The content covered in weeks four and five should be suﬃcient for doing this problem arranged. The inquiries below are intended for the Cost of Capital at Ameritrade case within your course supply. You can ﬁnd the data with this case for the course internet site in a schedule named Ameritrade. xls.
Please turn in your trouble set alternatives by placing them to bSpace as a great Excel ﬁle or pdf ﬁle. Upload a single answer for each group, with all group members on the ﬁrst web page.
If you submit an Stand out ﬁle, make sure the grader can understand what you did with no clicking on any cells. To create that likely, please incorporate cells with appropriate answers of the things you did.
This problem set is due by on the lookout for: 00 a. m. upon Wednesday, 11/28. No overdue assignments will probably be accepted.
Inquiries: Assume that the investments under consideration will be ﬁnanced with fairness only (i. e., zero debt ﬁnancing).
1 . What estimate in the risk-free price should be employed in calculating the cost of capital pertaining to Ameritrade?
2 . What estimate with the market risk premium must be employed in calculating the cost of capital for Ameritrade?
several. Ameritrade does not have a beta calculate since the ﬁrm has been publicly traded for simply a short time period. Exhibit 5 provides different choices of similar ﬁrms. What comparable ﬁrms do you advise as the correct benchmarks for evaluating the risk of Ameritrade’s designed advertising and technology investments? Hints for #3:
• It does not matter what Ameritrade consumes its investments on up-front (advertising and technology investments) since these kinds of costs will be known numbers, and you are determining the cost of capital to ﬁgure out the present value from the projected money ﬂows via later years. What matters is what beta the ﬁrm’s assets could have, where the possessions are the following cash ﬂows that Ameritrade gets out of making the up-front opportunities.
• It can be probably not useful to use a equivalent that has very little data (less than 2 years, say) since the equity beta you calculate based on hardly any data will very likely be highly noisy (you can try it—look in the standard problem on your approximated equity beta).
Tips for #4:
βE: To estimation the equity betas, here are some hints:
• Please regress (raw) stock returns in (raw) marketplace returns—you are not given a moment series pertaining to the riskless rate, so you cannot manage the regression using extra stock comes back and extra market returns (over the riskless rate).
• You use the market comes back from Show 6, although you’ll have to consult with your group members if you should use value-weighted or equal-weighted market returns. (The equal-weighted market go back sets all of the xi is actually to be equivalent. ) • For some in the stocks you are given info for share prices and dividends rather than being presented the share return immediately. Some of the stocks and options have been subject to stock splits.