Ameritrade
MGT 6060 Financial Management
Summer 2011
Prof. Jonathan Clarke
Case 3: cost of Capital at Ameritrade
Group Members:
Kristin Fadeley
Venkata Kuppusamy
Benedikt Schroeder
Yogesh Vasisht
Manoj Vattakkunnel
Question 1: What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
In a nutshell, Ameritrade's management should do a cost-benefit analysis, comparing proposed investments into technology upgrades and advertising with the Net Present
Value of the expected incremental free cash flows ("FCF's") that those two projects would add to the company's currently expected FCF's.
On the investment, or capital expenditure side, Ameritrade should carefully consider any estimates of time and money with regards to the envisioned technology upgrades:
Ameritrade is not just planning on increasing capacity, which might be as simple as an investment in additional bandwidth and hardware (servers), but also service improvements, which are likely software upgrades that are notorious for running over time and over budget. Management should therefore run multiple scenarios based on potential cost and time overrun scenarios to assess under which circumstances the project stays NPV positive.
Advertising campaigns are less likely to cause surprises on the investment side since they can be limited to a certain budget, but their success is very hard to predict. Even if the agency that Ameritrade ultimately selects can more or less precisely determine, how many potential new customers will be exposed to Ameritrade's new campaign, based on ratings, subscriptions and frequency of print and broadcast, it can only ever be a guess how many people will actually start using Ameritrade.
That brings us to the revenue side of this NPV calculation: Ameritrade will have to anticipate how much additional revenue-generating brokerage business the technology enhancements, capacity
Summer 2011
Prof. Jonathan Clarke
Case 3: cost of Capital at Ameritrade
Group Members:
Kristin Fadeley
Venkata Kuppusamy
Benedikt Schroeder
Yogesh Vasisht
Manoj Vattakkunnel
Question 1: What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
In a nutshell, Ameritrade's management should do a cost-benefit analysis, comparing proposed investments into technology upgrades and advertising with the Net Present
Value of the expected incremental free cash flows ("FCF's") that those two projects would add to the company's currently expected FCF's.
On the investment, or capital expenditure side, Ameritrade should carefully consider any estimates of time and money with regards to the envisioned technology upgrades:
Ameritrade is not just planning on increasing capacity, which might be as simple as an investment in additional bandwidth and hardware (servers), but also service improvements, which are likely software upgrades that are notorious for running over time and over budget. Management should therefore run multiple scenarios based on potential cost and time overrun scenarios to assess under which circumstances the project stays NPV positive.
Advertising campaigns are less likely to cause surprises on the investment side since they can be limited to a certain budget, but their success is very hard to predict. Even if the agency that Ameritrade ultimately selects can more or less precisely determine, how many potential new customers will be exposed to Ameritrade's new campaign, based on ratings, subscriptions and frequency of print and broadcast, it can only ever be a guess how many people will actually start using Ameritrade.
That brings us to the revenue side of this NPV calculation: Ameritrade will have to anticipate how much additional revenue-generating brokerage business the technology enhancements, capacity