MBA 203: Problem Set 4
Cost of Capital at Ameritrade
Due: Wednesday, November 28, 2012, by 9:00 a.m.
The course material covered in weeks 4 and 5 should be suﬃcient for doing this problem set. The questions below are for the Cost of Capital at Ameritrade case in your course packet. You can ﬁnd the data for this case on the course website in a spreadsheet named Ameritrade.xls.

Please turn in your problem set solutions by posting them to bSpace as an Excel ﬁle or pdf ﬁle. Upload a single solution for each group, with all group members listed on the ﬁrst page. If you turn in an Excel ﬁle, make sure the grader can understand what you did without clicking on any cells. To make that possible, please include cells with appropriate explanations of what you did.

This problem set is due by 9:00 a.m. on Wednesday, 11/28. No late assignments will be accepted.

Questions: Assume that the investments under consideration will be ﬁnanced with equity only (i.e., no debt ﬁnancing).
1. What estimate of the risk-free rate should be employed in calculating the cost of capital for Ameritrade?
2. What estimate of the market risk premium should be employed in calculating the cost of capital for Ameritrade?
3. Ameritrade does not have a beta estimate since the ﬁrm has been publicly traded for only a short time period. Exhibit 4 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? Hints for #3:

• It does not matter what Ameritrade spends its investments on up-front (advertising and technology investments) since these costs are known numbers, and you are calculating the cost of capital to ﬁgure out the present value of the projected cash ﬂows from later years. What matters is what beta the ﬁrm’s assets will have, where the assets are the subsequent cash ﬂows that Ameritrade gets out of making the up-front investments.

...ARCHITECTURE
The problems to estimate the cost of capital
Before starting to describe the problems associated to the estimation of the cost of
capital, it is extremely relevant to describe its meaning: according to Investopedia, it is “the
cost of funds used for financing a business”. In order to carry out this process, the companies
can only be financed through equity; only through debt; or...

...Task 5: Cost of Capital
TIP: read your lecture, it has a link to an example of computing cost of capital!!
http://www.expectationsinvesting.com/tutorial8.shtml
AirJet Best Parts Inc. is now considering that the appropriate discount rate for the new machine should be the cost of capital and would like to determine it. You will assist in the process of obtaining this rate.
1. Compute the...

...The Cost of Capital for Goff Computer, Inc.
Rahul Parikh
BUS650: Managerial Finance (MAH1209A)
Dr Charles Smith
March 18, 2012.
The Cost of Capital for Goff Computer, Inc.:
1. Most publicly traded corporations are required to submit 10Q (quarterly) and 10K (annual) reports to the SEC detailing their financial operations over the previous quarter or year, respectively. These corporate fillings are available on the SEC Web site at...

...What is cost of capital?
The cost of capital is the cost of obtaining funds, through debt or equity, in order to finance an investment. It is used to evaluate new projects of a company, as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet.
Importance
The concept of cost of capital is a...

...Cost of Capital
Definition: cost of capital is the rate of return that a company must earn on its project investments to maintain its market value and attract funds. The cost of capital to a company is the minimum rate of return that is must earn on its investments in order to satisfy the various categories of investors, who have made investments in the form of shares , debentures and loans. The...

...ogCost of capital
First of all I would like to say the I wanted to calculate the cost of debt and cost of equity but the information given in the statements are missing the items needed to calculate the cost of debt and the cost of equity but I would like to analyze the information related to this part
The market capitalization already increased in year 2010to 7,016 million from the previous year which was 3,805 million...

...WEIGHTED AVERAGE COST OF CAPITAL FOR DELL COMPUTER
1) From the SEC website, the balance sheet of Dell Computer reveals a
Book value of debt = $3,394,000,000 and
Book value of equity = $4,625,000,000
The same balance shows the breakdown of the long-term debt (book values) in table 1.
Table 1
Coupon Rate
(%) Maturity Book Value
(Face Value in million $)
3.38 06/15/2012 400
4.70 04/15/2013 599
5.63 04/15/2014 500
5.65 04/15/2018 499
5.88...

...What’s your real cost of capital?
By James J. McNulty, Tony D. Yeh, William s. Schulze, and Michael H. Lubatkin
Harvard Business Review, October 2002
Issue of the article: valuing investment projects
Number of pages: 12
Daniel Miravet Campos
Part 1. Executive summary
This article is fundamentally based on the exposition of a new method to calculate the cost of capital for a company (MCPM), to meet the inefficiencies of the...

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