Ameritrade - Cost of Capital Evaluation

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Finance 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 “go\no go” decision, whether it is done by an investor or a creditor. However such a decision requires also the computation of future cash flows. Since we are missing the information regarding Ameritrade’s future cash flows, this paper has one and only goal – to evaluate and discuss the main possible alternatives for…show more content…
However, we have to consider Ameritrade’s upcoming investment of 255,000,000$ in technology and advertising and the ways Ameritrade is going to finance this investment. The best scenario is finding the optimal capital structure by using interest coverage ratio table but, unfortunately, we do not have enough sufficient data. Ameritrade plans to make an investment which is 1\3 of its total value. By any standards, this is a very significant amount For Ameritrade. Ameritrade’s balance sheet for 1997 shows that the firm has ~ 53.5$m in cash reserves, which might be considered as possible financing source. The firm’s net income for that same year is much lower and equals to ~13.8$m. The implications are that minor fluctuations in Ameritrade’s cash flow might result in negative net income next year and therefore we conclude that Ameritrade should not use its cash reserves for its planned investments in order to prevent cash flow crunch scenarios. Another option is to finance the project by issuing equity, however at that stage we can’t examine this option based on the available data. That been said and without the ability to find the optimal capital structure, we believe that the whole amount of the planned investment should be financed by bonds issuance. Thus, the interest-bearing debt for our calculations will be 255,000,000$. Beta of debt Since Ameritrade has no current traded debt, it

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