Ameritrade Case

1. Briefly describe the project that Ameritrade is considering.

a. In order to expand and grow the revenues of the business Ricketts strategy consists of targeting self-directed investors. Rickett’s strategy consists of a) Reducing commissions from the current $29.95 to $8.00 per trade for all internet market orders; b) Increasing technological development to move the goal towards 100% reliability on online trading, at a cost of $100MM, thus increasing trade execution sped and c) increasing the company’s advertising budget to $155M for 1998 and 1999 to promote the lower cost and higher speed at which trades can be executed.

2. The title suggests that the cost of capital is important here. Concisely describe what cost of capital means. It is the cost of what to whom? Why is it important? What factors determine the cost of capital?

a. The cost of capital represents Ameritrade’s costs associated with its debt and equity carried on their books to fund projects such as the one mentioned in question 1. In the case, one of the most important costs of capital, particularly mentioned by Ricketts, is maximizing the shareholder value. Cost of capital is therefore not only associated with the Company’s direct cost of financing its projects, through both equity and debt, but also considering the return that will be provided to the equity and debt holders for financing these projects and the ultimate continued return on investment provided by the Company. Specific factors that determine the cost of capital include the future growth and performance of the company, the company’s historical ability to provide a return for both its equity and debt investors, and larger macro-economic factors such as the industry the Company competes in and the ultimate risk profile of the industry and the risk of Ameritrade based on what type of player it is within the industry. Overall, the risk profile, which can be based on varying