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    Weighted Average Cost of Capital of Athena

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    Please help me understand the following: (excel table attached)

    Walk through key assumptions, where you got inputs for key formulas.
    What did you choose as RF rate and why?
    What did you choose as Market premium and why?
    How did you calculate weightings of debt/equity?
    Is there any Debt outstanding and if so how did you calculate current rate?
    Tax rate?

    Weighted Average Cost of Capital

    Calculate the Weighted Average Cost of Capital for Athena Health (ATHN) for 2012 and 2013. Please show your work and list your assumptions.

    Step 1 to Calculate After -tax cost of debt
    After-tax cost of debt:  (assume the company's effective tax rate = 35%) 

    After tax cost of debt= Interest rate * ( 1- tax rate)
    2013 Interest rate 2012 Interest rate
    Interest rate for Athena Health= Interest 3.9 2.2% 0
    Debt 173.8 0 ( As there is no debt)

    2013 2012
    =2.2%*(1-0.35) 0
    After tax cost of debt= 1.43% 0%

    http://investing.money.msn.com/investments/stock-income-statement/?symbol=US%3aATHN
    http://investing.money.msn.com/investments/stock-balance-sheet/?symbol=US%3AATHN&stmtView=Ann

    Step 2: Cost of equity= Risk free rate + Beta * (Market risk premium)

    =2.65%+1.08*(7%)
    10.21%

    Note:
    1) Beta taken from http://investing.money.msn.com/investments/stock-price?symbol=US%3aATHN
    2) Market risk premium assumed as 7%
    3) Assumed same cost of equity for both the years.
    4) Risk free rate as 10 year treasury bond yiled : http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/
    Step 3: Computation of WACC

    For year 2013:

    Value Proportion Cost Product

    Debt 173.8 30.76% 1.43% 0.44%
    Equity Stock 391.3 69.24% 10.21% 7.07%
    Total 565.1 100% WACC= 7.51%

    For year 2012:

    Value Proportion Cost Product

    Debt 0 0.00% 0.00% 0.00%
    Equity Stock 391.3 100.00% 10.21% 10.21%
    Total 391.3 100% WACC= 10.21%

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    https://brainmass.com/business/cost-volume-profit-analysis/weighted-average-cost-capital-athena-574437

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    Solution:
    1. Walk through key assumptions, where you got inputs for key formulas.

    1) Market risk premium assumed as 7%
    2) Assumed same cost of equity for both the years.
    3) Risk free rate as 10 year treasury bond yield
    http://www.bloomberg.com/markets/rates-bonds/government-bonds/us/

    What did you choose as RF rate and why?
    As per stern, "Riskfree asset means that the actual return is equal to ...

    Solution Summary

    This solution helps in estimating weighted average cost of capital of the data tables provided with step-by-step calculations and all formulas used are included.

    $2.19