Case Analysis Cost of Capital at Ameritrade

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Case analysis "Cost of Capital at Ameritrade" Cost of capital refers to the maximum rate of return a company must earn from its investments, so that the market values of the company’s equity shares do not go down. The people at Ameritrade are not in agreement on the best estimate of the cost of capital. Research analyst put the cost of capital at 12%, while other members of the management estimate it to be at 9% and the CFO estimates it to be at 15%. The CEO of the company is optimistic that the rate of return is greater than the cost of investments. However, it will be difficult to continue with the project without agreeing on the estimate of the cost of capital. Determining the company’s cost of capital is essential for both…show more content…
The capital asset pricing model can be used to determine the rate of return for an asset that is risky. This model aims at assuring that investors are compensated for the risk and the value of money. Therefore, the expected return on a security is equal to the rate of a risk-free security and the risk premium. Risk premium is the minimum amount of money expected in return of an asset that is risky. The risk premium must exceed risk-free and less risky assets. Stock split is an action by a corporate to divide it existing shares into multiple shares. This increases the number of the company’s outstanding shares. However, when compared to share amount the total dollar value of the dollar remains the same. Companies perform stock splits when the price of the company’s shares are too high, making the shares too expensive for most investors. Stock splits make the stock prices affordable to most investors. It is recommendable to compare companies that can Ameritrade to companies such as ETrade, Quick & Reilly Group and Waterhouse Investor Services. Cited works Harvard Business School. Cost of Capital at Ameritrade. Rev. April 26 2001 The President and Fellows of Harvard College. (2000) Harvard Business School Case 201-046 (2nd edition), Cost of Capital at Ameritrade. Harvard Business School Pratt, Shannon P, and Roger J. Grabowski. Cost of Capital in Litigation: Applications and Examples. Hoboken, N.J: John

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