Arundel
2. How can the Capital Asset Pricing Model (CAPM) be used to estimate the cost of capital for real (not financial) investment decision?
The CAPM is a sound mathematical model that emphasizes expected returns in the market. It offers a basis of assessment for financial decisions when compared to real investments. The expected return on any venture must be higher than what a firm can receive by investing an equal sum of money in financial investments. Some notable investors disagree with the use of the model because they are concerned with only actual returns, but the CAPM is a good tool for explaining what can happen in an individual marketplace.
5. Ameritrade does not have a beta estimate as the firm has been publicly traded only for a short period at the time of the case. Exhibit 4 provides various choices of comparable firms. Which firms do you recommend as the appropriate benchmark for evaluating the risk of Ameritrade’s planned advertising and technology investments? Explain.
The two firms that would most closely associate with Ameritrade are Charles Schwab and E*Trade. Both of these firms are labeled as discount brokerages, but like Ameritrade they provide a technology service to the average investor that most of the larger investment firms do not. As well as the required asset minimums that the average investor does not have. The comparable firms also generate high brokerage revenue percentages like Ameritrade. The executives at Ameritrade should evaluate these firms and see what their marketing and technology budgets involve and what they have planned in the future in order to gauge appropriate risk. Ameritrade’s technology and advertising investments are brave, but the expected return from trade traffic seems to justify the very large increase in expenses.
The CAPM is a sound mathematical model that emphasizes expected returns in the market. It offers a basis of assessment for financial decisions when compared to real investments. The expected return on any venture must be higher than what a firm can receive by investing an equal sum of money in financial investments. Some notable investors disagree with the use of the model because they are concerned with only actual returns, but the CAPM is a good tool for explaining what can happen in an individual marketplace.
5. Ameritrade does not have a beta estimate as the firm has been publicly traded only for a short period at the time of the case. Exhibit 4 provides various choices of comparable firms. Which firms do you recommend as the appropriate benchmark for evaluating the risk of Ameritrade’s planned advertising and technology investments? Explain.
The two firms that would most closely associate with Ameritrade are Charles Schwab and E*Trade. Both of these firms are labeled as discount brokerages, but like Ameritrade they provide a technology service to the average investor that most of the larger investment firms do not. As well as the required asset minimums that the average investor does not have. The comparable firms also generate high brokerage revenue percentages like Ameritrade. The executives at Ameritrade should evaluate these firms and see what their marketing and technology budgets involve and what they have planned in the future in order to gauge appropriate risk. Ameritrade’s technology and advertising investments are brave, but the expected return from trade traffic seems to justify the very large increase in expenses.