DUKE UNIVERSITY Fuqua School of Business FINANCE 251F/351 Individual Assignment #1 Cost of Capital at Ameritrade Prof. Simon Gervais Spring 2010 – Term 1 In this case, you have to use data from comparables to estimate the cost of capital at Ameritrade. The process involves a few stages that this handout will guide you through. First, we need to determine which set of firms to use as comparable firms. You should try two different sets. The first set will include three discount brokerage firms: Charles Schwab Corp, Quick & Reilly Group, and Waterhouse Investor Services.1 The second set will include six investment services firms: A G Edwards, Bear Sterns, Merrill Lynch, Morgan Stanley Dean Witter, Paine Webber, and Raymond James Financial. Stock price and return data for these nine firms are provided in a separate spreadsheet that you can download from the course schedule at www.duke.edu/∼sgervais. In fact, this spreadsheet contains all six exhibits contained in the case. To estimate the equity beta for each of these firms, you will need to perform a regression of their past returns on past market returns (only the slope of this regression is useful for your analysis, i.e., there is no need to calculate/report on anything else). For this purpose, let us use monthly data from January 1992 through December 1996, that is, five years of monthly data as is the norm in practice.2 As you will see in Exhibit 5, the data for the discount brokerage firms includes stock price, dividend and stock split data. You will have to calculate monthly returns using this data. To help with the calculation of monthly returns, note that the return Rt of a stock in a given month t is   Pt −Pt−1 +Dt  if there is no stock split Pt−1 Rt = x x  y Pt −Pt−1 + y Dt  if there is an x for y stock split, Pt−1

where Pt denotes the stock price at the end of month t, and Dt denotes the dividend paid in month