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Ameritrade's management should consider the net present value of the proposed advertising program and technology upgrades. They need to make sure that the future cash inflows due to this project outweigh its future cash outflows. Additionally, the riskiness of the project would have to be determined. Ameritrade's managers should also consider what taking on these programs would do to its capital structure. They might have a certain debt to equity ratio they wish to maintain, or perhaps there would be covenants put on their contracts requiring them to maintain a certain debt to equity ratio while their loan was outstanding.
Ameritrade should use a 6.10% risk free rate when calculating its cost of capital. This is the average of the 20 year bond annualized yield to maturity (on August 31, 1997) and the long term historical average annual return (from 1929 – 1996). The long term bond return was used because it provides an accurate average annual return since it reflects many years.......

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Approximate Word Count: 310
Approximate Pages: 2 (250 words per double-spaced page)

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