Case Study: Ameritrade Essay

1238 Words5 Pages
Executive Summary: In mid-1997 Joe Ricketts the Chairman and CEO of Ameritrade, decided that Ameritrade’s new mission would be to become “the largest brokerage firm worldwide based on the number of trades.” In order to accomplish this mission Ameritrade would need to invest significantly in technology and advertising. This strategy would require large expenditures relative to Ameritrade’s existing capital. In order to gauge the financial impact of these large expenditures, there needed to be some accounting for the riskiness of the project. The average return on equity for Ameritrade from 1975 to 1996 was 40% and recent returns were much higher, with each of the most recent five years having larger returns than the 40% average.…show more content…
Ricketts planned to grow Ameritrade’s revenues by targeting self-directed investors, even defining Ameritrade’s mission ‘to be the largest brokerage firm worldwide based on the number of trades.’ This 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 estimate of the project’s risk. Ameritrade has been a pioneer in the deep-discount brokerage sector, since it formed in 1971. Ameritrade not only helped to create the deep discount market but it also was the first to offer many new services that changed the way individual managed their portfolio. The average return on equity during 1975 – 1996 was 40% and recent returns in the last five years were much larger than the 40% average. In March 1997, Ameritrade raised $22.5 million in an initial public offering allowing the company to continue adopting the latest advances in technology and to increase advertising to build its brand and improve market share. Ameritrade two primary sources of revenue were from transactions and net interest. Which meant that virtually all of Ameritrade’s net revenue were directly linked to the stock market. Ameritrade therefore was much more sensitive to declines in the stock market than the full-service brokers. Many of

More about Case Study: Ameritrade Essay

Get Access