Part b. The following is a snapshot of the financial statements of Amazon Inc. ($AMZN). Profit & Loss (in $ millions) FY19 FY18 Total Revenue 280,522 232,887 Operating Profit 14,541 12,421 Finance...

Part b. The following is a snapshot of the financial statements of Amazon Inc. ($AMZN). Profit & Loss (in $ millions) FY19 FY18 Total Revenue 280,522 232,887 Operating Profit 14,541 12,421 Finance Costs 1,600 1,417 Profit before tax 13,976 11,261 Tax Expense 2,374 1,197 Net income 11,588 10,073 Balance Sheet (in $ millions) FY19 FY18 Common Stock 5,000 5,000 Other equity capital 57,060 38,549 TOTAL SHAREHOLDERS FUNDS 62,060 43,549 Long Term Borrowings 23,414 23,495 Short Term Borrowings 0 0 TOTAL CAPITAL AND LIABILITIES 163,188 119,099 Fixed Assets 128,914 87,547 Cash and Cash Equivalents 55,021 41,250 Total Current Assets 96,334 75,101 TOTAL ASSETS 225,248 162,648 You are required to compute the various components of WACC and the WACC of Amazon using the above information. Compute the cost of debt (Kd) of the company. (2 marks) Compute the cost of equity (Ke) of the company using CAPM. (3 marks) Compute the capital structure of the company. (5 marks) Compute the WACC of the company taking corporate tax rate as 21%. (5 marks) How would you interpret the values of Kd, Ke, and WACC computed in this question for a technology company such as Amazon? Draw your analogies from corresponding prices of other competitive companies in the landscape to arrive at your conclusions. (10 marks) Further, the following information is available for computing the cost of equity: For CAPM, you may refer to the share price data of AMZN and the NASDAQ index data (in US$) for one year from 1 Jan 2019 to 31 Dec 2019 (attached with this document) for computing the Beta. Necessary adjustment in the beta would be required to get a better estimate of the cost of equity. Consider Rf = 1%, equity risk premium = 6%.
Jan 07, 2022
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