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Question #1: Ameritrade is planning on spending \$155M in the next two fiscal years on advertising and \$100M on technology upgrades. Management would need to consider if this large capital investment would directly result in future cash flows large enough to offset these investments at a rate that would satisfy the debt owners and shareholders. Management would need to determine the rate of return for these investments and compare this to the cost of capital, calculated using betas from comparable companies to determine accurate relationships to market fluctuations. If the rate of return for the project is less than the cost of capital, management can conclude that the investment would be more wisely spent on other projects. Additionally, they would need to determine the time required for the investments to effectively result in future cash flows through calculating the IRR. Since Ameritrade revenues are strongly influenced with downturns or upturns in the market, it would be advisable for them to analyze future market trends to determine whether this investment would yield positive results. Calculating Ameritrade’s beta would allow them to determine how at risk they are to trends in the market.
Question #2: The CAPM states that an investor’s expected rate of return equals the risk free rate plus the market risk premium weighted by beta. Since managers are expected to make decisions that add to shareholder value, projects that do not provide a return greater than the investor’s expected rate of return should not be undertaken. Additionally, when you use the asset beta (unlevered beta) you reflect on potential project risk not the company’s financing risk.
Question #3: To determine the risk free rate, we used a method that is representative of the economic life of the project. Technology is an industry that needs to be updated every…...

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