Corporate Finance Case Study Solutions

Case Study 5 - Solutions for Corporate Finance


Requirement

Enable analysts to produce high quality, brand conformant, print and web ready documents with minimal effort and in as short a time possible.


Solution

There are three components to our solution:


1. Template with layout and style

Powerful and robust Word template delivered with the require styles and layout ready for analyst to input their content.

State-of-the-art Word techniques are used to reproduce the required design and layout. For example:


2. Data entry dialog

A custom data-entry dialog pops up when creating a new document. It populates the document with all correct titles, analyst details and header and footer information. The dialog validates data entries and remembers data for next use. For example:


3. Custom tools

A toolbar of Word custom macro tools are provided to make text formatting and content insertion easy for the user while protecting the document from corruption. For example:

Tool

Description

User interface

Custom styles easily accessible

The required custom styles are available on a drop-down menu to quickly apply the required format

Insert Excel charts and table data

A macro tool inserts this data in the correct manner resizing, positioning and captioning in a pre-determined way

Paste formatted content

Pasting in content from other documents is a sure way to corrupt the receiving document as alien styles and formatting are brought in. This tool automatically parses the incoming text removing all harmful formatting

Other tools include: Insert frame to hold charts • Insert custom formatted table • Insert Watermark • Insert margin text • Insert Portrait/Landscape page • Fix paragraph numbering/ refresh styles • Convert to PDF • Set paper trays and print • Template Installer • Content Library • Insert Symbols •


Result

These high-function Word templates result in documents that are accurate, conformant to corporate style and are print and web ready without the need for further correction. Such templates leave Analysts free to concentrate on their key skills rather than waste time fighting with Word.


These templates and tools yield enhanced document quality and productivity and deliver significant savings in time and effort - a tiny sample of what we can do. Get in touch for more detail. Contact Chris Devrell at chris@cdev.co.uk or call +44 (0)2380 74 0990.

 

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is the return of the average-risk company, or equivalently, the return of a broad- based portfolio of companies, like those listed on the New York Stock Exchange(NYSE).3.What is the estimate of the risk-free rate

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that should be used in calculating the costof capital for Ameritrade?Since the projects being contemplated are long-term projects, we should use long-termrates. Since the projects are in the future, we should use current (at the time of the case)yields, not historical rates.In my opinion, we should use the risk-free rate equal to yield of 20-year US governmentsecurities, because it is long-term capital investment. We may use 30-year rate, but weare investing in technology, and concerning the speed of technological enhancements, 20-year rate is optimal. So it is 6,69%.

Sounds reasonable to me.

4.What is the estimate of the market risk premium,

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, that should be used incalculating the cost of capital for Ameritrade?Typically analysts use the stock market return minus U.S. government bond returns.Unlike the bond market, where the current yields are the unbiased market prices for  bonds whose cash flows are in the future, we don’t have a reliable estimate of where thestock market will move in the future. Stock brokers have a conflict of interest; if they areoptimistic, and can persuade people of their optimism, then more funds should flow intothe stock market and their commissions and salaries increase. Thus we typically usehistorical spreads over a long period of time, covering many business cycles, and suggestthat with no better information, we anticipate the future to be like the past. Also, largestocks tend to better estimate the market than small stocks.That is why we may use the difference between US Government Securities rate (6,69%)and historical Large Company Stocks annual returns. But we have 2 numbers: during1950-96 and 1929-96. The difference between them is 1,3%. I think that we should use“younger” value of 14%, because the years 1930-1949, of course, were under marketeconomy, but at the same time there were not so stable laws, a Second World War  passed, many companies at that time worked for government orders, so this number may be a bit out of overall tendencies.

I appreciate your thoughtfulness. You are quiteperceptive. The opposite side of this argument is that we don’t know what thefuture will bring. Perhaps we will have another period of world war, or terribleglobal market conditions. If such a scenario is not unreasonable, then we shouldn’texclude past data that relates to such times.

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=14%-6,69%=7,31%.5.In principle, what are the steps for computing the asset beta in the CAPM?

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