Cost of Capital at Ameritrade - 8788 Words

Harvard Business School 9-201-046 Rev. April 26, 2001 Cost of Capital at Ameritrade In mid-1997, Joe Ricketts, Chairman and CEO of Ameritrade Holding Corporation, wanted to improve his company’s competitive position in deep-discount brokerage1 by taking advantage of emerging economies of scale. The success of the strategy required Ameritrade grow its customer base. The growth would require substantial investments in technology to improve service and capacity, and in advertising, to increase customer awareness. The strategy would require large expenditures relative to Ameritrade’s existing capital. In order to evaluate whether the strategy would generate sufficient future cash flows to merit the investment, Ricketts needed an†¦show more content†¦Full-service brokers were less sensitive to market movements than deep-discount brokers like Ameritrade. Full-service brokers received asset management fees, which partially shielded the revenue stream from market declines. Moreover, most full-service brokerage firms such as Merrill Lynch diversified t heir revenue stream by engaging in investment banking activities such as mergers and security underwritings. Planned Investments and the Cost of Capital Ricketts planned to grow Ameritrade’s revenues by targeting self-directed investors. Ricketts decided Ameritrade’s mission was ‘to be the largest brokerage firm worldwide based on the number of trades.’ Ricketts’ strategy called for price cutting, technology enhancements, and increased advertising. First, Ameritrade would reduce commissions from $29.95 to $8.00 per trade for all Internet market orders. There were currently no major players in this price range although many customers were price sensitive. To ensure competitors such as Charles Schwab and E*Trade did not follow Ameritrade’s lead and try to compete on price, Ameritrade would have to become the low cost provider of reliable online brokerage services. State of the art technology was the only way to prevent system outages and move towards the goal of 100% reliability. Therefore, up to $100 million would be budgeted for technology enhancements which also would increase trade execution speed - an important attribute to individual investors.Show MoreRelatedCost of Capital at Ameritrade1330 Words   |  6 PagesCase 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 theyRead MoreCost of Capital at Ameritrade1450 Words   |  6 PagesCost 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’sRead MoreCost of Capital at Ameritrade1080 Words   |  5 PagesCase 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 balanceRead MoreCost Of Capital At Ameritrade2201 Words   |  9 Pages Cost of Capital at Ameritrade Introduction: Ameritrade is a pioneer in the deep-discount brokerage firm market that was formed in 1971. In March 1997, Ameritrade raised $22.5 million in a stock IPO allowing the company to continue its long tradition of adopting the latest advances in technology, and substantially increasing advertising to build its brand and improve market share. Joe Ricketts, Chairman and CEO of Ameritrade Holding Corporation, wanted to improve the company’s competitive positionRead MoreAmeritrade – Cost of Capital2478 Words   |  10 PagesGroup Case 1: Ameritrade – Cost of Capital Executive Summary: As a deep-discount brokerage, Ameritrade planned to improve its competitive position by price cutting, technology enhancements, and increased advertising in mid-1997. Before initiating the plan, Ameritrade needed know whether the investment returned more than it cost. We were hired to estimate the cost of capital correctly. The key question is to find suitable comparable firms to estimate Ameritrade’s asset beta, since it was a recently-listedRead MoreEssay Ameritrade Cost of Capital1042 Words   |  5 PagesAmeritrade is formed in 1971, and is a pioneer in the deep-discount brokerage sector. In march 1997, Ameritrade raised $22.5 million in an initial public offering. Management at Ameritrade is considering substantial investments in technology and advertising, but is unsure of the appropriate cost of capital. Estimating the cost of capital 1. Since we do not have the beta for Ameritrade, we need to find comparable firms for which we could compute the betas. There are several candidates in theRead MoreCost of Capital at Ameritrade Ppt960 Words   |  4 PagesCase: Cost of Capital at Ameritrade 1 Introduction Ameritrade is formed in 1971, and is a pioneer in the deep-discount brokerage sector. [A deep-discount broker is a broker that offers lower commissions than a discount broker, but also provides fewer services to clients. Such a broker usually will not provide anything beyond execution of stock and option trades, and will charge a flat fee regardless of the size of the trade] In march 1997, Ameritrade raised $22.5 million in an initialRead MoreAmeritrade - Cost of Capital Evaluation4249 Words   |  17 PagesFinance Seminar 12.12.2011 Case Study #2 Ameritrade Company Cost of Capital Evaluation Executive Summary The Ameritrade case study analysis brought in this paper comes to estimate the final cost of capital that should be applied to Ameritrade’s technology and marketing investment project. Allegedly, the final purpose of every WACC calculation is in helping to estimate the NPV of a project in order to make a â€Å"go\no go† decision, whether it is done by an investor or a creditor. HoweverRead MoreEssay about Cost of Capital at Ameritrade1002 Words   |  5 PagesChairman and CEO of Ameritrade Holding Corporation, wanted to improve his company’s competitive position in deep-discount brokerage1 by taking advantage of emerging economies of scale. The success of the strategy required Ameritrade grow its customer base. The growth would require substantial investments in technology to improve service and capacity, and in advertising, to increase customer awareness. The strategy would require large expenditures relative to Ameritrade’s existing capital. In order to evaluateRead MoreCase Analysis Cost of Capital at Ameritrade601 Words   |  3 PagesCase analysis Cost of Capital at Ameritrade Cost of capital refers to the maximum rate of return a company must earn from its investments, so that the market values of the company’s equity shares do not go down. The people at Ameritrade are not in agreement on the best estimate of the cost of capital. Research analyst put the cost of capital at 12%, while other members of the management estimate it to be at 9% and the CFO estimates it to be at 15%. The CEO of the company is optimistic that