Cost of Capital at Ameritrade 1. 2. 3. 4. 5. 6.

What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? How can the Capital Asset Pricing Model be used to estimate the cost of capital for a real (not financial) investment decision? What is the estimate of the risk-free rate that should be employed in calculating the cost of capital for Ameritrade? What is the estimate of the market risk premium that should be employed in calculating the cost of capital for Ameritrade? In principle, what are the steps for computing the asset beta in the CAPM for purposes of calculating the cost of capital for a project? Ameritrade does not have a beta estimate as the firm has been publicly traded for only a short time period. Exhibit 4 provides various choices of comparable firms. What comparable firms do you recommend as the appropriate benchmarks for evaluating the risk of Ameritrades planned advertising and technology investments? Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in Exhibit 3, calculate the asset betas for the comparable firms. How should Joe Ricketts, the CEO of Ameritrade, view the cost of capital estimate you have calculated?

7. 8.

Colorscope, Inc. 1. 2. Why would any customer, let alone large advertising agencies and departmental stores, go to Colorscope rather than go to the large printers listed in Exhibit 3? Set up a two stage cost system to figure out the profitability of different jobs. You will have to choose resource drivers to allocate the cost of resources to cost pools. Then choose cost drivers to allocate the costs in various cost pools to jobs. Compute the cost driver rates. Calculate profitability of job 61001 by allocating costs to that job using the cost driver rates that you estimated. It might be useful to diagram this system before you start calculating the cost pools and cost driver rates. What is the profitability of customer number 16 for Colorscope? What you have done above is a "full-cost" analysis. This is in contrast to a "direct-cost" analysis that ignores overhead costs. Is full cost the right metric for job profitability and customer profitability? What assumptions are we making about the variability of overhead costs when we do a "full-cost" analysis. What is the financial consequence of rework? What should Colorscope do about rework? How? What do you recommend to solve the cost-quality tradeoff problem? Should Colorscope do anything about its incentive system?

3.

4. 5. 6.

Owens & Minor, Inc. 1. 2. 3. 4. What are the services rendered by the distributor to manufacturers and hospitals? How has the nature of distribution changed over time? What is the value-added by O&M? Evaluate the impact cost-plus pricing has on distributors, customers, and suppliers. What effect will ABP have on customer behavior? Explain Exhibit 5. How does the pricing matrix work? How do the costs in Exhibit 5 correspond to the costs shown in the customer profitability statement in Exhibit 4? Why doesnt the matrix comprise all the costs shown in Exhibit 4? What are the obstacles to successful implementation of ABP at Ideal? How would you address these obstacles? What type of customers will adopt ABP first? How difficult or easy is it for O&Ms rivals to adopt ABP? What are the risks associated with ABP for Owens and Minor? Why is Owens and Minor adopting a cost-based pricing strategy rather than value-based pricing strategy?

5. 6. 7. 8. 9.

Performance Pay at Safelite Auto Glass 1. 2. 3. 4. 5. Why was the productivity of the Safelite installers so low? Does the proposed PPP plan address the problems described in question 1? Does it introduce new problems? Explain. What are the pros and cons of switching from wage rates to piece rate pay? Are Safelite installers good candidates for piece-rate pay? Why or why not? Should there be a guaranteed wage? If so, how should it be set? What are the likely consequences of a switch from wage to piece rates for: Turnover Recruitment Productivity Product Quality

Dell's Working Capital 1. 2. 3. How was Dells working capital policy a competitive advantage? How did Dell fund its 52% growth in 1996? Assuming Dell sales will grow 50% in 1997, how might the company fund this growth internally? How much would working capital need to be reduced and/or profit margin increased? What steps do you recommend the company take? How would your answers to Question 3 change if Dell also repurchased $500 million of common stock in 1997 and repaid its long-term debt?

4.

Toy World, Inc. 1. 2. 3. What factors could Mr. McClintock consider in deciding whether or not to adopt the level production plan? What savings would be involved? Estimate the amount of added funds required and the timing of the needs under level production. Prepare pro forma income statements and balance sheets (rather than a cash budget) to make this estimate. Ignore interest expense in making these estimates. Compare the liabilities patterns feasible under the alternative production plans. What implications do their differences have for the risk assumed by the various parties?

4.