For amazon company The purpose of this project is to help you synthesize many im

Question

For amazon company The purpose of this project is to help you synthesize many important aspects of financial analysis. You will read and use financial information presented by a company in the form of an annual rep. This activity helps you learn to gather information and become aware of the sources of financial information and then interpret, analyze, and use the information to evaluate the publicly traded company of your choice. In this project, each group is required to select a firm listed on Bahrain Bourse, collect the relevant information, and make a discussion on their selected firm's capital structure policies over the past five years. This project is designed to improve students' ability to 1. Develop a thorough understanding of relevant theories and practices on capital structure 2. Collect relevant data, critically analyze the data, and interpret the data. 3. Write a report and present their findings. 4. Conduct effective teamwork with other group members.

Explanation / Answer

1. Debt / Equity ratio = 3.14

Financing modes: Equity, long-term debt and short-term debt

2. Cost of equity = 11.38%

Cost of debt =

If long term-debt has an interest rate of 4% or 5%, the cost of debt is 3.6% or 4.5%.

3. Advantages and disadvantages of using debt

Cost of debt is much lower than the cost of equity, 3.6 or 4.5% and 11.38% respectively.

Debt/capital is 4.2%, the average for the sector is 16.3%.

Cost of Equity

Low

High

Selected Beta

1.05

1.21

(x) Market Risk Premium

5.5%

5.5%

Adjusted Market Risk Premium

5.8%

6.6%

(+) Risk-free Rate

4.0%

4.0%

(+) Additional Risk Adjustments

0.0%

1.0%

Cost of Equity

9.8%

11.6%

Estimate Cost of Debt

Cost of Debt Benchmarks

5 Year Avg Effective Interest Exp

5.0%

Synthetic Interest Rate Estimate

4.8%

Cost of Debt

Low

High

Selected Long-term Debt

4.0%

5.0%

Tax Rate

11.0%

11.0%

After-tax Cost of Debt

3.6%

4.5%

4. Debt relative to sector; debt relative to market

Debt relative to sector = 2.6

With other organizations, the debt ratio value is from 6 to 12.

Cost of Equity

Low

High

Selected Beta

1.05

1.21

(x) Market Risk Premium

5.5%

5.5%

Adjusted Market Risk Premium

5.8%

6.6%

(+) Risk-free Rate

4.0%

4.0%

(+) Additional Risk Adjustments

0.0%

1.0%

Cost of Equity

9.8%

11.6%

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