On the basis of the financial information given in this case, complete the WACC table that is prepared for this project . What was the WACC for Atlassian as at 2022? What was the WACC one year earlier? Estimate the important financial information such as the after-tax cost of debt, the risk-free rate, the market risk premium, the cost of equity and the weight of debt and equity. Clearly specify and justify the assumptions and calculations required for these analyses (ie. how did you select the beta, risk-free rate, market return, etc).WACC Calculation for Atlasian 20212022Shares Outstanding (in millions) Share Price Market Value Equity Total Market Value of Debt Total Capital - Atlassian Weight of Debt Weight of Equity Cost of Debt Effective Interest Rate for Atlassian Tax Rate After-tax Cost of Debt Cost of Equity Beta Market risk premium Rf Cost of Equity WACC longer 40 year period. Bond rates on government securities are also different depending onthe maturity of these bonds. You also believe that the market values of both company's short-term debt and long-term debt are the same as their book values. Atlassian shares are currentlytrading at $259 per share. At the same time last year the shares were trading at $380 per share.Atlassian credit risk is currently rated as Baa by Moodys.Total assetsTotal liabilitiesTotal equityTotal liabilities and equityShares outstandingTable 1Atlassian's Balance Sheet(Numbers in '000)US Corporate Baa effective yield10-year government bond rate30-year government bond rate20213,323,0182,910,350412,668Average return on the market over the past 40 yearsAverage return on the market over the past 5 yearsPanel B: Interest rate dataDebt to Value (D/V)Equity to Value (E/V)BetaEffective interest rate3,323,018252,000Table 2Capital Market DataPanel A: Information about Atlassian's beta and expected returns on the marketAtlassian beta-calculated against NASDAQ composite indexAtlassian beta - calculated against S&P 500 index0.773.68%20213.50%1.54%1.90%Table 3Atlassian's U.S. competitorsMicrosoft0.570.4320223,124,5782,821,618During the data collection stage, you also gathered recent data for Atlassian's three major U.S.competitors (Table 3). You plan to use this information to estimate the cost of capital for thesecompetitors as well. By doing so, you will be better placed to compare the cost of capital ofAtlassian with that of other (tech) industry leaders. Atlassian and its competitors' currentmarginal effective tax rates are 21%.Google0.010.99302,9603,124,578253,0001.003.53%0.910.809.88%11.74%20225.57%3.33%3.47%Cisco0.050.950.903.65% Estimating Atlassian's Cost of Capital During the Post-Pandemic EconomicRecovery PeriodCaseDescription/Requirements:You are the portfolio manager of a U.S. based mutual fund company that is managing atechnology fund which holds an investment portfolio of large U.S. technology companies,including Atlassian, Microsoft, Google, and Cisco. On September 14, 2022, you consideredpurchasing additional Atlassian shares for your fund. You decided to perform acomprehensive capital budgeting analysis on Atlassian's current investment projects todetermine the financial merits of such a decision.The cost of capital that your team has been employing to evaluate Atlassian's projects wasestimated in early 2019. You believe that the estimation of cost of capital should be re-estimated due to the uncertainty of the U.S. financial market following the outbreak of theCOVID-19 pandemic and the global turmoil caused by economic and geostrategicdevelopments. You intend to use the weighted average cost of capital (WACC) approach,which is obtained using the following equation:EWACC = · ( ) × ² × ( 1 – t) + ( ) × ₁-where:rp = Pre-tax cost of debt capitalte = Marginal effective corporate tax ratere = Cost of equity capitalD/V = Proportion of debt in a market-value capital structureE/V = Proportion of equity in a market-value capital structureYou gathered the necessary accounting information, stock price data and market data fromAtlassian's Financial Reports and other data sources. Table 1 presents the Balance Sheetinformation of Atlassian as at 2021 and 2022. Table 2 presents the market data that relates toAtlassian. You notice that some of the metrics that you collected differ depending on the waythat they are calculated. For example, the beta of Atlassian is different depending on whetherit is calculated against the NASDAQ or the S&P500 index.¹ Likewise, the expected return ofthe market differs depending on whether this is calculated over a shorter 5-year period or'The NASDAQ Composite index is skewed towards technology firms, with up to roughly 50% of the overallcomposition of the index made up of stocks from the technology sector. In contrast, the S&P 500 index offers amore equal representation of industries in the economy.

Question

On the basis of the financial information given in this case, complete the WACC table that is prepared for this project . What was the WACC for Atlassian as at 2022? What was the WACC one year earlier? Estimate the important financial information such as the after-tax cost of debt, the risk-free rate, the market risk premium, the cost of equity and the weight of debt and equity. Clearly specify and justify the assumptions and calculations required for these analyses (ie. how did you select the beta, risk-free rate, market return, etc).WACC Calculation for Atlasian 20212022Shares Outstanding (in millions)   Share Price  Market Value Equity      Total Market Value of Debt  Total Capital - Atlassian     Weight of Debt  Weight of Equity     Cost of Debt   Effective Interest Rate for Atlassian  Tax Rate  After-tax Cost of Debt     Cost of Equity  Beta  Market risk premium  Rf  Cost of Equity        WACC longer 40 year period. Bond rates on government securities are also different depending onthe maturity of these bonds. You also believe that the market values of both company's short-term debt and long-term debt are the same as their book values. Atlassian shares are currentlytrading at $259 per share. At the same time last year the shares were trading at $380 per share.Atlassian credit risk is currently rated as Baa by Moodys.Total assetsTotal liabilitiesTotal equityTotal liabilities and equityShares outstandingTable 1Atlassian's Balance Sheet(Numbers in '000)US Corporate Baa effective yield10-year government bond rate30-year government bond rate20213,323,0182,910,350412,668Average return on the market over the past 40 yearsAverage return on the market over the past 5 yearsPanel B: Interest rate dataDebt to Value (D/V)Equity to Value (E/V)BetaEffective interest rate3,323,018252,000Table 2Capital Market DataPanel A: Information about Atlassian's beta and expected returns on the marketAtlassian beta-calculated against NASDAQ composite indexAtlassian beta - calculated against S&P 500 index0.773.68%20213.50%1.54%1.90%Table 3Atlassian's U.S. competitorsMicrosoft0.570.4320223,124,5782,821,618During the data collection stage, you also gathered recent data for Atlassian's three major U.S.competitors (Table 3). You plan to use this information to estimate the cost of capital for thesecompetitors as well. By doing so, you will be better placed to compare the cost of capital ofAtlassian with that of other (tech) industry leaders. Atlassian and its competitors' currentmarginal effective tax rates are 21%.Google0.010.99302,9603,124,578253,0001.003.53%0.910.809.88%11.74%20225.57%3.33%3.47%Cisco0.050.950.903.65% Estimating Atlassian's Cost of Capital During the Post-Pandemic EconomicRecovery PeriodCaseDescription/Requirements:You are the portfolio manager of a U.S. based mutual fund company that is managing atechnology fund which holds an investment portfolio of large U.S. technology companies,including Atlassian, Microsoft, Google, and Cisco. On September 14, 2022, you consideredpurchasing additional Atlassian shares for your fund. You decided to perform acomprehensive capital budgeting analysis on Atlassian's current investment projects todetermine the financial merits of such a decision.The cost of capital that your team has been employing to evaluate Atlassian's projects wasestimated in early 2019. You believe that the estimation of cost of capital should be re-estimated due to the uncertainty of the U.S. financial market following the outbreak of theCOVID-19 pandemic and the global turmoil caused by economic and geostrategicdevelopments. You intend to use the weighted average cost of capital (WACC) approach,which is obtained using the following equation:EWACC = · ( ) × ² × ( 1 – t) + ( ) × ₁-where:rp = Pre-tax cost of debt capitalte = Marginal effective corporate tax ratere = Cost of equity capitalD/V = Proportion of debt in a market-value capital structureE/V = Proportion of equity in a market-value capital structureYou gathered the necessary accounting information, stock price data and market data fromAtlassian's Financial Reports and other data sources. Table 1 presents the Balance Sheetinformation of Atlassian as at 2021 and 2022. Table 2 presents the market data that relates toAtlassian. You notice that some of the metrics that you collected differ depending on the waythat they are calculated. For example, the beta of Atlassian is different depending on whetherit is calculated against the NASDAQ or the S&P500 index.¹ Likewise, the expected return ofthe market differs depending on whether this is calculated over a shorter 5-year period or'The NASDAQ Composite index is skewed towards technology firms, with up to roughly 50% of the overallcomposition of the index made up of stocks from the technology sector. In contrast, the S&P 500 index offers amore equal representation of industries in the economy.

Accepted Answer

The Weighted Average Cost of Capital:
The weighted average cost of capital is a single, composite…

WACC Calculation for Atlasian
	2021	2022
Shares Outstanding (in millions)
Share Price
Market Value Equity

Total Market Value of Debt
Total Capital - Atlassian

Weight of Debt
Weight of Equity

Cost of Debt
Effective Interest Rate for Atlassian
Tax Rate
After-tax Cost of Debt

Cost of Equity
Beta
Market risk premium
Rf
Cost of Equity


WACC