Ameritrade 1997 Case
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 greatly improve service and customer awareness, Mr. Ricketts believes that the investment carries a lot of risk that requiring a more in-depth financial justification as opposed to Ameritrade’s existing financial policy. Through initial discussions with Mr. Ricketts, we have agreed upon a financial analysis, adopting the CAPM model, to calculate the cost of capital of the investment. Mr. Ricketts & his management team will then make a sound financial decision basing on our analysis results. According to our agreed plans, Mr. Ricketts has specifically requested us to perform the following three tasks and provide our recommendation accordingly.
I. Briefly discuss the asset beta and CAPM model, and explain the steps for computing the asset beta and CAPM to produce the cost of capital for the investment project.
II. Mr. Ricketts is aware that Ameritrade does not have a beta estimate due to short trading history, and demands us to hand pick comparable firms that will be valuable in assessing the risk of Ameritrade’s planned investment.
III. Using the supplied financial data to calculate the asset betas for the comparable firms.
I.
Definition of Asset beta.
Beta represents a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. It is also known as "beta coefficient”, and is calculated using regression analysis. It represents the tendency of a security's returns to respond to swings in the market.
Beta can be
I. Briefly discuss the asset beta and CAPM model, and explain the steps for computing the asset beta and CAPM to produce the cost of capital for the investment project.
II. Mr. Ricketts is aware that Ameritrade does not have a beta estimate due to short trading history, and demands us to hand pick comparable firms that will be valuable in assessing the risk of Ameritrade’s planned investment.
III. Using the supplied financial data to calculate the asset betas for the comparable firms.
I.
Definition of Asset beta.
Beta represents a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole. It is also known as "beta coefficient”, and is calculated using regression analysis. It represents the tendency of a security's returns to respond to swings in the market.
Beta can be