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Cost of Capital at Ameritrade

  1. Can you use Ameritrade’s information to estimate the WACC? Why or why not?
  2. How you found the comparable firm? Be specific with the process and variables used to identify the comparable firm. If you used capital structure in any of the steps, did you use market value or book value and why? Did you use the financial statement information of a particular year or the average of a sample period?
  3. Why did you use equity and dividends received (rather than the original price and dividends provided) to calculate capital gains yield and dividend yield?
  4. In the last 5 years, how is your company’s total risk, systematic risk, and average return relative to the market average? How do you measure total risk and systematic risk?
  5. Why is value-weighted average return used as the proxy for the market average?
  6. In CAPM, what is the rf rate used and why did you choose that particular rate instead of the T-bill rate?
  7. Why is annual market return used in the CAPM return estimate, rather than monthly return?
  8. Are you able to use one of the dividend models to estimate the cost of capital? If yes, which dividend model is used and why?
  9. Find annual dividend and growth rate of the annual dividends.
  10. Find the D1, P0, and avg. dividend growth rate to get the cost of equity using the appropriate dividend model.
  11. Next, use Market Model. State the model’s equation, run the regression to get the outputs.
  12. Should both intercept and beta be used in the cost of equity calculation? Why or why not? Be aware of the monthly to annual adjustment when estimating the cost of equity.
  13. Is your CAPM beta similar to the beta from the market model?
  14. Compare the three cost of equity estimates. Are they similar? If one of them is significantly different from the rest, it may not be reliable. Find reasons to justify why that particular model isn’t reliable.
  15. Of the two similar cost of equity estimates, what do you do from here?
  16. To find the WACC, we also need to find the Rd and the capital structure weights. ***While the Rd of the comparable firm is given, use M&M proposition II to explain why we should use the Rd and capital structure weights of the comparable firm to calculate the WACC, rather than those of Ameritrade!
  17. When it comes to estimating the capital structure weights, should you use book value or market value? Why?

Last Updated on November 28, 2021

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