1.

When evaluating the proposed advertising program and technology upgrades,

Ameritrade management should consider the following factors:
a. Whether the program and upgrades would be worthwhile to generate significant future
cash flows to justify the investment and in turn, improve companys competitive position in
market.
b. Whether Ameritrade would be successful to attract new customers alongside pursuing
old ones, to increase the overall customer base.

To evaluate the qualitative success of the program and upgrades, consideration of the first one
reflects the success of the project statistically through the method of positive Net Present Value
projection. The second factor would help to understand Ameritrades consumer service and
operational activity as part of their effective strategy execution.

2. Ameritrade is a fully equity financed company. Hence, for Ameritrade, the cost of
capital is identical to cost of equity.

According to the Capital Asset Pricing Model (CAPM), cost of equity (re)= Risk free rate (rf)
+ beta * [market rate of return (mR) - Risk free rate (rf)]

For real investment decision, different plans can be tried out, for which the cost of weighted
average cost of capital (WACC) is considered, which in this case is identical to Cost of equity,
obtained through CAPM.

3. The risk-free rate estimated for calculating the cost of capital for Ameritrade would be
identical to the prevailing yields on US Government securities in terms of their annualized
yield to maturity. The prevailing yield on US Governments treasury bills for 30 year bonds
(for the longest given period would give more statistically perfect data) would represent to the
risk-free rate considered which would be 6.61%.

Market risk premium for a certain period represents the difference between the market return
and the risk-free rate for the same period. For Ameritrade, the market return is estimated from
the Historic Average Total Annual Returns on Common Stocks of Large companies and as
mentioned before, the risk-free rate from the US Government 30-years Long term bonds, each
between years 1929-1996, as the market risk premium is to be estimated in 1997. Hence, with
the risk-free data of 5.5% and market return value of 12.7%, the estimated value of market risk
premium would be 12.7% - 5.5% = 7.2%.

4. To compute the asset beta for Ameritrade, the following steps are to be performed:
i. To assess the risk of Ameritrade, similarly operational (in terms of the trading period and
similar type of operations like deep-discount brokerage) firms should be selected.
ii. Using a linear regression analysis, the monthly returns of the comparable firms with respect
to the monthly market return can be used to deduce levered equity beta for each of them.
iii. Using the capital structure (how equity and debt form the capital value of the firms
individually), the corresponding effect can be removed from the previously calculated
levered beta values to obtain unlevered beta.
iv. Averaging the unlevered beta values of all comparable firms, the unlevered beta of
Ameritrade can be deduced.
v. If Ameritrade were an equity and debt financed mixed capital structure company, then the
re-levered equity beta would have to be calculated with respect to the capital structure
(debt/value, equity/value). Since, it is mentioned that Ameritrade is solely an equity
financed firm, hence the asset beta for the same would be identical as unlevered beta (no re-
levering process would be required).

5. As mentioned about the future planning of Ameritrade to prosper its business, the
advertising and technology investments play the most significant role. These investments
can be expected to have come up to bring new consumers to strengthen its loyal consumer
base and making a better trading platform with better capacity through developed high-tech
medium. That planning, in turn, seems to have been planned to improve the brokerage
operations by trade-related risk-absorption. Hence, to find the comparable firms, the
operations of the concerned groups should be primarily involved with brokerage and trading
services so that those groups/firms reflect similar risk as does Ameritrades trading and
brokerage. From that perspective, Charles Schwab Corp., E-Trade, Quick & Reilly group,
and Waterhouse Investor services could be chosen selectively based on their specialization
in discount brokerage industry and for each of them, brokerage revenue value forming more
than 80% of total revenue.