Fall 2014
Corporate Finance
Prof. Jules van Binsbergen and Prof. Michael Roberts
Cost of Capital at Ameritrade
Read and prepare:
Cost of Capital at Ameritrade
Big picture question:
What cost of capita
Ameritrade!
David Cao
Jane Xuejing Li
Mike Xu
Dongye Zhang
KNOWLEDGE FOR ACTION
Background!
Ameritrade was a deep-discount brokerage rm that planned to invest
heavily in technology and a
Finance 611: Corporate Finance
Real Options
Capital Budgeting
How do we make investment decisions?
Compare costs and benefits: accept if benefits > costs
o We have developed a set of tools to value t
Finance 611: Corporate Finance
Risk Management
Derivatives: What are they?
A derivative security is a security whose cash flows are derived
from the market prices of other securities or assets.
o
o
D
Finance 611: Corporate Finance
Capital Structure
The Capital Structure Question
So far we tried to answer the following
The next question:
question:
Which projects should the firm invest in
to maxi
Finance 611: Corporate Finance
Capital Asset Pricing Model
Action
We are going to slow down.
Last two cases dropped from the schedule (Twitter IPO & Open Table
Acquisition).
Less time spent on case
Finance 611: Corporate Finance
Risk and the Cost of Capital
Measuring Returns
Recall the definition of the total return:
R1
Div1 P1 P0
P0
P0
Stock returns are highly variable over time: General Mot
Solutions to Problem Set 2
Corporate Finance, Sections 001 and 002
1. (a) The yield on the bond (assuming annual compounding) is:
r = (1000/800)1/5 1 = .04564
(b) With a yield of 4.564%, the present v
Solutions to Problem Set 3
Corporate Finance, Sections 001 and 002
1. (a) Because the yield to maturity on similar securities is 8%, you will pay a premium
for a 10% coupon bond such that the yield to
Solutions to Problem Set 4
Corporate Finance, Sections 001 and 002
1. (a) The stock price can be estimated using the dividend growth model as follows:
P0 =
EPS1 (1 b)
r b ROE
where b equals the plowba
Solutions to Problem Set 5
Corporate Finance, Sections 001 and 002
1. (a) The plowback ratio is equal to 1 (Div 1 /EPS1 ). We can calculate this number
from the dividend yield Div1 /P0 and the price-e
Solutions to Problem Set 6
Corporate Finance, Sections 001 and 002
1. Because the proceeds from Year 1 are reinvested in Year 2 etc., the proper summary
measure for returns is the geometric average of
Solutions to Problem Set 7
Corporate Finance, Sections 001 and 002
1. (a)
i. The investor should choose security 2 because security 2 has a higher expected
return than security 1 (R2 = .16 while R1 =
Solutions to Problem Set 8
Corporate Finance, Sections 001 and 002
1. (a) The risk premium is given by
RM Rf = .12 .06 = .06
(b) The equilibrium expected return of a risky asset is given by:
Ri = R f
Solutions to Problem Set 9
Corporate Finance, Sections 001 and 002
1. (a) Recall that the asset beta, A is the beta of the underlying assets of the rm.
Since the rm is a portfolio of debt and equity,
Solutions to Problem Set 10
Corporate Finance, Sections 001 and 002
1. (a) The position that produces prots if IBM increases while limiting losses if IBM
declines comes from buying a call. Buying an a