Cost Of Capital At Ameritrade Essay

704 words - 3 pages

Finance 5204Managing Corporate Capital Investment and Capital StructureCase1Cost of Capital at AmeritradeBy:Elaine HuangJonathan HudsonChristopher LenkerAmeritrade 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 firms in the Discount Brokerage Industry: Charles Schwab Corporation, E-Trade, Waterhouse Investor Services, and Quick and Reilly Group, in order to estimate the Beta of the firm. We have chosen these four firms as comparables to Ameritrade because they compete within the same realm of business as Ameritrade. We draw this conclusion based off several references from the text. The first reference demonstrates Ameritrade as a discount broker by stating, "Full-service brokers were less sensitive to market movements than deep-discount brokers like Ameritrade." Another assertion which illustrate Ameritrade's competition is, "…competitors such as Charles Schwab and E*Trade did not follow Ameritrade's lead and try to compete on price." These arguments along with others from the text provide convincing evidence that compel us to choose both the discount brokerage industry and Charles Schwab, E*Trade, Waterhouse, and Quick and Reilly Group, in order to accurately measure Beta and likewise risk.Using the stock price and returns data in Exhibits 5 and 6 and the capital structure information in Exhibit 4 estimate the equity beta βs, asset beta βa and the cost of assets, ka, for (i) discount brokerage firms and (ii) investment services firms as comparable groups, assuming (i) debt beta=0 and (ii) debt beta = 0.25.
Table A

Charles Swab

Quick and Reily

Waterhouse

Bs

2.297

2.2042

3.1899

Debt

0.08

0

0.38

Equity

0.92

1

0.62

i. Ba when Bd =

0

2.11324

2.2042

1.977738

2.0983927

ii. Ba when Bd =

0.25

2.13324

2.2042

2.072738

2.136726

Rf

6.61%

Rm-Rf

7.2%

Ka when Bd =

0

21.7184272%

ka when bd =

0.25

21.9944272%

Table B

A G Edwards

Bear Stearns

Merrill Lynch

MSDW

Paine Webber

Raymond James

Bs

1.4495

1.6893

1.8226

2.0924

1.7648

1.4489

Debt

0

0.5

0.52

0.53

0.53

0.04

Equity

1

0.5

0.48

0.47

0.47

0.96

i. Ba when Bd =

0

1.4495

0.84465

0.874848

0.983428

0.829456

1.390944

1.062137667

ii. Ba when Bd =

0.25

1.4495

0.96965

1.004848

1.115928

0.961956

1.400944

1.150471

Rf

6.61%

Rm-Rf

7.2%

Ka when Bd =

0

14.2573912%

ka when bd =

0.25

14.8933912%

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