Online Research Assignment
Look at AT&T’s latest annual report.

1. How much long-term debt does it have? What is the average cost of that debt? What is the market value of its common stock?

2. Assume that AT&T’s capital structure has only 2 components: long-term debt and common stock. Furthermore, assume that the market value of the debt equals the book value from (1). What is AT&T’s total market value? What are the weights for the debt and equity? (Recall weights must sum to 1.)

3. Figure out AT&T’s tax rate from the annual report. Use this tax rate to compute its after-tax cost of debt.

4. Use the CAPM to calculate AT&T’s cost of common equity. You can assume a market risk premium of 5%. You can use the 10-year Treasury bond as a proxy for the risk-free rate. You will need a value for beta: do not calculate it but get it up online instead.

5. Using the weights from (4) and the required returns from (5) and (6), calculate AT&T’s weighted cost of capital.

Based on your Online Research Assignment, answer the following questions: What do you think would happen to its weighted cost of capital if AT&T were to:
1. Add long term debt?

2. Issue new stock and use the proceeds to retire long term debt?

Written Assignment

1. Juno Mining Company plans a $200 million debt issue. The debt’s YTM is 10% and Juno has a 40% tax rate. What is its after-tax cost of debt?

2. Butternut Company sells for $10 per share. Its current dividend is $1 per share and is expected to grow at 10% a year forever. Calculate Butternut’s cost of internal equity.

3. ABC is planning a $200 million project, to be partly financed by issuing bonds with a coupon rate of 8%, 10 year maturity, a $1,000 face value, and a 2% flotation cost. ABC’s common stock sells for $15 per share, pays a dividend of $1.50 a share and the dividend is expected to grow at 6% a year forever. ABC expects to have $60 million in retained earnings for this project. ABC has a target capital structure of 25% and 75% common equity. Calculate its weighted cost of capital for this project.

Online Research Assignment Look at AT&amp;T’s latest annual report...

Online Research Assignment Look at AT&T’s latest annual report...