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Ameritrade Case

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Ameritrade Case
Ameritrade Case

Background In his effort to increase returns for Ameritrade shareholders and make Ameritrade the largest brokerage firm worldwide by trading volume, Joe Ricketts, Chairman and CEO of Ameritrade, seeks to improve Ameritrade’s competitive position in the deep-discount brokerage industry by taking advantage of emerging economies of scale.

To attract more investors, his strategy involves, first, cutting trade commissions from the existing rate of $29.95 per trade to $8.00. Second, he seeks to invest $100 million in technology advancements to make the online trading platform faster and closer to 100% reliability. Lastly, he has proposed increasing Ameritrade’s advertising budget to a cumulative $155 million for 1998 and 1999 fiscal years.

Issue The question presented is what weighted average cost of capital should be employed to value the planned investments and changes in the advertising budget.

Comparable Firms In my view, the true competitors of Ameritrade are securities brokerage firms, not Internet firms, as Ameritrade derives the majority of its revenues from its brokerage business. In contrast, Internet firms like Yahoo! derive their income from advertising and other sources dissimilar to Ameritrade. For Ameritrade, the Internet is merely the channel through which its brokerage services are provided. Therefore, I have limited our consideration of comparable firms to brokerage firms.

The discount brokers E*Trade, Charles Schwab, Quick & Reilly Group, as well as Waterhouse Investor Services have the most similar business concept, but provide only a very limited scope of returns and accounting data for comparison. Therefore, looking at firms with sufficient available data, the first metric I used to identify comparable firms was the proportion of revenue attributable to brokerage income. I sought firms with a percentage similar to Ameritrade’s at 65%. I determined that Bear Stearns, Merrill Lynch, A.G. Edwards, Paine Webber, and

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