Question: FINC3304 (BUSINESS FINANCE) Final Project - Fall 2017 Instruction: You

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Question:

FINC3304 (BUSINESS FINANCE)

Final Project - Fall 2017

Instruction:

You need to work on the mini-projects in Excel. Your final mini-project report should be well-organized and typed in a Word file. Are required to submit both your Word report and Excel files to the instructor using the mini-project submission tool in Blackboard. The style and organization of the project accounts for 10 points.

Mini-Project 3: Weighted Average Cost of Capital (80 points):

Find 2017 financial statements for Amazon.Com from UHV Mergent Online database, Yahoo! Finance, Google Finance, or other finance sources.

(1)  Estimate the weights of capital (debt, preferred stock, and common stock) for the company.

(2)  Estimate the before-tax and after-tax component cost of debt for the firm.

(3)  Estimate the component cost of preferred stock (if applicable) for the firm.

(4)  Estimate the component cost of common equity using CAPM for the firm.

(5)  Compute the firm's weighted average cost of capital (WACC). Discuss your findings.

Explanation / Answer

as per data amazon capital structure consists of

equity capital =90,609,000,000

Debt = 24,658,000,000

1) so the percentage wise weight of equity =79% Debt= 21%

2) current 10 year bond issued by amazon is yielding 3.11%

after tax cost of Debt would be =3.11*(1-35)  

=2.02%

3) there is no preffered stock

4) we have 2.34% us treasury bond yield as Risk free rate and current expected market rate is 9.03%

stock has a Beta of 1.42

CAPM= Rf+B*(Er-Rf)

=2.34+1.42*(9.03-2.34)

=2.34+9.49

=11.83%

5) Wd = 21% We =79% (We= weight of equity , Wd= weight of debt)

WACC = (Wd*Kd)+(We*Ke)

=(21*2.02)+(79*11.83)

=42.42+934.57

=976.99/100 i.e 9.76%

As we can see that there is less use of Debt in amazon and required rate of return is also around industry average.

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