Amitrade: a Problem Excercise of Cost of Capital Essay

The course material covered in weeks 4 and 5 should be sucient for doing this problem set. The questions below are for the Cost of Capital at Ameritrade case in your course packet. You can nd the data for this case on the course website in a spreadsheet named Ameritrade.xls. recreate turn in your problem set solutions by posting them to bSpace as an Excel le or pdf le. Upload a single solution for for each one group, with all group members listed on the rst page. If you turn in an Excel le, make sure the grader can understand what you did without clicking on any cells. To make that possible, please entangle cells with appropriate explanations of what you did.This problem set is due by 900 a.m. on Wednesday, 11/28. No late assignments will be accepted.Questions Assume that the investments under friendliness will be nanced with equity only (i.e., no debt nancing).1. What deem of the risk-free rate should be employed in calculating the cost of pileus for Ameritrade?2. What estima te of the market risk premium should be employed in calculating the cost of capital for Ameritrade?3. Ameritrade does not have a beta estimate since the rm has been in public traded for only a short time period. confront 4 provides various choices of comparable rms. What comparable rms do you recommend as the appropriate benchmarks for evaluating the risk of Ameritrades planned advertising and technology investments? Hints for 3 It does not matter what Ameritrade spends its investments on up-front (advertising and technology investments) since these costs are known numbers, and you are calculating the cost of capital to gure out the present value of the projected cash ows from later years. What matters is what beta the rms assets will have, where the assets are the subsequent cash ows that Ameritrade gets out of making the up-front investments. It is plausibly not useful to use a comparable that has real little data (less than 2 years, say) since the equity beta you estimate bas ed on very little data will be very noisy (you can try itlook at the standard error on your estimated equity beta).Hints for 4E To estimate the equity betas, here are some hints Please regress (raw) stock returns on (raw) market returnsyou are not given a time series for the riskless rate, so you cannot run the regression using excess stock returns and excess market returns (over the riskless rate). You use the market returns from Exhibit 6, but youll have to discuss with your group members whether you should use value-weighted or equal-weighted market returns. (The equal-weighted market return sets all the xi s to be equal.) For some of the stocks you are given data for stock prices and dividends rather than being given the stock return directly. Some of the stocks have undergone stock splits.