Cost of Capital at Ameritrade
Cost of Capital at Ameritrade
What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
Mr. Ricketts believes that his role as CEO is to maximize shareholder value by accepting any project whose expected return on investment is greater than the cost of capital. Therefore, the main factors that Ameritrade management should consider are the expected return on investment for the project, and how this compares to the project’s cost of capital. Other factors that should also be considered include: how market swings will affect the expected return on investment, the project’s payback period (the project will require massive initial outlays, so Ameritrade could find itself in financial trouble if results are not seen relatively quickly), the unique risk that would come along with being the only major player in their price range, the risks inherent in being the “first adopter” of new technology (unforeseen technical problems, the possibility that price cuts in the near-future could allow competitors to obtain the same technology at a drastically reduced price, etc.), the relative success of previous advertising campaigns, and the positive effects that an increase in market share could have on future projects.
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 an important measure when it comes to real investment decisions because it provides a basis of comparison for financial decisions. The return on a project must be greater than what the firm can earn by investing an equivalent amount of money in financial investments.
What is the risk-free rate that should be used in calculating the cost of capital using the CAPM? Explain.
The risk-free rate that should be used in calculating the cost of capital in the CAPM is 5.24%, which is the current yield on a 3-month T-Bill. We chose this rate because it is
What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
Mr. Ricketts believes that his role as CEO is to maximize shareholder value by accepting any project whose expected return on investment is greater than the cost of capital. Therefore, the main factors that Ameritrade management should consider are the expected return on investment for the project, and how this compares to the project’s cost of capital. Other factors that should also be considered include: how market swings will affect the expected return on investment, the project’s payback period (the project will require massive initial outlays, so Ameritrade could find itself in financial trouble if results are not seen relatively quickly), the unique risk that would come along with being the only major player in their price range, the risks inherent in being the “first adopter” of new technology (unforeseen technical problems, the possibility that price cuts in the near-future could allow competitors to obtain the same technology at a drastically reduced price, etc.), the relative success of previous advertising campaigns, and the positive effects that an increase in market share could have on future projects.
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 an important measure when it comes to real investment decisions because it provides a basis of comparison for financial decisions. The return on a project must be greater than what the firm can earn by investing an equivalent amount of money in financial investments.
What is the risk-free rate that should be used in calculating the cost of capital using the CAPM? Explain.
The risk-free rate that should be used in calculating the cost of capital in the CAPM is 5.24%, which is the current yield on a 3-month T-Bill. We chose this rate because it is