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Ameritrade Case Analysis Question #1: Ameritrade is planning on spending $155M in the next two fiscal years on advertising and $100M on technology upgrades. Management would need to consider if this large capital investment would directly result in future cash flows large enough to offset these investments at a rate that would satisfy the debt owners and shareholders. Management would need to determine the rate of return for these investments and compare this to the cost of capital, calculated using betas from comparable companies to determine accurate relationships to market fluctuations. If the rate of return for the project is less than the cost of capital, management can conclude that the investment would be more wisely spent on…show more content…
We decided to use the longer term S&P 500 return because we wanted to more accurately project the expected returns using a long term horizon so abnormal increases or decreases would be smoothed out and not substantially affect our model. Question #4: According to Ameritrade’s income statement, 90.8%((51,936,902+18,193,946)/77,238,340) of its revenue came from brokerage business. In Exhibit 4, Waterhouse Investor Srvcs, Charles Schwab Corp, Quick & Reilly Group, and E*Trade had the similar brokerage revenue percentage. They also all belonged to discount brokerage, which was the same with Ameritrade. For E*Trade, it just had a short business history, so we dropped it and kept the other three. We also took Mecklermedia, Netscape and Yahoo as the references because they were all belong to Internet industry, which will help us to better determine the risk from the technology and advertisement investments perspective. Question #5: Question #6: Since we are evaluating a financial service firm, debt is treated differently than for non-financial services firms. Most financial service firms seem to view debt as a form of inventory rather than view debt as a source of capital. We believe capital at financial service firms seems to be narrowly defined as including only equity capital. Thus, our asset beta is

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