For this question pertaining to estimating cost of debt captial, please let me k

Question

For this question pertaining to estimating cost of debt captial, please let me know where I went wrong with my answers. Please solve the problem in its entirity and show your steps to your calculations.

QUESTION 4 Partially correct 033 points out of 1.00 PFlag question Estimating Cost of Debt Capital Assume the December 31, 2010, partial financial statements taken from the annual report for AT&T; (T) follow. Consolidated Statements of Income Dollars in millions 2010 Operating revenues Wireless service Voice Data Directory Other Total operating revenues 53,510 28,315 27,479 3,935 11,041

Explanation / Answer

(b) cost of equity = risk free rate + (beta*market premium)

= 3.3%+(0.65*5.2%)

= 3.3%+3.38% = 6.68%

= 6.7% (rounded off to 1 decimal place)

(c) market value of debt = $68,167 million

Market value of equity calculation: No. of shares = 6,495,231,088

Closing stock price = $30.58

Total value of stock = 6,495,231,088 shares*$30.58 = $198,624.17 million

Total enterprise value = equity+debt = $198,624.17 million+ $68,167 million = $266,791.17 million

Thus WACC = 6.68%*(198,624.17/266,791.17)+3.25%*(68,167/266,791.17)

= 4.9732%+0.8304%

= 5.8%

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