1. Briefly describe the project that Ameritrade is considering. Ameritrage wants to be the largest brokerage firm worldwide based on the number of trades. In order to grow the customer base the company would require substantial investment in technology and advertising. These investments are made to improve service, capacity and customer awareness of Ameritrade.

2. The title suggests that the cost of capital is important here. Concisely describe what cost of capital means. It is the cost of what to whom? Why is it important? What factors determine the cost of capital? The cost of capital is the opportunity cost of funds - debt and equity – to the company while undertaking a project. It is used to evaluate new projects of a company as it is the minimum return that investors expect for providing capital to the company, thus setting a benchmark that a new project has to meet. He factors that determine the cost of capital are risk free rate, risk premium and beta asset for the project.

3. Ameritrade has a short history of trading, so its equity beta cannot be computed precisely using its own historical data. Exhibit 4 provides some choices for comparable firms. Which of these firms do you think are appropriate to use as comparables to determine the beta of Ameritrade’s planned advertising and technology investments? Why? Even though the project will invest in advertising and technology, but these investments will bolster Ameritrade’s position in the deep-discount brokerage market and from this market the company will generate all its revenues. And thus we should not use an internet firm as a comparable twin for beta calculation. Ameritrade wants to be a leader in deep-discount brokerage. Other firms in similar business with are Charles Schwab, E*Trade, Quick & Reilly and Waterhouse Investors. Charles Schwab, E*Trade and Quick & Reilly have very low debt to value ratio and majority of their revenue is coming from brokerage. Also Charles Schwab and E*Trade have...

...AmeritradeCase
Background In his effort to increase returns for Ameritrade shareholders and make Ameritrade the largest brokerage firm worldwide by trading volume, Joe Ricketts, Chairman and CEO of Ameritrade, seeks to improve Ameritrade’s competitive position in the deep-discount brokerage industry by taking advantage of emerging economies of scale.
To attract more investors, his strategy involves, first, cutting trade commissions from the existing rate of $29.95 per trade to $8.00. Second, he seeks to invest $100 million in technology advancements to make the online trading platform faster and closer to 100% reliability. Lastly, he has proposed increasing Ameritrade’s advertising budget to a cumulative $155 million for 1998 and 1999 fiscal years.
Issue The question presented is what weighted average cost of capital should be employed to value the planned investments and changes in the advertising budget.
Comparable Firms In my view, the true competitors of Ameritrade are securities brokerage firms, not Internet firms, as Ameritrade derives the majority of its revenues from its brokerage business. In contrast, Internet firms like Yahoo! derive their income from advertising and other sources dissimilar to Ameritrade. For Ameritrade, the Internet is merely the channel through which its brokerage services are provided. Therefore, I...

...For Amoco sides, their opening exchange ratio is 1. The big difference between our opening prices indicates this negotiating process should be tough.
First, we checked the discount rate. For us, BP company, we use 8.83%, however, Amoco they use a higher one around 9%. The main difference to calculate the discount rate is that we use the 30-year Treasury rate as risk free rate compared to Amoco used 20-year Treasury rate. Moreover, we use the debt to debt plus equity but they use debt to equity to calculate WACC. To compromise these differences, we agree to use the average discount rate that doesn’t make a large influence of the valuation price. After this, we discussed the most important factor –growth rate. Based on the assumption in the case, we use 4% as terminal growth rate, 2% annual oil demand growth rate plus 2% inflation rate. However, Amoco hold the view that the oil price would grow at 6% in long-term, and it’s hard for both of us to get a compromising rate. Therefore, we jumped to synergy and currency questions, and we agreed on the synergy that Amoco would bring BP the North America market and BP would use US currency to acquire Amoco’s share. After discussed all these details, we came back to the final offer price. We offered a higher one as exchange rate 0.6. Amoco rejected. Finally, after they thoughtful discussion they offered 0.66 exchange rate or price 52.965 as their final offer, which for us is lower than our walk-away price 65.94....

...Questions and Analysis
1. What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
a. Opportunity Cost – Will Ameritrade benefit from spending money on advertising and technology upgrades more than the next best alternative and more than reinvesting the money.
b. Debt-to-Equity Ratio – If this ratio is high then Ameritrade may be able to generate more equity and increase earnings by more than the cost then the shareholders will benefit because more earnings will be spread amongst shareholders.
c. Future cash flows – If futures cash flows are high and Ameritrade is able to remain cash positive, and then they will have more protection against market volatility.
d. Return on Investment or Equity – this will tell Ameritrade if the proposed upgrades and additional advertising will generate earnings growth and by how much (additional money for shareholders as well).
2. How can the Capital Asset Pricing Model (CAPM) be used to estimate the cost of capital for real (not financial) investment decision? The CAPM states that an investor’s expected rate of return equals the risk free rate plus the market risk premium weighted by beta. Managers are expected to make decisions that add to shareholder value. If the project does not provide a return greater than the investor’s expected rate of return, the...

...Benjamin Chung and Lars Bungum
DATE: March 12, 2014
SUBJECT: Ameritrade’s Cost of Capital
Executive Summary
After careful analysis of Ameritrade and comparable companies, I have estimated a 14.784% cost of capital that should be used to evaluate Ameritrade’s upcoming investments in technology and advertising. After analyzing the historical return on Ameritrade’s investments, I have concluded that if the firm manages this project at least as well as its previous investments, the return on the proposed project will exceed the cost of capital resulting in a positive NPV project.
Based on the estimated cost of capital, relative to the company’s historical returns on investment, I recommend that Ameritrade undertakes this investment project. I believe that the estimated cost of capital is appropriate because it is partly based on a set of companies where the main source of revenue is similar to that of Ameritrade, deep discount brokerage companies. In addition, the nature of the project is to increase the customer base of Ameritrade, a frequent and archetypal venture for a deep-discount brokerage firm. Because Ameritrade has very limited data due to its recent IPO, I will be using the comparable data of Waterhouse Investors, Quick and Reilly Group Incorporated, and Charles Schwab Corporation to estimate Ameritrade’s levered beta using a bottom-up approach. I will be using these...

...CASE WRITEUP 3
ALUMNI GIVING
MGSC2301
Professor Robert Parsons
1.
Variables Entered/Removedb |
Model | Variables Entered | Variables Removed | Method |
1 | % of Classes Under 20 | . | Enter |
a. All requested variables entered.b. Dependent Variable: Alumni Giving Rate |
Model Summary |
Model | R | R Square | Adjusted R Square | Std. Error of the Estimate |
1 | .646a | .417 | .404 | 10.375 |
a. Predictors: (Constant), % of Classes Under 20 |
ANOVAb |
Model | Sum of Squares | df | Mean Square | F | Sig. |
1 | Regression | 3539.796 | 1 | 3539.796 | 32.884 | .000a |
| Residual | 4951.683 | 46 | 107.645 | | |
| Total | 8491.479 | 47 | | | |
a. Predictors: (Constant), % of Classes Under 20b. Dependent Variable: Alumni Giving Rate |
Coefficientsa |
Model | Unstandardized Coefficients | Standardized Coefficients | t | Sig. |
| B | Std. Error | Beta | | |
1 | (Constant) | -7.386 | 6.565 | | -1.125 | .266 |
| % of Classes Under 20 | .658 | .115 | .646 | 5.734 | .000 |
a. Dependent Variable: Alumni Giving Rate |
Regression Function
Question 2 and 3’s data:
2. I am 95% confident that my statement is correct when I say that the average of expected alumni giving rate for a university with 40% of its classes with fewer than 20 students is between -2.48624 and 40.33560.
3. I am 95% confident that my statement is correct when I say that the average of expected alumni giving rate for all...

...CASEAmeritrade
Introduction:
The Ameritradecase 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...

...
1. What factors should Ameritrade’s management team consider when evaluating the proposed advertising program and technology upgrades? How significant are these factors from a risk perspective?
Based on the case, we know the company Ameritrade Holding Corporation is a deep-discount brokerage, and the company’s proposed strategy is to increase the customer base by being a low-cost provider against its competitors. The company plans to invest more towards technology and advertising, and cut costs to improve the firm’s service, capacity, and customer awareness. If Ameritrade should go forward with this investment, it’s prudent to consider some factors. From a risk perspective the company should calculate the cost of capital as a basis for project evaluation. Ameritrade should also calculate the net present value (NPV) to determine the costs and benefits of the proposed investments. When calculating the NPV we should be aware of choosing the appropriate discount rate, which is the most important factor in the formula. Using too high or too low a discount rate can increase the uncertainty of future cash flows. Lastly, the company should also consider cash flows when evaluating the investment. If a company wants to start a new project or investment, cash will be the biggest determining factor. The CEO Joe Ricketts strongly believed his company can do this investment, however, his management team does not have enough...

...Executive Summary As a Deep-Discount Brokerage firm, Ameritrade Holding Corporation (AHC) plans to invest in advertising and technology in order to increase their consumer base and thus revenues. The purpose of this report is to assess the riskiness of the proposed investments by considering the project’s cost of capital calculated via the Capital Asset Pricing Model (CAPM). A range of factors will be considered in order to assess each possible variable that may influence the result. Areas of focus include the risk free rate, market index average returns, the market risk premium, identifying suitable comparables and calculating the asset betas. The appropriate risk free rate was calculated using U.S. 10-year securities with an annualized YTM of 6.34%. The proposed investment is assumed to have a ten-year life cycle due to the ever-changing environments of both the discount and Internet industries and the size of investment. Market risk premiums varied depending on the chosen market index. This report opted for the VWI NYSE, AMEX and NASDAQ monthly returns due to their relevance to AHC and its risk characteristics. A historical approach was adopted using returns of the average market proxy from 84’-97’. The average annual return (15.71%) was calculated using the assumed risk free rate and VW market return, the market risk premium was assumed to be 9.37%. Asset betas were calculated using linear regression models plotting monthly market returns against...