Look up Amazon (AMZN) and Ali Baba Group (BABA) stocks on yahoo finance and answ

Question

Look up Amazon (AMZN) and Ali Baba Group (BABA) stocks on yahoo finance and answer the following (15 PTS)

       a. Which one is more liquid? Explain. (5 PTS)

      b. What is the enterprise value for both companies? (5 PTS)

       c. Luke wants to own enough stock of Amazon to be able to control their decisions. How much money does he need to come up with? Note that in order have control, he needs to have 51% ownership. (5 PTS)

      d. (Bonus Question): Jason is sitting on the board of Amazon and wants to avoid a take-over by Luke. What suggestions do you have for him? (5 PTS)

Explanation / Answer

(a)

Stock liquidity can be evaluated by the stock's bid-ask spread. The lower the spread, the more liquid the stock.

For Amazon, spread = 637 - 636.05 = 0.95 [0.15% of ask price of $637]

For Alibaba, spread = 79.67 - 79.65 = 0.02 [0.03% of ask price of $79.67]

Since Alibaba has a lower bid-ask spread in terms of percent of ask price, Alibaba stock is more liquid.

(b)

Enterprise value, Amazon** = 314.63 billion

Enterprise value, Alibaba** = 199.15billion

**As per Capital IQ data mentioned in Yahoo Finance website for both companies

(c)

For Amazon, value of common stock = $5,000,000

To have control, he needs to buy 51% of total stock by paying $5,000,000 x 51% = $2,550,000

(d)

Jason can avoid a hostile takeover using following measures.

1) Introducing a poison pill feature to prevent hostile takeovers. A poison pill is a legal clause that must be fulfilled in case of a takeover, but it comes as very costly to the acquirer, thus increasing the cost of takeover.

2) Another strategy may be a White Knight where a friendly company is approached to takeover the target company instead of the hostile acquirer.

Note: Source of data are (1) Amazon: http://finance.yahoo.com/q/ks?s=AMZN+Key+Statistics (2) Alibaba: http://finance.yahoo.com/q/ks?s=BABA+Key+Statistics

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