Corporate Finance

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The initial evaluation may indicate that the project should be undertaken or rejected under the following conditions:

- Optimistic View – Expected rate of return (40%) = Accept the Project

- Medium View – Expected rate of return (15%) = Accept the Project

- Minimum View – Expected rate of return (10%) = Marginal decision

The additional criterion is the risk of the project. Without much detail on the plans for the $100 million, I believe that there is associated risk, since there is no timetable for the implementation of the completion of the project, nor details on the scope. With the WACC and the assignment of risk, I believe that there is not sufficient data to make a decision on WACC alone.

Conclusion

With the available data, I would perceive this model with the limited data to be a feasibility study, since there is a great deal more analysis that should be accomplished to view the investment of a quarter of a billion dollars in a project. Some of the points that need clarification or add risk are:

- Borrowing would raise the debt to equity ratio, and there is no certain way to tell with the present data, if Ameritrade could borrow the funds it required, just based upon their current equity is $66 million. Also with the limited details that are provided, it would be hard to find an institution or investor that would provide the capital.

- Financing with the sale of common stock poses three issues:

- The floating cost required to generate the capital from the sale of stock

- The condition of the market in making the sale of the stock successful

- The timing required to raise the required capital.

- Revenue generation poses a major threat to the project, since the inflow of revenue is dependent upon the stock market. The reduction of the fee charged to the customers from $29.95 to $8.00 would require that Ameritrade generate approximately 3.8 times the current number of transactions, just to stay at the current revenue level.

- There needs to be a reliable expected return on investment provided, since there is the optimistic view from Joe Ricketts and a lower number from the management team.

- There also needs to be an analysis of what this project and even effect of the proposal on the intrinsic value of their stock.

I would view both WACC models as the assessment of a project that could be feasible, and the recommendation would be that of a more finite evaluation of project and the provision of a more definitive timetable so that all the proper assessments may be accomplished.

References

Brigham, E. & Houston, J. (2009). Fundamentals of Financial Management, South-Western

Cengage Learning, Mason, OH

Mitchell, M. & Stafford, E. (2000). Cost of Capital at Ameritrade, Harvard Business School,

Boston, MA.