For the purpose of obtaining the financial information, I used financial Morning Star website to obtain the information from AT&T for the end of year 2015. All the information is from December of 2015. All the information presented there is from the website presented in million dollars. Income before tax and income tax expense are given on the site. Average tax rate is obtained here by dividing tax expense with income before tax.
The Financial Morning Star was used in this assignment because of its ability to capture all aspects of financial performance of the company as well as key rations and vital information in the financial analysis of the company. Therefore, this source was used because it has both information and sufficient resource information for the required analysis. Consider the financial information provided in this case – sufficient information is present for the purpose of 2015 end-year financial information.
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In this section, we determined the yield to maturity for a bond investment with a minimum of 5 years. The investment used was due for January 2025. With the current tax rate of 20% and a maturity yield of 3%, the after tax cost of debt is 2.4% (Averkamp, 2014). In this calculation, we took the investment period to be that of ten years (expiring at the beginning of 2025 from end of year 2015).
Yield to maturity is defined as the total possible return that can be expected from an investment that is kept for a specific amount of time, and that return is expected at the end of that time period. In this case, we kept the investment for the period of ten years with a fixed interest rate. These investments could be in the form of bonds or gifts. The time period which the investment is held is called the maturity and current market price is maintained for the investment till the end of its investment.
Preferred stock and debts are issued in specific par values. Therefore, all dividends arising from that investment are paid based on a par fixed rate. The cost of preferred considers the cost of issuing the stocks and the dividends paid out to holders as a total of the costs to be considered. In this step, it was important to determine the cost of preferred stock. Therefore, an addition of the annual dividend alongside the cost of issue for each stock was done and compared (in percentage) to the total value of the current stock on the market. The total cost for issuing the share was added to the total value of dividends and considered as the cost of issuing the preferred stocks.
One can also consider the cost of preferred stock as the rate of return expected from the holders of the company in order to maintain their share in the company. It is an extension of the cost of capital since this cost includes the cost of preferred stocks, cost of debt and cost of common stock.
The cost of common equity can be viewed in terms of investor’s share in the company’s equity. This is the return that such investors require when they have invested in a company. This cost represents the market’s demand for compensation for investment in a company. This is because there is a risk that the investor undertakes for owning part of the company, or investing their money to finance the company activities.
Cost of common equity required the CAPM model to determine. This is because there is no explicit cost that is carried in company operations that can be considered to be the cost. Therefore, substitutions were made after obtaining values from the web on the beta, risk free rate for a 5 year bond and the average return for bonds over the last 65 years (from 2014). The data was then used to compute the value of cost of common equity using the CAPM model.
Calculating weighted costs was conducted here. Weighted costs are equally proportionated among each other to give the general estimation of each cost of capital against each other on a scale of 100. All the different investors require to be compensated for their various inputs. Therefore, the weighted costs consider all the different investors in the company in order to adequately compensate them from the total costs expected. The WACC formula was used for each of the components to determine their weighted costs. Their unweighted costs were substituted with the costs mentioned in previous steps. In this case, the different unweighted costs were considered in proportion to each other and weighted costs were found.
Averkamp, H. (2014). How do I calculate the after-tax cost of debt? Retrieved from Accounting Coach: http://www.accountingcoach.com/blog/after-tax-cost-of-debt .
Financial Morning Star. (2016). AT&T Financials . Retrieved from Financial Morning Star: http://performance.morningstar.com/stock/performance-return.action?p=dividend_split_page&t=T®ion=usa&culture=en-US .