Ameritrade Harvard Case Study
Ameritrade – case study
Executive Summary
Ameritrade provides online brokerage services and operates an Internet-based financial management services business. 90% of the company’s revenues are from the provision of discount brokerage services.
The company’s objective is to improve its competitive position in deep-discount brokerage. In order to achieve this objective, the company must grow its customer base, requiring an investment of $100 million to upgrade its technological capabilities as well as an increase of $155 million for its advertisement budget. In order to evaluate the company’s cost of capital, we used the Cost Asset Pricing Model. Since the company went public recently, it would not be an accurate assessment of the risk of the investment to find the beta of this short time period. Therefore, we chose a similar company called Charles Schwab, which has very similar sources of revenue, discount brokerage services. However, this company has a very different capital structure, so we unleveraged the beta in order to get the best, most accurate beta for Ameritrade. We assumed that the capital structure of Ameritrade did not have debt, and that the project would be financed with equity only. We found a levered beta for Charles Schwab of 2.15. After unlevering it, we got a beta of 1.8768. When using the CAPM model, we concluded that the cost of capital of Ameritrade is equal to 20.40%.
Factors to be considered in evaluating the project
Various factors must be considered by the management of Ameritrade when evaluating the proposed strategies. It is necessary to determine the cost of capital that should be employed for Ameritrade. An appropriate discount rate is required to derive the net present value (NPV) of the investment. NPV is the preferred decision criterion when deciding whether a firm should accept an investment. The NPV indicates how much value the investments ads to the firm and therefore the firm should accept projects with a positive NPV.
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Executive Summary
Ameritrade provides online brokerage services and operates an Internet-based financial management services business. 90% of the company’s revenues are from the provision of discount brokerage services.
The company’s objective is to improve its competitive position in deep-discount brokerage. In order to achieve this objective, the company must grow its customer base, requiring an investment of $100 million to upgrade its technological capabilities as well as an increase of $155 million for its advertisement budget. In order to evaluate the company’s cost of capital, we used the Cost Asset Pricing Model. Since the company went public recently, it would not be an accurate assessment of the risk of the investment to find the beta of this short time period. Therefore, we chose a similar company called Charles Schwab, which has very similar sources of revenue, discount brokerage services. However, this company has a very different capital structure, so we unleveraged the beta in order to get the best, most accurate beta for Ameritrade. We assumed that the capital structure of Ameritrade did not have debt, and that the project would be financed with equity only. We found a levered beta for Charles Schwab of 2.15. After unlevering it, we got a beta of 1.8768. When using the CAPM model, we concluded that the cost of capital of Ameritrade is equal to 20.40%.
Factors to be considered in evaluating the project
Various factors must be considered by the management of Ameritrade when evaluating the proposed strategies. It is necessary to determine the cost of capital that should be employed for Ameritrade. An appropriate discount rate is required to derive the net present value (NPV) of the investment. NPV is the preferred decision criterion when deciding whether a firm should accept an investment. The NPV indicates how much value the investments ads to the firm and therefore the firm should accept projects with a positive NPV.
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