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Ameritrade

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1. What factors should Ameritrade’s management team consider when evaluating the proposed advertising program and technology upgrades? How significant are these factors from a risk perspective?

Based on the case, we know the company Ameritrade Holding Corporation is a deep-discount brokerage, and the company’s proposed strategy is to increase the customer base by being a low-cost provider against its competitors. The company plans to invest more towards technology and advertising, and cut costs to improve the firm’s service, capacity, and customer awareness. If Ameritrade should go forward with this investment, it’s prudent to consider some factors. From a risk perspective the company should calculate the cost of capital as a basis for project evaluation. Ameritrade should also calculate the net present value (NPV) to determine the costs and benefits of the proposed investments. When calculating the NPV we should be aware of choosing the appropriate discount rate, which is the most important factor in the formula. Using too high or too low a discount rate can increase the uncertainty of future cash flows. Lastly, the company should also consider cash flows when evaluating the investment. If a company wants to start a new project or investment, cash will be the biggest determining factor. The CEO Joe Ricketts strongly believed his company can do this investment, however, his management team does not have enough confidence that they can get the higher expected return. Thus, at this time, we should measure the firm on whether it has the necessary cash flow to cover expenses.

2. Describe your process for calculating asset betas using comparables. Are there any firms that you would exclude from your comparables analysis? Why/why not?

The formula for asset beta is “asset beta= equity beta/(1+(1-t)*(R))”. In order to solve for asset beta, we first found adjusted

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