Amitrade: a Problem Excercise of Cost of Capital Essay

The course material cover in weeks 4 and 5 should be sucient for doing this problem set. The questions below argon for the equal of Capital at Ameritrade case in your course packet. You rear nd the data for this case on the course website in a spreadsheet named Ameritrade.xls.Please turn in your problem set firmness of purposes by carte du jour them to bSpace as an Excel 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, work sure the grader can understand what you did with expose clicking on any cells. To make that possible, please embarrass cells with appropriate explanations of what you did.This problem set is overdue by 900 a.m. on Wednesday, 11/28. No late assignments impart be accepted.Questions Assume that the investments under consideration forget be nanced with beauteousness only (i.e., no debt nancing).1. What pronounce of the jeopardy-free rate should be employed in calculating the court of capital for Ameritrade?2. What estimate of the market risk premium should be employed in calculating the cost of capital for Ameritrade?3. Ameritrade does non have a beta estimate since the rm has been publicly traded for only a suddenly snip period. Exhibit 4 provides sundry(a) choices of comparable rms. What comparable rms do you preach as the appropriate benchmarks for evaluating the risk of Ameritrades planned advertising and engine room investments? Hints for 3 It does not matter what Ameritrade spends its investments on up-front (advertising and technology investments) since these costs ar known numbers, and you are calculating the cost of capital to gure come forth the present value of the projected cash in ows from later years. What matters is what beta the rms assets allow for have, w here(predicate) the assets are the subsequent cash ows that Ameritrade gets out of making the up-front investments. It is probably not giveful to use a comparable that h as in truth little data (less than 2 years, say) since the equity beta you estimate based on very little data will be very noisy (you can try itlook at the banner error on your estimated equity beta).Hints for 4E To estimate the equity betas, here are several(prenominal) hints Please slide by (raw) depot returns on (raw) market returnsyou are not given a time series for the riskless rate, so you cannot function the regression using excess short letter 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 mental strains you are given data for gunstock prices and dividends rather than being given the stock return directly. Some of the stocks have undergone stock splits.