r is the discount rate or cost of capital we need to calculate. Ameritrade’s cost of capital should reflect a risk premium to account for the uncertainty of the expected future cash flows .
Cost of capital =r1+Beta(rm-r1)
Beta represents the risk of Ameritrade. Rm is the return of the average-risk company, just like the NASDQ. R1 is the risk free return, reflecting the time value of money.
After all, the CAPM provides a useful equation to calculate the discount rate for a real investment decision.
As I said above , we need to calculate the NPV.
Cfi---is the expected cash flow in period i. and r is the discount rate we are looking for.
If the discount rate is too high, good projects maybe rejected and if we use a lower rate, bad projects may arise.
2 In my opinion, we should use the risk-free rate equal to yield of 20-year US government securities, because it is long-term capital investment. We may use 30-year rate, but we are investing in technology, and concerning the speed of technological enhancements, 20-year rate is optimal. So it is 6,69%
2 Using the yields of long-term (10 to 30-year) bonds to determine the risk-free interest rate.
It is important to measure historical stock returns over the same time horizon as that used for the risk-free interest rate.
It takes many years of data to produce even moderately accurate estimates of expected returns. Yet very old data may have little relevance for investors’ expectations of the market risk premium today.
3 condition1: Historical stock return: 14.0%
Market risk premium: 8%(14-6)
Condition2: Historical stock teturn: 14%
Market risk premium:7.66%(14-6.34)
We do not decide which one is right 14%-6.69%
4 A corporate action in which a company's existing shares are divided into multiple shares. Although the number of shares outstanding increases by a... [continues]
Cite This Essay
(2011, 11). Cost of Capital of Ameritrade. StudyMode.com. Retrieved 11, 2011, from http://www.studymode.com/course-notes/Cost-Of-Capital-Of-Ameritrade-835087.html
"Cost of Capital of Ameritrade" StudyMode.com. 11 2011. 11 2011 <http://www.studymode.com/course-notes/Cost-Of-Capital-Of-Ameritrade-835087.html>.
"Cost of Capital of Ameritrade." StudyMode.com. 11, 2011. Accessed 11, 2011. http://www.studymode.com/course-notes/Cost-Of-Capital-Of-Ameritrade-835087.html.