Ameritrade- Case Study Report (Assignment)

1540 WordsJun 22, 20137 Pages
Executive Summary As a Deep-Discount Brokerage firm, Ameritrade Holding Corporation (AHC) plans to invest in advertising and technology in order to increase their consumer base and thus revenues. The purpose of this report is to assess the riskiness of the proposed investments by considering the project’s cost of capital calculated via the Capital Asset Pricing Model (CAPM). A range of factors will be considered in order to assess each possible variable that may influence the result. Areas of focus include the risk free rate, market index average returns, the market risk premium, identifying suitable comparables and calculating the asset betas. The appropriate risk free rate was calculated using U.S. 10-year securities with an annualized…show more content…
Therefore greater weight was given to the discount brokerage comparables as a source of beta estimates. It is noted that E*Trade is not used as their historical data is limited and does not meet the investment horizon (Figure6.) Computing Asset Betas (Figure1) 3 The first step in calculating the beta for the chosen comparables was to use the monthly stock price information to calculate the % excess returns for a period of 5 years (1992-1996). Again VW index was used as the source of monthly market return data points. To calculate the excess returns of each stock, (End price – starting price + dividend)/starting price, was used. This data was plotted against the monthly market index returns using the excel function “SLOPE” which enabled the betas to be calculated. The historical data varied slightly for each comparable, therefore 5-year investment horizons of 1992 to 1996 and 1992 to the most recent historical data available was found using the same methodologies for each comparable (Figure7) noting the betas found are fully levered. The next step involved finding the unlevered beta using the debt/equity ratios (Figure9), a 35% tax assumption, the Hamada equation and data from Figure 8 , the unlevered beta for each comparable were calculated, shown Figure 10. Leaving us with(U = 2.045). Analysis and Summary Cost of Capital Using the CAPM, the project’s cost of capital is found to be 25.5%. This Figure represents

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