Case Study

1. Can you use Ameritrade's information to estimate the WACC? Why or why not?

2. How you found the comparable firm? Be specific with the process and variables used to identify the comparable firm. If you used capital structure in any of the steps, did you use market value or book value and why? Did you use the financial statement information of a particular year or the average of a sample period?

3. Why did you use equity and dividends received (rather than the original price and dividends provided) to calculate capital gains yield and dividend yield?

4. In the last 5 years, how is your company's total risk, systematic risk, and average return relative to the market average? How do you measure total risk and systematic risk?

5. Why is value-weighted average return used as the proxy for the market average?

6. In CAPM, what is the rf rate used and why did you choose that particular rate instead of the T-bill rate?

7. Why is annual market return used in the CAPM return estimate, rather than monthly return?

8. Are you able to use one of the dividend models to estimate the cost of capital? If yes, which dividend model is used and why?

9. Find annual dividend and growth rate of the annual dividends.

10. Find the D1, P0, and avg. dividend growth rate to get the cost of equity using the appropriate dividend model.

11. Next, use Market Model. State the model's equation, run the regression to get the outputs.

12. Should both intercept and beta be used in the cost of equity calculation? Why or why not? Be aware of the monthly to annual adjustment when estimating the cost of equity.

13. Is your CAPM beta similar to the beta from the market model?

14. Compare the three cost of equity estimates. Are they similar? If one of them is significantly different from the rest, it may not be reliable. Find reasons to justify why that particular model isn't reliable.

15. Of the two similar cost of equity estimates, what do you do from here?

16. To find the WACC, we also need to find the Rd and the capital structure weights. ***While the Rd of the comparable firm is given, use M&M proposition II to explain why we should use the Rd and capital structure weights of the comparable firm to calculate the WACC, rather than those of Ameritrade!

17. When it comes to estimating the capital structure weights, should you use book value or market value? Why?

Please use both the PowerPoint file and the Excel file for the case analysis and submit the Excel and Word files with your work back to me.

Video 1:  https://youtu.be/S5YeCCW2Ues

After watching the first 5~ish minutes of this Video 1, you will need to construct "Sheet1" on your own as follows:

At the bottom of the Excel file, and on the right of "Exhibit 6", you should see a circle with a + sign within, click on it one time. A blank new sheet called 'Sheet1" should be created for you automatically. Note that the 5-yr sample period we need to use, as indicated in the video is Dec 31 of 1991 to Dec 31 of 1996. We use yr-end information because we need to do cross-industry comparison when identifying the comparable firm, while not all firm have the same fiscal yr end... You will find the stock price, dividend, and split information of CS in "Exhibit 5" and value-weighted market return in "Exhibit 6". Copy and paste those data to "Sheet1", and only data during the sample period specified above. You should end up with the sheet1 that looks like the sheet1 in the video now.

Video 2:   https://www.youtube.com/watch?v=OLXjkAGOOuI

Video 3:   https://youtu.be/7K8Se52NSc4

Video 4:   https://www.youtube.com/watch?v=YjtFHepPNKA

Video 5:   https://youtu.be/YuCYOF4GBgI