114885754-Cost-of-Capital-at-Ameritrade

114885754-Cost-of-Capital-at-Ameritrade - Analysis of Cost...

Info icon This preview shows pages 1–4. Sign up to view the full content.

View Full Document Right Arrow Icon
Analysis of Cost of Capital at Ameritrade
Image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Executive Summary The CEO of Ameritrade, Joe Ricketts, is looking to invest a whopping US$ 155,000,000 increasing the marketing budget and US$ 100,000,000 in technology enhancements. As such, he must justify this investment by proving that the investment is worthwhile. In order to evaluate the investment Ricketts would like to use the NPV of the project in order to merit the investment; Ricketts needs to know the risk of the project. The assumptions for our calculations can be found in Appendix 1 of this paper but the major one was deciding to compare Ameritrade to Charles Schwab as they are similar firms for reasons detailed later in the paper. We used the CAPM to find the costs and then the WACC to find the cost of capital. We found a WACC (risk of the project) of 17.61% - higher than the discount rate often used by the CFO of Ameritrade. Ricketts should use 17.61% to discount the future cash flows from his investments.
Image of page 2
Introduction Ameritrade is one of the first deep discount brokerage firms, founded in 1971. The firm makes the majority of its profits from the interest it charges customers for trades and not from commission fees charged for services. In 1997, the CEO of Ameritrade, Joe Ricketts, wanted to improve the company’s position ; this required Ameritrade to grow its customer base. Ricketts planned on achieving this growth by investing in technological advancements (US$ 100m) and inc reasing the company’s advertising budget (US$ 155m). In order to decide whether the investment is worthwhile for Ameritrade, Ricketts needed to estimate the risk/reward of the project. In our paper we will estimate the cost of capital; or in other words, the risk that Ameritrade will take by comparing it to similar companies. All our assumptions will be stated during the paper and in the appendixes. Whenever making an investment in a project a factor of consideration is the NPV of the project. In order to calculate the NPV of a project we need the projected cash flows and the cost of capital (the WACC). In order to obtain the cash flows we will need to have some kind of growth to apply to previous year’s performance. In our case the CEO, Joe Ricketts, believed that the proposed investment would yield a very high reward “ on the order of 30% to 50%” . However, other members of management were more conservative “estimating the expected investment returns at only 10% to 15%” . In our paper we will focus in solely on the cost of capital at Ameritrade.
Image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
Image of page 4
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern