Eaton V_FIN711_Week 8_Individual Leadership Plan Addendum - Finance

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Running head: INDIVIDUAL LEADERSHIP PLAN ADDENDUM

Individual Leadership Plan Addendum - Plan

Velda Eaton

University of Phoenix – School of Advanced Studies

Individual Leadership Plan Addendum – Finance 2

AT&T Corporation

The American Telephone & Telegraph Company was incorporated in New York on March

3, 1885 for the purpose of establishing a long distance telephone system throughout the country. In

March 1900, the American Telephone & Telegraph Company acquired all the stock of the

American Bell Telephone Company by an exchange of stock on the basis of two shares of

American Telephone & Telegraph Company for each share of American Bell Telephone Company.

The company is presently known as AT&T, which was adopted in April 1994.

AT&T Incorporated is a diversified company with a tier-one classification among the

leading providers of telecommunication services nationally and internationally. As a provider of

local, long distance, internet and transaction-based voice and data services, the primary business

segments of the organization are AT&T Business Services and AT&T Consumer Services. As of

December 31, 2004, AT&T Business Services offered a variety of global communications services

to over 2 million customers, including large domestic and multinational businesses, small and

medium-sized businesses and government agencies. As of December, 31 2004, AT&T Consumer

Services provided domestic and international long distance and transaction based communications

services to over 24 million residential stand alone long distance and bundled consumers in the

United States (AT&T, 2005).

Based on the closing price of $24.84 per share on June 30, 2009, the aggregate market value

of voting and non-voting common stock held by non-affiliates was $146.6 billion. On January 31,

2010, common shares outstanding were 5,902,074,438 (AT&T, 2010, p. 4). AT&T’s gross revenues

for fiscal year 2009 were $123 billion with a net income application to common shares of $12.5

billion (SEC, 2009).


Financial Overview

AT&T’s internal control over financial reporting is a process designed to provide reasonable

assurance regarding the reliability of financial reporting and preparation in accordance with the

generally accepted accounting principles (GAAP) and based on criteria established in Internal

Control—Integrated Framework Issued by the Committee of Sponsoring Organizations of the

Treadway Commission (COSO). AT&T’s management is responsible for maintaining effective

internal control over financial reporting for the Report of Management, which is an assessed risk

that a possible material weakness exists by testing and evaluating the design and operating

effectiveness of internal control based on the assessed risk (Ernest-Young, 2009).

The Current Financial Model

Within the current financial model, critical accounting policies and estimates have a

significant impact on the financial statements. Doubtful accounts are estimated losses that result

from the failure of customers to make required payments. The probability or recoverability is used

with current collection trends and economic factors. As evidenced by the stated financial model, the

theory of investment, which is a germinal theory, depicts dividends and capital structures that are

irrelevant in the determination of stock prices in the market (Miller-Modigliani, 1958; Chew, 2001).

Instead the market value of a firm is based on the earning power of the assets currently held and on

the size and relative profitability of the investment opportunities, which is independent of the capital

structure (Miller-Modigliani, 1958). As evidenced by AT&T segment units: (1) wireless, (2)

wireline, (3) advertising solutions, and (4) other, offer different products and services over various

technology platforms that are managed separately and are independent of each other as depicted in

the charts below (AT&T, 2009).


The above charts depict the wireless operating results for operating income margin of 24.8

percent in 2009, 22.5 percent in 2008 and 16.4 percent in 2007. The higher margin in 2009 was

primarily due to revenue growth of $4,262, while the higher margin in 2008 was primarily due to

revenue growth of $6,651. Each revenue increase exceeded the corresponding operating expense

increase of $2,075 in 2009 and $2,587 in 2008. The expense increase for 2008 is net of a decrease


in depreciation and amortization of $1,309. Service revenues are comprised of local voice and data

services, roaming, long-distance and other revenue (ATT, 2009).

Service revenues increased 9.6 percent in 2009 and 14.8 percent in 2008. The increases

consisted of data service revenue increases of 33.4 percent in 2009 and 52.5 percent in 2008. The

increases were primarily due to the increased number of subscribers and heavier usage by

subscribers of advanced handsets and other data-centric emerging devices, such as net-books,

eReaders, and mobile navigation devices. The increases in data service ARPU (average revenue per

user) were 22.0 percent in 2009 and 33.8 percent in 2008 that reflect this trend. The significant data

growth also reflects an increased number of subscribers using the 3G network. Data service

revenues represent approximately 29.0percent and 23.9percent of the Wireless segment service

revenues in 2009 and 2008 with voice and other service revenue increases of 2.1 percent in 2009

and 6.6 percent in 2008. The increase in 2009 was due to a 9.4 percent increase in the average

number of wireless customers, down from 14.0 percent in 2008. Voice and other service ARPU

declined 6.7 percent in 2009 and 6.5 percent in 2008 (ATT, 2009).

Equipment revenues increased 0.3 percent in 2009 and increased 22.9 percent in 2008. The

lower incremental increase in 2009 was due to lower traditional handset sales, offset by sales of

more advanced integrated devices. The increase in 2008 was due to higher handset revenues,

reflecting higher gross customer additions, and customer upgrades to more advanced devices (ATT,

2009).


The chart above depicts and represents access lines served by AT&T’s Incumbent Local

Exchange Carriers (ILECs) and affiliates with prior period amounts restated to conform to current

period reporting methodology. Revenue from retail payphone lines is reported in the other segment,

as the conglomerate is in the process of ending the retail payphone operations. Total wired

broadband connections include DSL, U-verse High Speed Internet access and satellite broadband.

Satellite service includes connections under agency and resale agreements, which includes

consumer U-verse Voice over IP connections.

Operating Results for the Advertising Solutions segment operating income margin was 25.7

percent in 2009, 31.2 percent in 2008, and 31.8 percent in 2007. The decrease in the segment

operating income margin in both 2009 and 2008 was primarily the result of decreased operating

revenues.


Under the current financial model and shown in the previous chart, the operations and

support expenses increased 6.4 percent in 2009, compared to an increase of 13.6 percent in 2008.

The increase in 2009 was primarily due equipment cost increases of $1,246, reflecting the higher

cost of acquiring more advanced integrated devices compared to prior periods. Inter-connect,

universal service fee (USF), and reseller expense increases of $426 were due to higher network

traffic and revenue growth. Upgrade commissions and residual expense increases of $313 were due

to sales and upgrades to more advanced devices. Customer service cost increases of $214 were due

to customer growth; and finance, IT, and other administrative cost increases of $306 (Ernest-Young,

2009).

Strategic Changes

In researching the many types of financial models and theorems, in conjunction with the

current theory of investment, the efficiency and economic value added theory is a strategic alliance,

which are suggested models to implement within the organization. The Efficiency theory is a

germinal theory proposed by Fama (1965) that states, an efficient market is where large numbers of

rational profit-maximizers actively compete to predict future market values from new information

on inherent values to be reflected immediately in actual prices. Market efficiency is the ability to

allocate capital effectively, by pricing securities solely (Weaver-Weston, 2002). Economic Value

Added Theory is considered to be a current theory and is an integrated financial system used in

decision-making and multiple corporate applications such as performance measurement,


determining shareholder value, and equity valuation (Stewart, 2001). This theory requires change in

a firm’s culture and fiscal responsibility (Hatfield, 2002). This theory is not a new concept;

however, is deemed highly flexible, and a concept of residual income that gives an imaginary

financial premise inoperable unless markets are efficient (Chen-Dodd, 2002).

In additional to the above stated theorems and models; the Black-Scholes Model would help

the AT&T Corporation capitalize within the foreign market. This theory is considered to be a

germinal model. The model is proposed by Fischer Black and Myron Scholes in 1973. The model is

based on a portfolio of stocks and options with the valuation based on the assumptions of short-term

horizons, fixed interest rates, prices for the underlying assets, no dividend payments, no selling or

buying options, and abilities to borrow and short sell (Versluis-Hillegers, 2006).

Black-Scholes model attributes to the volatility smile. All the parameters in the model other

than the volatility are observed without ambiguity. An interest rate curve with variance to tenor, is

obtained, which helps to pick the appropriate rate to use within the Black-Scholes model. Short

stock rate and a short stock position is not free. Often a long stock position is lent at a low cost. In

both the cases, this is considered as a continuous dividend and therefore is an opportunity and asset

for the firm (Versluis-Hillegers, 2006).

Efficiency Theory

The efficiency theorem will change the wireless, wireline, and the wireless supplemental

operating and financial data operating results for an operating income margin from 24.8 percent in

2009, to 26.1 percent in 2011, and 28.0 percent in 2012. Service revenues will increase to 11.3

percent by 2011 from 9.6 percent in 2009, and up to 14.8 percent, in 2012. The projected increases

will be from data service revenue increases from 33.4 percent in 2009, back to 52.5 percent, in

2012. Equipment revenues will increase from 0.3 percent in 2009, to 15.9 percent in 2011, and 22.9


percent by 2012. However, the wired broadband connections, which include DSL, U-verse High

Speed Internet access and satellite broadband, will increase to 25.6 percent. Satellite service

includes connections under agency and resale agreements, which includes consumer U-verse Voice

over IP connections will increase slowly but rapidly at 0.8 percent bi-annually. The efficiency

theorem will allow the ability to attract and offer a projected cost deployment of devices with

services and manage growth in wireless data services including network quality (Myers, 2001).

The Economic Value Added Theory

Because the economic value added theorem is an integrated financial system used in

decision-making for multiple business applications such as performance measurement, determining

shareholder value, and equity valuation, will be beneficial during accountability of asset valuation,

which is acquired based on market indication of enterprise value. Enterprise value is the sum of a

company’s equity and debt values. A standard valuation technique is to determine enterprise value

as a multiple of a company’s operating income before depreciation and amortization. AT&T will be

the benefactor of EVA’s performance measurement for determining equity valuation. The increase

will be minimal with this theorem of measure; however, will have a long-term effect at a steady

incline of 1.2 percent per quarter (ATT, 2009).

Black-Scholes Model

The Black-Scholes model will be a key component in minimizing interest rate and foreign

exchange risk. The model is designed to project and make assumptions of short-term horizons, fixed

interest rates, and prices for the underlying assets of an organization. The majority of financial

instruments are medium- and long-term fixed rate notes and debentures. The changes in interest

rates can lead to significant fluctuations, which is a mix of fixed and floating rate debt. The

corporation is exposed to foreign currency exchange risk through the foreign affiliates and equity

investment in foreign companies.


The Black-Scholes model can help pick the appropriate rate to swap from fixed rate foreign

currencies to fixed-rate U.S. dollars at issuance through cross-currency swaps, removing interest

rate and foreign currency exchange risk associated with the underlying interest and principal

payments, which will alleviate the losses by 4.4 percent in 2011 and increase gains by 6.1 percent

by 2014, which is shown in the chart above (Miller, 2001).

The Global Interface

The ongoing uncertainty in global financial markets could materially adversely affect the

ability and the larger customers’ ability to access capital needed to fund business operations. The

recent instability in the global financial markets and ongoing uncertainty affecting these markets

have resulted in extreme volatility in the credit, equity and fixed income markets. This volatility has

limited, in some cases severely, most companies’ access to the credit markets, leading to

significantly higher borrowing costs for companies or, in many cases, the inability of these

companies to fund their ongoing operations. With the suggested theorems in place, contracts with

large financial institutions will support AT&T’s own treasury operations, including contracts to

hedge the exposure on interest rates and foreign exchange with the ability to obtain funding for

credit lines and other short-term debt obligations. At present, AT&T have been successful in

continuing to access credit and fixed income markets when needed (ATT, 2009).


Leadership and Management Style - Conclusion

The leadership style is a combination of democratic, servant-leader, and bureaucratic with

an underlying leaning toward task- and people-oriented styles of leadership. The adjustment to

leadership will be as a bureaucratic leader to be able to delineate a very structured and procedural

strategy. The democratic leader listens and studies the ideas as the servant-leader facilitates the

goals by giving what is required to be productive. As evidenced by Pleiffer and Jones (1974) the

analysis and interpretation, strength and weakness of this leadership instrument taps into a degree to

which one is task or people-oriented. Task-orientation is concerned with getting the job done, while

people-orientation focuses on group interactions and the needs of individual members (Jensen-

Meckling, 2001).

Management seeks to ensure the objectivity and integrity of the financial data by the careful

selection of managers and by organizational arrangements that provide an appropriate division of

responsibility through communication programs aimed at ensuring that policies, standards and

managerial authorities are understood throughout the organization. The descriptive leadership style

will be an asset needed to implement the suggested financial theories and models to make optimal

choices to manage the organization as well as lead. Management maintains disclosure controls and

procedures that are designed to ensure that information required to be disclosed by AT&T is

recorded, processed, summarized, accumulated and communicated to all levels of management to

allow timely decisions regarding required disclosure and reported within the time periods specified

by the Securities and Exchange Commission’s rules and forms. As AT&T’s management is

responsible for establishing and maintaining adequate internal control over financial reporting, as

defined in Rule 13a-15(f) or 15d-15(f) under the Securities Exchange Act of 1934, which was

designed to provide reasonable assurance to the company’s management and Board of Directors


regarding the preparation and fair presentation of published financial statements. With the suggested

theorems in place, AT&T will be ahead of the competition with a comfortable marginal advantage

within the U.S. and foreign marketplace.


Reference

AT&T. (2009). Annual Report 2009. http://www.att.net.

AT&T. (2009). Proxy Report 2009. http://www.att.net/investorrelations.

AT&T. (2010). News and reports archives 2010. http://www.att.net/news.

Chen, Sh. & Dodd, J. (2002). Market efficiency, CAPM, and value-relevance of earnings and

EVA: A reply to the comment by professor Paulo. Journal of Managerial Issues, 14(4),

507-512.

Chew, D. H. (2001). Financial innovation in the 1980s and 1990s. In Chew, D. H. (Ed.). (2001)

The New Corporate Finance: Where Theory Meets Practice, New York:Irwin.

Fama, E. & French, K. (1996). The CAPM is wanted, dead or alive. The Journal of Finance,

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Hatfield, G. (2002). R&D in an EVA world. Research Technology Management, 45(1), 41-47.

Jensen, M. & Meckling, W. (2001). The nature of man. In Chew, D. H. (Ed.). (2001) The New

Corporate Finance: Where Theory Meets Practice. p. 4-19. New York: Irwin

Jensen, M. C. (1986). Agency Costs of Free Cash Flow, Corporate Finance, and Takeovers.

American Economic Review, 76(2), p. 323- 330.

Miller, M. (2001). The Modgliani-Miller propostions after thirty years. In Chew, D. H. (Ed.).

(2001) The New Corporate Finance: Where Theory Meets Practice, p. 35-50. New York.

Modigliani, F. & Miller, M. (1958). The cost of capital, corporation finance, and the theory of

investment. American Economic Review, 48, 655-669.

Myers, S. (2001). Finance theory and financial strategy. . In Chew, D. H. (Ed.). (2001). The new

corporate finance: Where theory meets practice. p. 96-106. New York: Irwin

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http://www.att.net/news

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Relations Training, Vol. 1 (Revised). San Diego, CA: University Associates Press.

Used with permission.

Securities & Exchange Commission. (SEC). (2009). Annual Reports Archives. http://www.sec.gov.

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Where Theory Meets Practice, p. 35-50. New York: Irwin

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Eaton V_FIN711_Week 8_Individual Leadership Plan Addendum - Finance