The objective of this case is to estimate the cost of capital (the OCC) that Ameritrade should use in evaluating projects. To do this, you should use the capital asset pricing model (CAPM). You will need to estimate an asset beta. While information for Ameritrade's stock price is available, it is only available for a short period, and so should not be used in calculating a beta. Your solution should work along the following lines:
- Identify comparable companies.
- Using the stock price and returns data given to you, estimate the asset betas of these comparable companies.
- Use these asset betas to compute an asset beta for Ameritrade's project.
- Use the CAPM to come up with an estimate of the OCC on Ameritrade's project.
Note: The risk-free rate you should use in the SML refers to the risk-free rate over the same horizon as the project/investment you are considering. For projects/investments that last 3 months, for instance, you should use the 3 month risk-free rate1. For projects that last 10 years, use the 10 year rate.