1. What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
2. How can the Capital Asset Pricing Model be used to estimate the cost of capital for a real (not financial) investment decision?
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?
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?
5. 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 advertising and technology investments?
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