Cost of Capital at Ameritrade

1450 Words6 Pages
Cost 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’s cost of capital. Other factors that should also be considered include: how market swings will affect the expected return on investment, the project’s payback period (the project will require massive initial outlays, so Ameritrade could find…show more content…
This is because market conditions have become more stabilized as time has passed, so it is useful to exclude data from more volatile time periods. Specifically, we wish to exclude the effects of the Great Depression. Another option is to use data for small companies in order to match the high return and high risk nature of Ameritrade. Although Ameritrade’s investment may make it more risky than the average large company, the beta we have chosen already reflects that higher risk. Therefore, we have chosen to use the market return for large companies because it more accurately depicts an overall picture of the stock market and Ameritrade’s status as a large firm. After subtracting the chosen risk-free rate of 5.24% from the average large company market return of 14.0%, we estimated the market risk-premium to be 8.76%. Ameritrade does not have a beta estimate as the firm has been publicly traded only for a short period at the time of the case. Exhibit 4 provides various choices of comparable firms. Which firms do you recommend as the appropriate benchmark for evaluating the risk of Ameritrade’s planned advertising and technology investments? Explain. Although technically Ameritrade is a discount brokerage, because their prices are so much lower than their competitors, their revenue depends on the volume of transfers more than anything else. Their system is very different from other discount brokerages who can earn a more significant

More about Cost of Capital at Ameritrade

Open Document