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Cost of Capital at Ameritrade

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by

Oleg Pynda

on 19 May 2014

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Transcript of Cost of Capital at Ameritrade

Summary
At what cost ?
Ameritrade's new mission is
"to be largest brokerage worldwide based on number of trades".

To accomplish this goal Ameritrade plans to invest
<$255 mln.
in technology and advertisement.

In order for investment project to be successful gains must be greater then cost.


And we need to answer the main question:
Cost of Capital at Ameritrade
by Oleg Pynda, Evgenii Petrusha and Maksym Shvachko
What is the Cost of Capital for Ameritrade ?
Our estimate of Cost of Capital for Ameritrade is
17.0%
Our assumptions:
Risk-free rate :
YTM of 10y govt bonds (assume forecasting period is 10y)

Risk premium
: Excess returns of big cap stocks (1950-1997)

Cost of debt
: risk-free+1% (assume we are little bit riskier than govt.)

Target D/E ratio: 0.78
planned investment of 255 M
net need in borrowed funds 201 M (adj. for cash)
Equity at market value (259 M)
... and methodology:
Beta(debt)=0.25

We compare Ameritrade with Investment Services firms.

We took
historical Beta
of equity for
last 3 years
.

Thank you for your attention!
WACC:
Full transcript