Ameritrade (Hbr) Case Class Notes

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Ameritrade Case Class Notes Problem: Cost of capital for technology improvements; additional advertising Incremental CF overtime = Project/∆ Looking for cost of capital for entire company  WACC (for debt, equity, assets) Use CAPM model; Ri = Rf + βi/change (Rm-Rf/Market Risk Premium) ; can assume market risk premium is 0 Decide on industry of company to use data instead of public financial statement history because of limited stock data A.K.A. βe and you need more historical data for reliable regression βassets = d/(d+e) * βd + e/d+e * βe β = the sensitivity of ???? against the market; no movement/no change β = 0 Take average of βa of companies in the industry Use βa instead of βe because firms carry different capital structure and use leverage differently Use industry because the business share the same common risks factors and sensitives; β should be directly related Ameritrade’s CEO stated they were a Discount Brokerage Firm Core business is brokerage; majority of revenue comes from stock trading 80% of income comes from trading = argument against being an inet company 20% interest income Pricing model is to provide low price services = “discounted” Decide of Rates Ri = Match investment horizon with rate Rf = recommended 30yr current rate “Annualized Yield to Maturity” from Exhibit 3 = 6.61% recommend using 30yr rate to extend the burden because the investment is relatively large vs. size of company Rm = recommended large company stock at longest timeframe from Exhibit 3 = 12.7% Whichever is most representative of the market SEE “Best Practices in Estimating the Cost of Capital: Survey & Synthesis” βe Estimates for other companies (comparable firms) Charles Schwab 2.29- 2.45 Quick & Reilly 2.055-2.38 Waterhouse

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