Ameritrade Case

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Firm Name

Equity Beta

Debt Beta Assumption

E/V

D/V

Tax Rate

Asset Beta

Bear Stearns (Investment Services)

1.747

0

0.50

0.50

0%

0.8739

Merrill Lynch & Co (Investment Services)

1.895

0

0.48

0.52

0%

0.9099

Paine Webber (Investment Service)

1.928

0

0.47

0.53

0%

0.9062

Raymond James Financial (Investment Services)

1.370

0

0.96

0.04

0%

1.3153

Ameritrade

11.884

0

0.08

0.92

0%

1.0013

Final Beta

1.0013

- When calculating the cost of capital, we will first need to calculate the cost of equity. In doing this we will use the risk-free rate, equity beta, and the market risk premium. Then we will calculate the cost of debt using the risk-free rate and the debt beta. The calculations follow below:

RE = Rf + BE ( E * ( Rm – Rf )

= 6.61 + 11.84 * 11.19

= 139.10%

RD = Rf + ( Rf * BD )

= 6.61 + ( 6.61 * 0 )

= 6.61%

We will then calculate the weighted average cost of capital (WACC). When calculating the WACC we will use the equity / total value, firm’s cost of equity, debt / total value, the cost of debt, and the tax adjusted interest expense. The calculation follows below:

WACC = (E/V)*RE+(D/V)*Rd*(1-Tc)

WACC = .08 * 1.391+ (.92) * 0 * (1-0)

WACC = .11128 + 0

= 11.13%

Joe Rickets the CEO will be disappointed to see that the cost of capital is 11.13%. Although this is better than the 15% discount rate the CFO at Ameritrade, Joe should have been hopeful that it would be in line with some of the managers at Ameritrade estimates that cost of borrowing should be 8-9%. With that said, I do believe that he will go ahead with the project to bring long-term growth to TD Ameritrade.

Exhibit – Regression Models

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