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 = ?