Cost of Capital at Ameritrade

Paper Summary:

This paper presents a case study that examines several key factors that Ameritrade should evaluate when considering a proposed advertising program and technology upgrades. The paper first discusses their competitive situation, the environment and the market. It then looks at the issue of return on investment and whether or not this new program of technology and advertising is going to deliver those results.

From the Paper:

"The only logical comparative for calculating an asset beta is eTrade. Ameritrade is not an Internet or technology company in that they do not develop technology and their business is not as dependent on the growth of the Internet so much as it is on the growth of stock market volumes. Only eTrade and Waterhouse make good comparables in terms of being in the same discount brokerage business. Full service brokers are working with different revenue streams and ancillary businesses that greatly reduce their effectiveness as comparables. Waterhouse's relevance becomes suspect when you consider that they are no longer public. Their data is old - the beta of a discount brokerage in the telephone era is not especially useful to a decision about a discount brokerage entering the Internet era. The cost of capital for eTrade is 6.4%. As with Ameritrade they have no long-term debt and do not pay dividends. Ameritrade's cost of capital is going to be around 8%. Their borrowing cost is 8-9%, and we should take the lower figure to reflect that they have some equity, and that equity has thus far been free due to the lack of dividends."

Sample of Sources Used:

• Kester, W. Carl, Tofano, Peter, and Ruback, Richard S. (2005) Case Problems in Finance. 12th ed. McGraw-Hill, New York.

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