Case Study Guidelines
Students are required to read closely the assessment criteria for both case study presentation and written report as listed on the course outline (page 5 to 6).
Case Study Questions
Presenting groups need to address the following questions in their presentations.
Cost of Capital at Ameritrade
1) What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
Cost of capital
NPV: only accept projects with positive NPV
Discount Rate: needed to calculate NPV ( normal internal use 15%; management suggest 8%-9%; external from Credit Swiss First Boston was 12%)
From the results: relatively high cost of capital, so Ameritrade should only accept projects with potentially high rate of returns to cover the cost (but under similar risk levels)
2) How can the Capital Asset Pricing Model be used to estimate the cost of capital for a real (not financial) investment decision?
Systematic Risk & Non-systematic Risk, Formula
3) What is the estimate of the risk-free rate and market risk premium that should be employed in calculating the cost of capital for Ameritrade?
Risk-free Rate: assuming long term projects, so long term US government bond rates (Exhibit 3: 10 or 20 year bonds; 30 year bonds might be too long for technology industry)
Risk Premium: difference between US Government Securities rate and historical Large Company Stocks annual returns (from Exhibit 3); use the 1950-1996 one because the unstable economy environment and political issues during 20s and 30s in US / or use the 1929-1996 one because enough time length and not possible to predict if there would no wars or any other crisis happen in future
4) In principle, what are the steps for computing the asset beta in the CAPM for purposes of calculating the cost of capital for a project?