Ameritrade - Strategic Evaluation
1) What factors should Ameritrade management consider when evaluating the proposed advertising program and technology upgrades? Why?
Strategic evaluation
2) Ameritrade does not have a beta estimate as the firm has been publicly traded for only a short time period. What comparable firms do you recommend as the appropriate benchmarks for evaluating the risk of Ameritrade’s planned advertising and technology investments.
Beta: 1) which firms to use as a benchmark and why
2) Calculate beta for comparables
3) Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in Exhibit 3, calculate an estimate of Ameritrade’s cost of capital.
Class next week
4) How should Joe Ricketts, the CEO of Ameritrade, view the cost of capital estimate you have calculated? Do you believe the project should the project be undertaken?
Strategic evaluation + class next week
Large expenditures relative to existing capital- finance considerations, overleveradged? Generate the revenue necessary—run the stats on expenditures verses vapital
Can they realize the economies of scale
Competitor response to expenditures
How do they know that the marketing campaign will be effective
Revenues- fees and interest
Competition- lower fees, higher interest Risk: recession lack of trading, lower revenues
Full service- Ameritrade- non-diversified risk, struggle to keep up with competition in downturn economy
Planned Investments and Cost of Capital
Cost cutting- reduced commission, can the cuts cover the costs,
Concern: price war
Advertisement
Technology
Risk
30%-50%?
Run different models on different discount rates
Run different models compared with various
Strategic evaluation
2) Ameritrade does not have a beta estimate as the firm has been publicly traded for only a short time period. What comparable firms do you recommend as the appropriate benchmarks for evaluating the risk of Ameritrade’s planned advertising and technology investments.
Beta: 1) which firms to use as a benchmark and why
2) Calculate beta for comparables
3) Using the stock price and returns data in Exhibits 4 and 5, and the capital structure information in Exhibit 3, calculate an estimate of Ameritrade’s cost of capital.
Class next week
4) How should Joe Ricketts, the CEO of Ameritrade, view the cost of capital estimate you have calculated? Do you believe the project should the project be undertaken?
Strategic evaluation + class next week
Large expenditures relative to existing capital- finance considerations, overleveradged? Generate the revenue necessary—run the stats on expenditures verses vapital
Can they realize the economies of scale
Competitor response to expenditures
How do they know that the marketing campaign will be effective
Revenues- fees and interest
Competition- lower fees, higher interest Risk: recession lack of trading, lower revenues
Full service- Ameritrade- non-diversified risk, struggle to keep up with competition in downturn economy
Planned Investments and Cost of Capital
Cost cutting- reduced commission, can the cuts cover the costs,
Concern: price war
Advertisement
Technology
Risk
30%-50%?
Run different models on different discount rates
Run different models compared with various