Finance 2
Group Case Amazon
Authors:
Max Langenberg, 12598720
Sven Haneveld, 12624039
Jesse Dubié, 12580341
-----------------------------------------------------------------------------------------------=CALCULATION OF BETAS AND WACC=
Q1
The estimated equity beta of Amazon.com, Inc. is 0.836.
After collecting the weekly data for the 5-year period from 31-12-2015 to 31-12 2020, we
first calculated the weekly rates of returns for both Amazon and S&P 500. We have used the
following two methods for calculating the equity beta: the slope function and the BETA
formula.
Calculations:
SLOPE (Excel Function) (AMZN as y axis) (MARKET as x axis)= 0.835592068
VARIANCE AMZN = VAR.S(D3:D263) = 14.7...
VARIANCE S&P 500 = VAR.S(H3:H263) = 6.2...
CORRELATION = CORREL(C3:C263,H3:H263) = 0.54...
BETA: √14.70 x0.54 / √6.24 = 0.836
Q2 Net debt = (Short-term debt + Current portion of long-term debt + Long-term debt +
non-convertible debt) – (Cash + Short-Term Investment) = (4586mln + 11529mln +
84389mln + 31816mln) - (42379mln + 42274mln) = $47667mln
Market value of equity (31-12-2020) = Share price x Number of shares outstanding =
3256.93 (Retrieved from Yahoo.finance) x 503mln = $163.823.579.000
Unlevered/Asset beta (with cash) = $163823579000 / (163823579000 + 47667000000) x
0.835592068 = 0.647
Unlevered/Asset beta (excluding cash) → total assets = 321195mln, cash = (cash + short-term
investment) = 84653mln, business assets = total assets - cash = 236542mln, cash beta is 0.
(84653mln / 321195mln) x 0 + (236542mln / 321195mln) * x = 0.647
Asset beta (excl. cash) = x = 0.879
Q3 Rd = ytm - pL = 0.05 - 0.002(1-0.45) = 4.89% (average default rate of 0.2% is found in
the textbook, chapter 12, page 454, 5th edition)
Q4 Re = 1% + 0.836x6% = 6.016% (CAPM)
Pre-tax WACC = 163823579000 / (163823579000 + 47667000000) x 6.016% + 47667mln /
(163823579000 + 47667000000) x 4.89% = 5.762%
After-tax WACC = 4.66% + 47667mln / (163823579000 + 47667000000) x 4.89% x (1-0.28)
= 5.454%
=VALUATION=
Q5
a)
b) The capital structure of the new project should be the same as the firm’s existing one (1)
and the risk of new projects is the same as for the firm’s existing projects (the firm should not
have a different risk profile) (2). Also, the only market imperfection there can be is taxes (3).
c) Use the after-tax wacc, because we are discounting a project, for which we assume there to
be a fixed D/E-ratio (namely the same ratio as of Amazon as a whole).
NPV = -$650mln + 29.3mln/1.06 + 195.321mln/1.06^2 + 211.297mln/1.06^3
+230.834mln/1.06^4 + 251.933mln/1.06^5 + 243.533mln/1.06^6 = $271.668mln
Q6
Debt capacity = $300mln
Rd = 5%
Tax benefits have r = 5% as well
Interest per year = 5% x $300mln = $15mln
Tax savings per year = $15mln x 0.21 (corporate tax rate) = $3.15mln
NPVU = -$650mln + 29.3mln/1.0605 + 195.321mln/1.0605^2 + 211.297mln/1.0605^3
+230.834mln/1.0605^4 + 251.933mln/1.0605^5 + 243.533mln/1.0605^6 = $269.964mln
NPVL = NPVU + PVTS
NPVL = 269.964mln + 3.15mln/1.05 + 3.15mln/1.05^2 + 3.15mln/1.05^3 + 3.15mln/1.05^4
+ 3.15mln/1.05^5 + 3.15mln/1.05^6 = $285.952mln
The answer resulting from the APV method is different from the WACC method, because the
WACC method is used under different assumptions than the APV method. The WACC
method is calculated assuming a fixed D/E-ratio (the one consistent with Amazon as a whole)
and the APV method uses a fixed debt level. The debt level is different for both methods,
hence the interest paid on that debt is different as well. This results in varying tax benefits,
which means that the value of the firm changes.