070$

Total current liabilities $64,42081,389$

Long$-$term debt $166,250125,972$

Deferred credits and other noncurrent liabilities:

Deferred income taxes $57,85943,207$

Post employment benefit obligation $19,21831,775$

Other noncurrent liabilities $30,23319,747$

Total deferred credits and other noncurrent liabilities $107,31094,729$

Stockholders' equity

Common stock $($$$1$ par value, $14,000,000,000$ authorized at December $31,2018$ and $2017$; issued $7,620,748,598$ at December $31,2018$ and $6,495,231,088$ at December $31,2017)7,6216,495$

Additional paid$-$in capital $125,52589,563$

Retained earnings $58,75350,500$

Treasury stock $(339,120,073$ at December $31,2018$ and $355,806,544$at December $31,2017,$ at cost$)(12,059)(12,714)$

Accumulated other comprehensive income $4,2497,017$

Noncontrolling interest $9,7951,146$

Total stockholders' equity $193,884142,007$

Total liabilities and stockholders' equity $$531,864$ $$444,097$

Consolidated Statements of Stockholders' Equity $--$ Excerpts $2018$

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 $1,1261,126$

Balance at end of year $7,621$ $$7,621$

Additional Paid$-$In$-$Capital

Balance at beginning of year $ $89,563$

Issuance of common stock $35,473$

Issuance of treasury stock $(115)$

Share$-$based payments $604$

Balance at end of year $$125,525$

Retained Earnings

Balance at beginning of year $$50,500$

Net income attributable to AT&T $($$$2\mathrm{.}85$ per diluted share$)19,370$

Dividends to stockholders $($$$2\mathrm{.}01$ per share$)(14,117)$

Cumulative effect of accounting changes and other adjustments $3,000$

Balance at end of year $ $58,753$

Treasury stock

Balance at beginning of year $(356)$ $$(12,714)$

Repurchase of common stock $(20)(692)$

Issuance of treasury stock $371,347$

Balance at end of year $(339)$ $$(12,059)$

In mid $2019,$ Yahoo reports that AT&T has a market beta of: $0\mathrm{.}76$

and that its closing stock price at the end of $2018$ was: $$28\mathrm{.}54$

AT&T$\text{'}$s statutory tax rate is: $21\%$

$($a$)$ Explain what AT&T$$s market beta of $0\mathrm{.}76$ 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 $2\mathrm{.}1\%.$ Estimate AT&T$$s cost of equity capital using the CAPM model. Round answer to one decimal place.

Answer

$0$

$\%$

$($c$)$ Footnote $12$ of AT&T$$s $10-$K reports that the market value of its debt is approximately $$180\mathrm{.}659$ billion. Assume that the company$$s after$-$tax cost of debt is $3\mathrm{.}70\%.$ Using this information, estimate AT&T$$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

$0$

$\%$

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