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. please turn in your problem set responses by posting them to bSpace as an go by le or pdf le. Upload a single solution for each group, with all group members listed on the rst page. If you turn in an Excel le, engender sure the grader can understand what you did without clicking on any cells. To make that possible, please include 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 consideration will be nanced with equity besides (i.e., no debt nancing).1. What estimate of the risk-free rate should be employed in calculating the cost of peachy for Ameritrade?2. What estima te of the commercialize risk pension should be employed in calculating the cost of capital for Ameritrade?3. Ameritrade does non acquire a important estimate since the rm has been publicly traded for only a short time period. Exhibit 4 provides various choices of comparable rms. What comparable rms do you recommend as the appropriate benchmarks for evaluating the risk of Ameritrades plotted advertising and applied science 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, w here the assets are the subsequent cash ows that Ameritrade gets out of making the up-front investments. It is probably not useful to use a comparable that has real little data (less than 2 years, say) since the equit y beta you estimate ground on very little data will be very noisy (you can try itlook at the standard illusion on your estimated equity beta).Hints for 4E To estimate the equity betas, here are some hints Please regress (raw) stock getting evens on (raw) market devolvesyou are not disposed a time series for the riskless rate, so you cannot run the regression using nimiety 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.