...Ameri

Assignment Questions Ameritrade:

* What factors should Ameritrade management consider when evaluating the proposed advertising program and technology updates? Why?

* How can the CAPM be used to estimate the cost of capital for a real (not financial) investment decision?

* What is the estimate of the risk-free rate that should be employed in calculating the cost of capital for Ameritrade?

Because it is an investment into technology I would suggest to take a bond with a duration which is not too long. Five years may be too short, but ten years seem acceptable. So the risk free rate should be 6,34 % according to the 10-years government bond.

* What is the estimate of the market risk premium that should be employed in calculating the cost of capital for Ameritrade? 

Because Ameritrade belongs to the large companies we should use the large company stocks. But now we have to make an assumption due to the history of the stocks. We can take the average return of the shorter history or the longer history. Both has its advantages or disadvantages. When we want to simulate normal business we should use the short time history. This makes sure, that the great regression of the 1930's is not recognized. but otherwise regressions appear and the last ones we had in 2007 and 2009. Therefore I would suggest to take the long term view within the regression of the 1930's and estimate a annual return of 12,7 % what leads to a market risk premium of 6,36 %.

* In principle, what are the steps for computing the asset beta in the CAPM for purposes of calculating the cost of capital for a project?

* Ameritrade does not have a beta estimate as the firm has been publicly traded for only a short ime. Exhibit 4 provides various choices of comparable firms. What comparable firms do you recommend as the appropriate benchmark for evaluating the risk of Ameritrade's planned advertising and technology investments?

* Using the stock price and returns data of Exhibits 5...