Cost of Capital at Ameritrade What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why? Mr. Ricketts believes that his role as CEO is to maximize shareholder value by accepting any project whose expected return on investment is greater than the cost of capital. Therefore‚ the main factors that Ameritrade management should consider are the expected return on investment for the project‚ and how this compares to the project’s
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Case Study of Cost of Capital at Ameritrade 1-a How can the CAPM be used to estimate the cost of capital for a real business investment decision? CAPM results can be compared to the best expected rate of return that investor can possibly earn in other investments with similar risks‚ which is the cost of capital. Under the CAPM‚ the market portfolio is a well-diversified‚ efficient portfolio representing the non-diversifiable risk in the economy. Therefore‚ investments have similar risk if they
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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
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Case Solution Cost of Capital at Ameritrade | | • Executive summary: Formed in 1971 and listed in March 1997‚ Ameritrade has been one of the most successful players in the deep- discount brokerage sector. Ameritrade’s two major sources of revenue‚ Transaction income (brokerage commissions‚ clearing fees‚ and payment for order flow) and Net interest revenues that were generated from net balance
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MBA 203: Problem Set 4 Cost of Capital at Ameritrade Due: Wednesday‚ November 28‚ 2012‚ by 9:00 a.m. The course material covered in weeks 4 and 5 should be sufficient for doing this problem set. The questions below are for the Cost of Capital at Ameritrade case in your course packet. You can find the data for this case on the course website in a spreadsheet named Ameritrade.xls. Please turn in your problem set solutions by posting them to bSpace as an Excel file or pdf file. Upload a single solution
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Capital Structure Case1 Cost of Capital at Ameritrade By: Elaine Huang Jonathan Hudson Christopher Lenker 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 AMERITRADE’S PLANNED INVESTMENTS? WHY? We recommend using the following firms in the Discount Brokerage Industry: Charles Schwab Corporation
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Ameritrade: Cost of Capital What factors should Ameritrade Management consider when evaluating the proposed advertising program and technology upgrades? Why? When considering the proposed advertising program and technology upgrades‚ we have to ensure that the project will likely add value to the company‚ so we need to consider the return on investment versus the cost of capital. If the return on investment‚ measured by the net present value and internal rate of return‚ exceeds the cost of capital
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1997‚ Ameritrade has been growing rapidly in sales while maintaining higher than 40% ROE(on average) during 1975-1996. In March 1997‚ Ameritrade filed IPO on NASDAQ (AMTD) and raised $22.5 million. The main purpose of the IPO is to allow the company to continue its growth. Therefore‚ The CEO & chairman‚ Joe Ricketts‚ has approached our firm and eventually retaining our service to help him evaluate his substantial investments in technology and advertising. While the investment is being expected to
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Spring 2010 Ameritrade - Harvard Case Study Background: Ameritrade Holding Corporation is securities brokerage services and technology-based financial services firm from the United States. The company was founded in 1971 and is headquartered in Omaha‚ Nebraska. “Ameritrade MERITRADE for self-directed retail investors; TD AMERITRADE Institutional that provides brokerage and custody services; trading platforms that enables research and analysis; a suite of education
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Executive Summary: In mid-1997 Joe Ricketts the Chairman and CEO of Ameritrade‚ decided that Ameritrade’s new mission would be to become “the largest brokerage firm worldwide based on the number of trades.” In order to accomplish this mission Ameritrade would need to invest significantly in technology and advertising. This strategy would require large expenditures relative to Ameritrade’s existing capital. In order to gauge the financial impact of these large expenditures‚ there needed to be
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