Project Investment Decision Is Being Presumed Around August 1997

1606 Words Dec 13th, 2015 7 Pages
Ameritrade went public only from March 1997, and this project investment decision is being presumed around August 1997. In the initial phase of a publicly-traded company, the stock return can be extremely volatile and difficult to estimate. This also presents a challenge that we cannot accurately calculate an equity beta (βE or βL) due to lack of sufficient historical data for variances and the expected return based on statistical tools. In such a scenario, we seek to use the data from similar companies within the same industry. It is prudent to use the data of companies that have similar capital structure, size, investments and business operations. In particular, the discount brokerage firms seem to have striking similarity in business operation and revenue model with Ameritrade. Akin to Ameritrade, the discount brokerage firms, Charles Schwab, Quick & Reilly, Waterhouse and E*Trade obtain most of their revenue from discount brokerage (80-100%). These firms also operate under internet trading and have similar capital structure. As of Aug 1997, Ameritrade do not have any outstanding long-term debt (Exhibit-2). Similarly, E*Trade and Quick & Reilly are all equity firms. Charles Schwab has only 5-8% debt on an average from 1992-97. Only Waterhouse had a debt of about 38% during 1992-96. On the other hand, the investment banking services firms and Internet firms have significantly different business operations; they obtain far less revenue from brokerage (0-57%), and have…

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