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Calculating the WACC for Amazon

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Describe how the Weighted Average Cost of Capital (WACC) is calculated in amazon.com. Evaluate the effectiveness of this approach.

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Amazon.com is amazing online super mart selling numerous items including book for which it is famous for. Now it is one of the world's leading online retailers with over 17 million customer accounts in over 150 countries. The company sells books, music, DVDs, videos, toys, electronics software, video games, home improvement products amongst others. Through its marketplace services- amazon.com auctions, zshops etc. the company has created web-based marketplaces where buyers and sellers enter into transactions involving a wide range of products.

As the company states in its 199 10-k:

"We offer our customers a superior shopping experience by providing high value through selection, convenience, ease of use, low prices, product information and an intense focus on customer service. We are a proven technology leader, having developed electronic commerce innovations such as 1-click technology, personalized shopping services, easy to use search and browse features, secure payment protections, and wireless access to our stores."

Calclating WACC
The WACC is the required rate of return that a firm must achieve in order to cover the cost of generating funds in the marketplace. Another way to think of the cost of ...

Solution Summary

The solution calculates the WACC for Amazon.

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AMAZON.com: Weighted Average Cost of Capital (WACC)

Please show work and calculations.

Estimate the components of the cost of capital for AMAZON using MARKET data:

(a) For the cost of common stock, analyze using the dividend growth model and beta estimate using the dividend growth model and CAPM. To determine Beta, first use published sources. Next calculate your own beta estimate using regression analysis with 52 weeks of daily data. See the textbook's website to DOWNLOAD the regression tool kit from Chapter 6 (Financial Management Theory and Practice, 14th Edition, Brigham & Ehrhardt), If the published estimated and the results of your regression analysis differ, justify your final choice of Beta for the WACC determinations.

(b) Calculate the cost of preferred stock.

(c) Calculate the cost of DEBT. Recall that you do NOT use the coupon rate, but instead use the YTM for each bond issue.

(d) Determine the appropriate weights for each of the categories using MARKET values.

(e) Calculate the company's WACC.

(f) In your opinion, has the company minimized its WACC? What could it have done differently? Recall that more debt increases the risk of BANKRUPTCY and more equity means the flotation costs of issuing stock.

(g) Provide reasons why or why not the current WACC is appropriate for future use by the company. If not, explain which WACC should be used for future business decisions.

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