What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
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?
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| 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?
The asset betas for these firms can be found by using the following equation, which essentially unlevers the equity beta: Asset = E * E/(D+E) Calculate the return of the investment, return on the market. Calculate the standard deviation, variance and covariance of the investments. Use the below formula to solve for the Beta of an asset. The equity betas E, for the comparable firms are found by performing a regression calculation on the returns of each of the 3 stocks against the value weighted market index over a 5 year period. Returns were computed using data from Exhibit 5 and the following equation: Return = ( [ (Stock Split Ratio) * P] (T+1) – P_t + [Stock 4.- Ameritrade does not have a beta estimate as the firm has been publicly traded for only a short time-period. Exhibit 4 of the case provides various choices of comparable firms. What comparable firms do you recommend as the appropriate benchmarks for evaluating the risk of Ameritrade’s planned advertising and technology investments? Analysis of Exhibit 1 provides insight into Ameritrade’s scope of business. For the 3 years that data is provided, nearly 90% of Ameritrade’s net revenues were brokerage revenues consisting of transaction income and net interest. Looking to Exhibit 4 for comparable firms, we see that Charles Schwab Corp, E*Trade, Quick & Reilly Group, and Waterhouse Investor Services have similar business risks and can be used as an appropriate benchmark for evaluating the risk of Ameritrade’s proposed project. Additionally, these firms all represent other discount brokerage firms. Ameritrade is not a full blown technology or internet firm because they are only involved in a niche market of the internet so comparing them to Yahoo or Netscape would not make sense as those companies provide much broader technology and internet services than Ameritrade. Comparing Ameritrade fo tull-service brokerage and investment firms also does not charge the same amount in fees as those other firms. While Ameritrade may be ahead of the curve on providing technology and internet access for trading options, those attributes provide a competitive advantage over other comparable firms in the discount brokerage business which should be used as comparable firms. Download 14.94 Kb. Share with your friends:
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