The Ameritrade case was extremely hard, however I found it interesting because made search for financial information that I didn’t manage before. How ever I try to follow these steps. According to what I had read in finance books. Company background to use
•Ameritrade is formed in 1971, and is a pioneer in the deep-discount brokerage sector. •This case describe that the Ameritrade’s revenue is very sensitive to the market movement because, Ameritrade’s has two primary sources of revenue 1) brokerage commissions, clearing fees, and payment for order flow. 2) Net interest revenues that were generated by charging customers on debt balances maintained in brokerage accounts and the investment of customer’s cash segregated in compliance with federal regulations in short term marketable securities. 90 % of the total net revenue of Ameritrade is from brokerage activities $51,936,902+18,193,946)/$77,238,340. According to the Annual Income Statements. •In the time of the case (1997), Ameritrade raised $22.5 million in an initial public offering. Ameritrade is considering substantial investments in technology and advertising, Find a comparable firms to find a Beta
Since there is not a beta for Ameritrade in the case, so I compare some firm’s brokerage Charles Schwab (82%), E*trade (95%), Quick & Reilly (81%) and Waterhouse Investor (99%) Find the risk-free rate.
To determine the risk free rate, I would use to match the economic life of the project, counting that yes is a significant investment in technology and the goal of the company to be the largest brokerage firm, however technology needs to be renovated every couple of years, and advertising too, the project in considering I Would take it as a short t term project. Thus, I would use the prevailing yield of 5-year bonds from exhibit #3 where the Risk Free rate= 6.22%
Find the market-risk premium
Although The case gives two tables for the historical averages, one for...