The case you have to analyze: The company we are going to look at is Ameritrade,
ID: 2725597 • Letter: T
Question
The case you have to analyze: The company we are going to look at is Ameritrade, a deep-discount brokerage company. Click HERE
to access the background information and financial statements of the company.https://umassd.umassonline.net/bbcswebdav/internal/courses/2016_Spring_1_FIN312_04_UMD/wikis/course/ab26bdb4bcba46b68f1a5d6ab3946125/ee226c1e1f7c4cacabf617fbcef65ef1/Amertrade%20Case.pdf
Problems you have to solve in each section: Section 1 (3 credits): Analyze company's financial performance based on provided financial statements Read the case and financial statements carefully and answer the following questions: 1. what business is Ameritrade in? 2. what is Ameritrade's competitive advantage compared to other companies in the industry? 3. what are the revenue sources? 4. Based on the Income Statements and Balance Sheet, calculate 3 financial ratios of your choice and explain the implications of your results. Section 2 (3 credits): Evaluate investment projects Read the "Planned investments of cost of capital" part of case carefully and answer the following questions: 1. what is Ameritrade's strategic goal? 2. what are some of strategies that Ameritrade is going to implement 3. what investment projects do the company plan to evaluate and potentially take on? 4. what kind of rate of returns are expected? 5. what discount rates have been used in evaluating Ameritrade? Section 3 (4 credits): Estimate cost of capital Based on the case information and information from Exhibit 1-5 (view Exhibit 5 HERE), come up with your estimate of the WACC of the company and justify your estimates: 1. estimate the cost of debt based on data from Exhibit 3 and historical data of corporate bonds . Assuming the company issued 20-year bonds, which annualized yield to maturity is appropriate as an estimate of cost of debt? briefly justify your choice. 2. estimate the cost of equity using either SML: a. explain why you cannot use dividend growth model in this case. b. what is your choice of risk-free rate? c. what is your choice of market rate of return? d. pick the company's beta from this website e. briefly justify your choices. 3. estimate the capital structure weights based on Exhibit 4 (debt/value: market value of debt / total market value of the firm). 4. assume the company has 30% tax rate, what is the estimated weighted average cost of capital for the company? 5. how is your estimated cost of capital compared to the discount rates that have been used in evaluating Ameritrade?
Explanation / Answer
Answer
Section 1
Answer 1. 2 3 & 4
What business is Ameritrade in? what is Ameritrade's competitive advantage compared to other companies in the industry? what are the revenue sources? Based on the Income Statements and Balance Sheet, calculate 3 financial ratios of your choice and explain the implications of your results.
When the Securities and Exchange Commission eliminated the practice of fixed brokerage commissions on May 1, 1975, a handful of small firms, including First Omaha Securities, Inc., saw a unique opportunity. First Omaha Securities evolved into TD Ameritrade, and for over 35 years has remained a pioneer in an industry that continues to innovate new ways that make Wall Street more accessible to the individual investor.
In the 1980s and 1990s, TD Ameritrade pioneered a number of ‘firsts,’ leveraging technology to make investing easier, faster, and more efficient. In 1988, the company was the first to offer touch-tone phone trading. And, in 1995 it acquired K. Aufhauser & Co., which was credited with executing the first online trade in 1994. Following its Initial Public Offering (IPO) in March 1997, the company combined its various brokerage units into one broker dealer, Ameritrade, Inc., and launched its first national advertising campaign, complete with a pricing philosophy that continues today.
Between 1998 and 1999, Ameritrade helped grow and improve the online trading experience for self-directed investors. The company started offering online options order entry and electronic trade confirmations via email. These innovations, along with extended-hours trading, the Ameritrade Online Investor Index (one of the first online investor behaviour measuring tools), and trading via the SprintPCS Wireless Web, the first of its kind via mobile device, helped keep Ameritrade at the forefront of a booming industry.
With the start of the new millennium, Ameritrade launched paperless account creation, which brought the entire account opening process online for the first time. The bursting of the ‘Tech Bubble’ resulted in excess industry capacity, and no firm was more involved in consolidation than Ameritrade. Starting in 2001 with its purchase of National Discount Brokers, the company would acquire 10 firms in 10 years, adding clients, accounts, technology, and other services for self-directed investors. In 2003, it launches the industry’s first trade execution guarantee of 10 seconds. And, following its integration of Datek Online Holdings, Ameritrade unveiled a redesigned client website in 2004 that streamlined processes and tools, and made trading more flexible with now industry-standard solutions like Snap Ticket and Trade Triggers.
In 2006, Ameritrade purchased TD Waterhouse USA from TD Bank Financial Group, creating TD Ameritrade, one of the largest discount brokerages in the United States – and the largest in terms of average client trades placed each day. The merger with TD Waterhouse helped the company expand its product offering, with a more concentrated focus on long-term investing, guidance and asset gathering. With a nationwide branch network and offerings for IRAs and college savings accounts, among other things, the company created unique tools designed to make the planning process less intimidating for American investors. Tools that help investors decide between Traditional and Roth IRAs and the asset allocation guidance tool, Portfolio Planner, helped make TD Ameritrade a bona fide player in the competitive retirement business.
In 2009, TD Ameritrade looked back to its trading roots and acquired thinkorswim Group Inc., which included the fastest-growing brokerage at the time, thinkorswim, a company recognized throughout the industry for its record of innovative technology and sophisticated trading platforms. This most recent combination allowed TD Ameritrade to further expand its offerings for active traders by introducing complex options, futures and foreign exchange trading. In 2010 and 2011 the company embraced mobile devices by developing trading applications for the Android, iPhone, and iPad. And, in 2011, the company launched Trade Architect, a streaming web-based trading platform that brought together the best of thinkorswim and TD Ameritrade.
Today, TD Ameritrade provides investing and trading services for nearly six million client accounts that total more than $600 billion in assets, and custodial services for more than 4,000 independent registered investment advisors. With clients placing, on average, approximately 400,000 trades each day, it maintains the leadership position.
The Company is a securities broker-dealer that provides trade execution and clearing services on a fully disclosed basis to TD Ameritrade, Inc. and TD Ameritrade Asia Pte. Ltd. (“TDA Asia”), indirect wholly owned subsidiaries of the Parent. The Company is required to comply with all applicable rules and regulations of the Securities and Exchange Commission (“SEC”), the Financial Industry Regulatory Authority (“FINRA”) and the various securities exchanges in which it maintains membership.
TD Ameritrade Holding Corporation (Source : Yahoo Finance)
Financial Highlights
Fiscal Year
Fiscal Year Ends:
30 Sep
Most Recent Quarter (mrq):
31-Mar-2016
Profitability
Profit Margin (ttm):
25.64%
Operating Margin (ttm):
40.58%
Management Effectiveness
Return on Assets (ttm):
3.24%
Return on Equity (ttm):
17.01%
Income Statement
Revenue (ttm):
3.23B
Revenue Per Share (ttm):
6.00
Qtrly Revenue Growth (yoy):
4.90%
Gross Profit (ttm):
3.20B
EBITDA (ttm)6:
N/A
Net Income Avl to Common (ttm):
829.00M
Diluted EPS (ttm):
1.49
Qtrly Earnings Growth (yoy):
8.50%
Balance Sheet
Total Cash (mrq):
10.45B
Total Cash Per Share (mrq):
19.76
Total Debt (mrq):
1.81B
Total Debt/Equity (mrq):
37.23
Current Ratio (mrq):
1.16
Book Value Per Share (mrq):
9.21
Cash Flow Statement
Operating Cash Flow (ttm):
1.70B
Levered Free Cash Flow (ttm):
N/A
Profitability ratios and Return on Equity ratio of TD Ameritrade are Comfortable.
Financial Highlights
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