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Overview on Business in Financial Sector and Ameritrade

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Overview on Business in Financial Sector and Ameritrade

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Chulalongkorn Business School




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Overview on Business in Financial Sector and Ameritrade

The firms, which are within the financial service sector, especially deep-discount brokerage, have the differences from manufacturing firms in terms of debt function, major investment, and revenue structure. As for analysis debt function, debt of the non-financial service firms is usually considered as a source of funds, which is allocated to invest in capital expenditure (CAPEX) or working capital. However, the financial service firms use debt as raw material but sometimes the firms use debt becoming the source of funds that must be analyzed for each case resulting in difficulty to consider the current level of leverage. This implies that we must be more carefully calculate the firm's cost of capital and Degree of  Financial Leverage (D.O.F), which has an impact on beta value in the next step. With respect to major investment, the financial service firms invest in low Property, Plant and Equipment (PPE) because the having much PPE says buying several equipments does not lead to expansion of bank business, but the high operating expenses such as investing in development of human capital and marketing communication brings about the business extension. This factor will cause the different Beta in each business. As regards revenue structure, the revenue structure of the financial service firms is divided into 3 sources, which are net interest revenue, commission, and fee from transaction such as asset management fee and investment banking fee. Because each firm in the sector has the different proportion of each source of its revenues, it is the main reason for the more volatility in earning that contributes to the high undulation of the firm's profits too. From the analysis above, we can conclude that Ameritrade is considered as the firm, which is within the financial service industry by focusing on generating revenue from the brokerage fee mainly.

The current goals of Ameritrade are competitive position in deep-discount brokerage business and being the largest one in term of number of trades. To achieve its goals, Joe Ricketts, Chairman and CEO of Ameritrade,  has planned 3 strategies, which are cutting down its price from $29.95 to $8.00 per trade, 100 millions technology enhancement to improve service and capacity and 155 million advertising to increase brand awareness by that this number of investment covers 1998-1999 period. These strategies lead to question whether a good and value-added project is. Following value chain analysis from the top line

to the bottom one, Ameritrade has competitive advantages via offering better financial services than its competitors to generate its more margins. Ameritrade does not only emphasizes improving its technology as a support value activity to create value for its customers, but also stresses on marketing particularly self-directed investors, which becomes a primary value activity to make its different and outstanding services. These 2 things are the Key Success Factors for Ameritrade to remain the number one in the industry. When we consider each item in Ameritrade's Consolidated Annual Income Statements and Balance Sheets that cover 1995-1997 periods, Ameritrade had high commission income and advertising expenses. Moreover, the account receivables from its customers and correspondents are the asset that has the highest value and the account payables to customers and correspondents are the highest value of liabilities. Therefore, Ameritrade does not use debt in capital structure at the present time. This brings about the items of liabilities in the reports being similar to net working capital. If Ameritrade approves credit loan or sells on credit leading to create account receivable, Ameritrade must borrow money or buys goods by its credit. This causes that all of the items in the reports are raw material for operating business instead, not source of funds from financing. To sum up, Ameritrade did not finance by debt in 1997.

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