Ameritrade Case Analysis

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Cost of capital at Ameritrade Case Analysis Ronnie Salhov 30141718 Ameritrade’s case study deals with the issue of another decision criteria when it comes to choosing whether to take on an investment or a project. The proposed investment is made in order to get closer to achieving the company’s objective, which is to become top at the discount-brokerage industry. It plans to achieve that goal by increasing its consumer base. This can be done if it improves its technologies to be able to provide to its customers a service that will be faster, easier and the most safe and reliable existed among its competitors in the market. This, of course, will be provided by the lowest price possible. Moreover, part of the investment is planned to go to advertising in order to increase the consumers’ awareness. When Ameritrade considers taking this project it should consider 2 important factors. The first will be the riskiness of the project. The riskiness will be taken into account through the discount rate, which will be used to discount the estimated expected cash flows that will follow by taking the project. In the case, we are told about several different estimations as to the level of expected return. One must take into account what are the factors that brought each of these estimators to offer such a rate, is it high enough, or maybe too high. A reasonable thing to do in order to estimate the discount rate will be to calculate the return on debt and the return on equity, and by giving weight to the capital structure, find the overall cost of capital of the firm, thus finding the Weighed Average Cost of Capital (WACC). Second important factor is positive NPV. As known, a firm is adding value by taking on projects with a positive NPV. Thus, Ameritrade has to calculate the NPV of this investment by estimating its future cash flows and only if it will turn positive it
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