Case Study Ameritrade

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Cost of Capital at Ameritrade CAPM Cost of Capital at Ameritrade ● ● ● Introduction to Case Calculate CAPM Calculate WACC Company Background ● ● Ameritrade is formed in 1971 pioneer in the deep-discount brokerage sector. In Mar 1997, Ameritrade raised $22.5 million in IPO ● Company Background ● - Source of revenue from Transaction and Net interest Business Question Joe Ricketts (CEO) is thinking cut cost, invest in advertise or invest in technology - Expect return 30-50% - Expect return 10-15% ● What type of Ameritrade Business? ● Who are Ameritrade’s Competitors ● ● ● ● E*Trade Waterhouse Investor Service Charles Schwab Quick & Reilly Other Information that we have? ● Ameritrade Annual Income, Balance sheet Capital Market return data Ameritrade & Competitors Stock price Stock return from NYSE ● ● ● What do we need to answer question ● CAPM (Capital Asset Pricing Model) ◦ Risk Free Rate ◦ Beta (unleverage) ◦ Risk Premium ◦ Expected Market Return ● WACC (Weighted Average Cost of Capital) ◦ E/V ratio ◦ Re ◦ Rd ◦ D/V What do we need to answer question ● CAPM (Capital Asset Pricing Model) ● WACC (Weighted Average Cost of Capital) CAPM - Capital Asset Pricing Model Ke = Rf + B (Rm-Rf) ◦ Risk free rate ◦ Beta ◦ Expect Market return ◦ Market risk premium (Rm-Rf) CAPM - Capital Asset Pricing Model Risk free rate We pick up 30-years bonds Rf = 6.61% Why? Ameritrade is going to make a substantial investment in technology Ameritrade’s mission is to be the largest brokerage firm worldwide(Long term investment) CAPM - Capital Asset Pricing Model Market Risk Premium Historic Average Total Annual Returns on US government securities and Common Stocks(Exhibit 3) We consider Ameritrade is a large company - in 1997, Ameritrade(NASDAQ: AMTD) raised 22.5 million in an initial public offering

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