a. Go to http://finance.yahoo.com and get the âMarket Capâ for AT&T (ticker: T). The market value of common equity (i.e., the market capitalization) is the stock price multiplied by the number of shares.
b. The appropriate component weights must be determined in order to calculate the WACC. Select âBalance Sheetâ from the column on the left and get the most recent âShort/Current Long Term Debtâ (this is the amount of debt due within one year) and âLong Term Debt.â Using these values, compute the weights for each of these three components of capital structure. (Notice that we are assuming that the short-term debt is a permanent component of capital structure rather than a temporary component used to finance working capital. In an ideal world, we would like to know the firmâs target weights. Because we donât know that, we would like the market values of the components. We have the market value of equity, but we only have the book values of debt. The book value of short-term debt should be close to its market value. Sometimes an analyst will estimate the market value of each long-term debt issue, but we will just use the book value of long-term debt for this Cyberproblem as an estimate of its market value.)
c. Next, view AT&Tâs âKey Statisticsâ and find its beta.
d. To estimate the component costs of capital, we need estimates of the 6-month risk-free rate (to be used in estimating the cost of short-term debt) and the 10-year risk-free rate (to be used in estimating the cost of long-term debt and the cost of equity). Go back to the home page (http://finance.yahoo.com), select Investing, and select Bonds. What are the yields on the 6-month and 10-year Treasury securities?
e. Apply the Capital Asset Pricing Model (CAPM) Security Market Line to estimate rs for AT&T. Assume a market risk premium (rm - rRF) of 6.0%. Use the yield on a 10-year Treasury bond (found earlier in the problem) as an estimate of the risk-free rate.
f. We need an estimate of AT&T's cost of debt. First, find its bond rating. Go to http://www.moodys.com (you will have to register to search for AT&T, but it is free). At the top right, search for AT&T by its ticker symbol (T). Find the most recent bond rating by scrolling down to the âAnalyst Informationâ section. From http://bondchannel.bridge.com/publicspreads.cgi?Industrial, the appropriate yield spread needs to be found. For AT&T, get the shortest spread (probably 1 year) and the 10-year spread. (Note: Spreads are quoted in basis points, where 100 basis points equal 1 percentage point.) To estimate the cost of short-term debt, add the shortest spread to the 6-month yield on a Treasury security, found earlier (note: ideally, we would like the 6-month spread, but that is not reported, so we use the shortest reported spread). To estimate the cost of long-term debt, add the 10-year spread to the 10-year yield on a Treasury security.
g. Assume AT&T has an effective tax rate of 35% and using the component weights, the component costs, and the tax rate, estimate the weighted average cost of capital.
