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Submitted By aliknow

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Words 944

Pages 4

On Amazon

Due Date: January 16, 2016

Name:

Professor

Finding the weighted average cost of capital for Amazon.com

Ticker: AMNZ

Amazon is an American publically traded company and is one of the largest retailing firms headquartered in Seattle, Washington. The reason why I chose this firm is that it has equity, debt and lease payments in its capital structure. The following are the calculations performed in order to determine the WACC for the firm. Cost of debt

According to Moody’s report for year 2014, the credit rating of Baa1 reflects excellent liquidity and financial policy for the shareholders (Moody, 2014). Even though the article reflected it to be a positive sign for the firm, still the rating is quiet low.

Based on the financial statements of Amazon.com, if the firm has good credit ratings it must add 0.625% to the LIBOR rate in order to derive the cost of debt and if the rating is poor it must add 1% to the LIBOR rate (Amazon, 2014). I presume the credit rating to be extremely low so adopting a conservative approach, I have rather added 2% to the rate:

The cost of debt for Amazon.com therefore is:

KD= RF + spread KD= 0.561% + 2%

KD = 2.561%

For Amazon.com, the interest rate is the function of LIBOR rate so the book value approximately equals the market value. The estimated fair value of long-term debt is $9.981 billion ($9.1 billion for notes and $881 million for other long-term debt) as stated in the note 6 to the financial statements.

Cost of equity

The method preferred for calculating the cost of equity for Amazon.com is by applying CAPM model. The beta for 2014 has been determined by using the daily returns of market index i.e. S&P 500 and the stock (Finance, 2014). The results were as shown in the table below: Covariance | 0.000069 | Variance | 0.000050 | Beta | 1.380 |

Formula used for beta is:

Beta=…...

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