Finance 5204 Managing Corporate Capital Investment and Capital Structure Case1 Cost of Capital at Ameritrade By: Elaine Huang Jonathan Hudson Christopher Lenker AMERITRADE DOES NOT HAVE A BETA ESTIMATE AS 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 INVESTMENTS? WHY? We recommend using the following
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Toyota Cost of Capital Case: General Methodology We used the following framework to do the calculations for all the companies. Afterwards we will discuss their implications: To estimate the cost of equity (RE) we used the following CAPM model: RE = RF + βE (RM-RF) whereby‚ Market Premium = RM – RF = 6% (Given in case) RM = Return for S & P 500 (a market return that takes into account systematic risk associated with the market place where our company is traded‚ NYSE) Risk Free Rate
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Case Solution Cost of Capital at Ameritrade | | • Executive summary: Formed in 1971 and listed in March 1997‚ Ameritrade has been one of the most successful players in the deep- discount brokerage sector. Ameritrade’s two major sources of revenue‚ Transaction income (brokerage commissions‚ clearing fees‚ and payment for order flow) and Net interest revenues that were generated from net balance
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decrease the present value of project inflows by 1%. Since finding appropriate hurdle rates is critical to accepting or rejecting projects‚ Marriott should be precise by calculating and using division-specific rates on division-specific projects. We used the WACC method so that our hurdle rates would reflect appropriate cost of debt and cost of equity‚ as explained in our subsequent analysis. We found Marriott’s hurdle rates: 8.646% for hotels‚ 10.94% for restaurants‚ 11.094% for contracts‚ and 9.688%
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case‚ Marriott Corporation: The Cost of Capital (Abridged)‚ concentrates on making decisions based on capital asset pricing model (CAPM) and the weighted average cost of capital (WACC) to measure the opportunity cost for investments. Dan Cohrs‚ the Vice President of Finance of Marriott Corporation‚ had to deal with making recommendations for the hurdle rates at Marriott Corporation and its three divisions which are lodging‚ restaurant and contract services. In calculating rates‚ he had to face two major
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The Cost of Capital LEARNING OBJECTIVES After reading this chapter‚ students should be able to: • Explain what is meant by a firm’s weighted average cost of capital. • Define and calculate the component costs of debt and preferred stock. • Explain why retained earnings are not free and use three approaches to estimate the component cost of retained earnings. • Briefly explain why the cost of new equity is higher than the cost of retained earnings‚ calculate the cost of new
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Assignment | Cost of Capital‚ Capital Budgeting and Financial Planning | Chapter(s) | 9‚ 10‚ 12 | Group Name | | Student Name(s) | | Date | | Instructions: HW Assignments will be uploaded to Kean Blackboard and must be accessed from there. You must work in groups where assigned (or independently if not assigned to groups) on homework assignments. Points are noted against each question. You are required to submit Home Work assignments electronically on Kean Blackboard using MS-Office
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assistant‚ Joanna Cohen‚ to estimate Nike’s cost of capital‚ which‚ per Cohen’s analysis‚ came to 8.4%. Background The cost of capital is the minimum return that a company should make on an investment or the minimum return necessary for investors to cover their cost. Two main factors of the cost of capital are the cost of debt and the cost of equity. The capital used for funding a business should earn returns for the investors who risk their capital. For an investment to be worthwhile
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1. What is the weighted average cost of capital for Marriot Corporation? Briefly outline the key assumptions that you made in computing the WACC. 2. What is the cost of capital for the lodging and restaurant divisions of Marriot Corporation? Briefly outline the key assumptions that you made in computing the cost of capital and outline any limitations that are presented by your analysis. 3. If Marriot uses a single company-wide cost of capital for evaluating investment opportunities in each of its
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Corporation for calculating the hurdle rates at each of the firm ’s three divisions--lodging division‚ restaurant division and contract service division. Marriott uses Weighted Average Cost of Capital (WACC) as the hurdle rate‚ and use it to discount the appropriate cash flows when evaluate an investment project. Our goal is to determine the WACC at every division base on the information that the case has provided. First of all‚ we will determine the cost of debt‚ cost of equity and the capital structure
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