Cost of Capital at Ameritrade 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 that should be employed in calculating the cost of capital for Ameritrade? 4. What is the estimate of the market risk premium that should be employed in calculating the cost of capital for Ameritrade? 5. 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? 6. 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? 7. Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in Exhibit 3, calculate the asset betas for the comparable firms. 8. How should Joe Ricketts, the CEO of Ameritrade, view the cost of capital estimate you have calculated?

Colorscope, Inc. 1. Why would any customer, let alone large advertising agencies and departmental stores, go to Colorscope rather than go to the large printers listed in Exhibit 3? 2. Set up a two stage cost system to figure out the profitability of different jobs. You will have to choose resource drivers to allocate the cost of resources to cost pools. Then choose cost drivers to allocate the costs in various cost pools to jobs. Compute the cost driver rates. Calculate profitability of job 61001 by allocating costs to that job using the cost driver rates that you