AF5318
Capital Structure project
Group 8
Company Selected: Amazon
Submitted to Prof. WEI
Class Time: Monday 15:30-18:30
LIU Yuanqi
23045236g
ZHENG Yilan
23059713g
WANG Keer
23062683g
JIN Tingting
23053453g
ZHOU Ziheng
23068172g
1. Introduction
1.1 Amazon’s brief introduction
Amazon is the largest e-commerce company in the world in terms of market capitalisation and
revenue. Founded in 1994 by Jeff Bezos, Amazon began as an online bookstore. Over the years,
Amazon's offerings have grown exponentially, becoming a one-stop shop for almost anything
you can think of. Today, Amazon is the destination of choice for customers seeking
convenience and a large selection of products at competitive prices. Amazon operates huge
distribution centres and uses advanced technologies such as robotics and artificial intelligence
to achieve amazing delivery speeds. To solidify its leadership position, Amazon continues to
introduce new services such as Subscribe & Save, Amazon Fresh Grocery Delivery, and Prime
Wardrobe Fashion Try-On programme, it’s commitment to customer satisfaction, innovation
and a broad product range has reshaped the way we shop.
1.2 Amazon’s Financial Data from 2018 to 2022
In mIllions
2018- 2022
AM AZON
FIN AN CIAL DATA
Source
12/31/22
12/31/21
12/31/20
12/31/19
12/31/18
B/S
B/S
73,850
11,265
54,944
2,730
35,216
1,991
23,414
1,305
23,495
1,371
85,115
57,674
37,207
24,719
24,866
53,888
36,220
42,122
36,092
31,750
31,227
21,454
(4,915)
(11,373)
(6,884)
10,242
10,180
10,060
9,960
9,820
84.00
166.72
162.85
92.39
75.10
860,328
1,697,210
1,638,271
920,204
737,482
L-T Debt
S-T Debt
Total Debt
Cash & Equivalents
B/S
Net Debt
Shares Outstanding
Shares Price
B/S
Yahoo!
Finance
Market Value
3.50%
N D/ EV
4.00%
3.00%
2.00%
1.25%
From the above table, we can clearly see that Amazon's total debt is growing rapidly. In the
1.00%
0.00%
recently
ended FY2022, the total debt increased by nearly 50% to $85,115 million. In 2020 and
-1.00%
12/31/2018
-0.94%
-2.00%
12/31/2019
12/31/2020
-0.30%
-1.25%
12/31/2021
12/31/2022
the year after, the stock soared to $166 per share. However, in FY2022, shares of Amazon are
wrapping up their worst year since the dot-com crash. The stock has tumbled 51% in 2022.
And its market cap has shrunk to about $860 billion from $1.7 trillion to start the year. The
company is struggled with slowing sales. Because of the outbreak of pandemic, consumers
came to depend on online retailers like Amazon for goods ranging from food, tissue and face
masks to furniture. This pushed Amazon's sales soaring while its stock hit an all-time high. As
the economy recovers, consumers are gradually returning to their old spending habits, such as
shopping in stores and spending more on things like travel and restaurants, which has led to a
slowdown in Amazon's revenue growth. Additionally, at the beginning of the year, the
company faced rising costs due to inflation, the war in Ukraine, and supply chain constraints,
and its stock price continued to decrease.
1.3 Amazon’s Net Debt to EV ratio analysis
AM AZON
FIN AN CIAL DATA
Cash & Equivalents
B/S
Net Debt
Shares Outstanding
B/S
Yahoo!
Finance
Shares Price
Market Value
53,888
36,220
42,122
36,092
31,750
31,227
21,454
(4,915)
(11,373)
(6,884)
10,242
10,180
10,060
9,960
9,820
84.00
166.72
162.85
92.39
75.10
860,328
1,697,210
1,638,271
920,204
737,482
3.50%
N D/ EV
4.00%
3.00%
2.00%
1.25%
1.00%
0.00%
-1.00%
12/31/2018
-0.94%
-2.00%
12/31/2019
12/31/2020
12/31/2021
12/31/2022
-0.30%
-1.25%
The Net Debt to EV ratio has generally been increasing over the past 5 years. While it starts at
-0.94% in 2018 and drops to a low of -1.25% in 2019, it eventually increases to 3.50% in 2022.
Fluctuations in the net debt to EV ratio vary over the five-year period, and we can use 2020 as
the cut-off point because the Net debt-to-Enterprise Value ratio will be positive after 2020.
Debt
2018
2020
40,000
2022
31,227
30,000
20,000
10,000
0
-10,000
-20,000
2018
2020
-6,884
-4,915
2022
From 2018 to 2020, the change is relatively small, decreasing from -0.94% to -0.30%. However,
from 2020 to 2022, the fluctuations become more pronounced. The ratio increases from 1.25%
to 3.50%, indicating a substantial change in the relationship between net debt and EV. The
volatility is relatively higher in the latter years compared to the earlier years.
The fluctuation in the net debt to EV ratio is due to changes in debt and enterprise value. The
Enterprise Value
2,000,000
1,638,721
1,500,000
1,000,000
860,328
737,482
500,000
2018
2020
2022
increase in this ratio from 2020 to 2022 can be attributed to the increase in debt and decrease
in enterprise value.
2. Industries and Competitor analysis
2.1 Current situation of Internet and direct retail industry
The internet and direct retail industry have experienced tremendous growth in recent years due
to the rise of e-commerce. This lucrative industry includes companies that sell goods and
services directly to consumers through digital platforms such as company websites, mobile
apps, social media shops or television shopping channels. By eliminating intermediaries such
as brick-and-mortar retailers, these direct-to-consumer companies can offer lower prices to
attract more shoppers. They also employ targeted digital marketing strategies to strengthen
customer relationships and promote repeat purchases.
2.2 Competitor analysis
eBay is a globally recognized e-commerce company that provides an open online trading
platform that connects buyers and sellers around the world to create business and trading
opportunities. Much like Amazon, eBay provides a safe and secure shopping environment and
supports a variety of transaction methods, including auctions, one-bite prices and fixed prices,
and ensures the safety of users' transactions through a number of security measures and
protection mechanisms.
Ticker
Company N ame
N asdaqGS:AM ZN
Am azon.com , Inc.
Ticker
Company N ame
N asdaqGS:EBAY
eBay Inc.
N et D/ EV
Industry M edian N et D/ EV
0.96%
- 3.01%
N et D/ EV
Industry M edian N et D/ EV
9.93%
- 3.01%
2.3 eBay’s Net Debt to EV ratio analysis
The most recent financial data of eBay and Amazon as shown below. Both of the two
companies are listed on the Internet and Direct Marketing Retail industry, for the industry data
is shown as follow:
ND/EV AT 2022/12/31
In millions
L-T Debt
S-T Debt
Total debt
Ebay
7,721
1,150
8,871
Amazon
73,850
11,265
85,115
Cash & Equivalents
Net debt
2,154
6,717
53,888
31,227
Ordinary shares
Share price
Enterprise Value
539
41.47
22,352
10,242
84.00
860,328
ND/EV
23.11%
3.50%
EBAY
AMAZON
23.11%
3.50%
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
Amazon's Net D/EV ratio is 0.96%, Ebay’s Net D/EV ratio of 9.93%, both of the two
companies’ Net D/EV is higher than the industry median (-3.01%), indicating a higher reliance
on debt (debt financing) compared to its peers.
Trade-off theory suggests that firms weigh the benefits of debt (such as interest tax protection)
against the costs of financial distress. Highly leveraged industries typically have established
companies with stable cash flows and high tangible assets, while low-leveraged industries have
fast-growing R&D companies with unstable cash flows and low tangible assets.
Net D/EV
25,00%
23,11%
21,49%
20,00%
19,10%
16,32%
15,00%
15,56%
10,00%
3,50%
5,00%
-0,94%
-1,25%
12/31/2018
12/31/2019
0,00%
-0,30%
12/31/2020
-5,00%
1,25%
12/31/2021
12/31/2022
-3,01%
Amazon
Ebay
Industry Median
Both eBay and Amazon are two of the largest and oldest major players in the Internet and
Direct Marketing Retail industry. They share many similarities, primarily in attracting visitors
to their websites and providing them with the ability to browse available products and make
purchases. The difference between the two companies lies in their business models; Amazon
operates like a traditional retail shop, relying on third-party sellers to list their products on the
site so that consumers have a large inventory of items to search for, while eBay operates more
like an auction house, relying on sellers to list their items for sale so that they can be auctioned
off at a specific time.
Amazon is a fast-growing company and has a lower D/EV ratio compared to its competitor,
eBay, which is in line with the trade-off theory of a low-leverage industry. Its lower Net D/EV
ratio can be attributed to its high growth rate, large weighting of cash and cash equivalents and
high expenses (such as year-over-year increases in labour costs, surged from 24,300 employee-
workers in 2000 to an eye-popping 798,000 today) that doomed it to low profit margins. The
lower ratio also means that Amazon has less income available for tax shelter, and it prefers to
use its own capital or other non-debt capital to support its operations and growth (737,482,000
common shares in 2018 and 1,697,210,000 common shares in 2021). However, it also implies
that Amazon has lower financial risk, greater flexibility in the face of economic uncertainty or
declining earnings, and that it is more solvent.
eBay's higher Net D/EV ratio is more in line with the trade-off theory for highly leveraged
industries. This may be due to the company's preference for bond financing and its higher profit
margins (it has reduced its workforce from 17,700 a decade ago to 13,300 today, greatly
reducing labour costs).
As we can see from the table, eBay has been redeeming its own common stock year after year,
which requires a lot of liquidity and could lead to missed potential growth opportunities or
limit the company's ability to make valuable investments in the future. On top of that, a higher
Net D/EV ratio means that the company faces greater pressure to service its debt and interest
payments.
2.4 The outlook of the Internet and Direct Marketing Retail industry
The overall outlook for continued growth on the Internet and direct retail industry remains
favourable. Several positive trends are expected to drive further expansion in the coming years.
As digital transformation unfolds globally, more and more consumers are adopting online
shopping behaviours and expecting a seamless omnichannel experience. Young people have
embraced a digital-first lifestyle, fuelling the industry's momentum. In addition, continued
investment to improve logistics networks means that customers will experience faster delivery
times and a wider choice of products through same-day and one-day shipping options. While
near-term headwinds such as inflation, falling consumer spending and potential oversaturation
in specific categories present challenges, the long-term outlook remains favourable.
The migration to digital commerce platforms has cemented a strong industry base as broadband
access expands and consumer preferences for convenience evolve. Large companies will also
invest in new areas such as live streaming and social selling to keep user stickiness high.
Internet and direct retailing appear to be well-positioned for continued growth over the next
decade.
3. Estimate the firm’s WACC
3.1 Equity cost of capital
In part 3, we firstly estimated the equity cost of capital using the single factor index model.
Using the Yahoo! Finance website, we gathered relevant historical data on Amazon and
imported it into excel to do the calculations, eventually estimating our own beta at 1.153492906.
3.2 The regression line
The regression curve is shown below.
y = 1,1535x + 0,0013
0,3
0,2
0,1
0
-0,15
-0,1
-0,05
0
0,05
0,1
0,15
-0,1
-0,2
-0,3
Ряд1
Линейная (Ряд1)
3.3 Collected Beta estimates
We collected Beta estimates from Bloomberg (raw Beta and adjusted Beta) and Yahoo! Finance
and then calculated the mean of the beta estimates. The calculation results are shown in the
following table.
3.4 Choose a Beta estimate
We chose to take the mean of several beta estimates as the final beta estimate, which is 0.76.
Since our beta and Yahoo's beta are much lower than Bloomberg's valuation from the
estimation results, averaging multiple beta estimates from different sources helped account for
potential errors or biases in any single data point. So, taking the average value is more reflective
of the proper level.
3.5 Estimate weighted-average debt cost of capital.
We used the Bloomberg terminal to collect the information about Amazon's bonds and found
the corporate bonds. The original data from Bloomberg are shown below.
We downloaded the data to excel and then calculated the market value of debt.
3.6 Calculate WACC with taxes.
A key WACC input is the tax rate. Reviewing Amazon's financial reports, we determined an
average effective tax percentage of 14.63% over the past three years.
The calculation results are shown in the table below.
4. Estimate the present value of the interest tax shield
The focus of this part is estimating the present value of the tax shield of Amazon. Two
calculation methods are used, one is the permanent debt approach and the other one is the
Weighted Average Cost of Capital approach.
Figure 1
Figure 1 above, indicates the present value of the tax shield by using the permanent debt
approach. First of all, the market value of debt and effective tax rate are calculated, which are
57,513 million dollars and 14.63% respectively. These two numbers are both calculated from
part 3. After that, the present value of the tax shield is equal to the multiplication of the market
value of debt and the effective tax rate. The present value of the tax shield is 8,414 million
dollars.
Figure 2
In addition, the second approach of WACC takes into account company growth. Growth is
divided into two stages. The first stage is the rapid growth stage when the company's growth
rate is high. As shown in figure 2 above, in the first phase, Amazon’s growth rate is 27% and
will last for 3 years. Amazon’s industry classification is consumer discretionary, so its
EV/EBITDA is 10, which is the median number of the industry of consumer discretionary.
After that, historical free cash flow is computed to help guide the judgment on setting first
stage inputs for growth period & growth.
Figure 3
The changes in net working capital between 2018 and 2022 are required before computing the
FCF of Amazon. Figure 3 shows the process of calculating the changes in net working capital.
The net working capital is computed by accounts receivable plus inventory and minus accounts
payable. Thus, the data on the changes in NWC each year could be computed by the NWC this
year minus the NWC last year. The changes in NWC are -1387 million in 2019, -13355 million
in 2020, 5584 million in 2021, and 10162 million in 2022.
Figure 4
The next step is calculating the free cash flow of Amazon. After gaining the data of increased
NWC, the FCF formula can be EBIT(1-T) + D&A - Capex - M&A - changes in NWC. Then
the FCF from 2019 to 2022 can be computed, which are 15358.03 million in 2019, 12735.25
million in 2020, -13056.27 million in 2021, and -35216.92 million in 2022.
Figure 5
As shown in the figure 5, the forecasts of FCF between 2023 and 2025 are calculated by FCF
from last years multiplies by the growth rate 27% plus one. The EBITDA in 2022 is computed
by the EBIT plus D&A.
Figure 6
In figure 6, the PV(Stage 1) is calculated by adding up the PV of FCF between 2023 and 2025
and the PV(Stage 2) is the PV of terminal value for both initial firm value with leverage and
initial firm value unlevered. The difference is that the discount rate for VL is WACC 7.82%
and the discount rate for VU is WACC pre-tax 7.83%. After getting the value of VL and VU,
the PV of the tax shield(WACC approach) can be calculated by VL - VU, which is 353.52
million dollars.
5. Capital structure choice
The current capital structure is not optimal. Amazon should increase its leverage ratio.
Currently, Amazon maintains a relatively low debt ratio compared to its industry peers.
However, upon further analysis, we believe the capital structure could be improved.
Firstly, Amazon carries superb credit ratings of AA, demonstrating low default risk. The
probability of financial distress is thus estimated at minimally 0.1%. Additionally, Amazon's
large-scale operations and diversified revenue streams imply significant loss absorbency in the
unlikely event of distress. Based on historical bankruptcies, expected losses would average
approximately 47 cents on the dollar. （The loss rate: 2722÷5833=0.46665524=46.7%）
Then, we calculated present value of expected future cost of financial distress.
PV (Distress costs)
= probability of distress x cost of distress
=0.1% x ($18500M *46.7% loss rate)
=$8.6395M
𝑉 𝐿  𝑣 𝑢 + PV (Interest Tax Shield) - PV (Distress costs)
=882847 + 8414 - 8.6395=$891252.36M > $883200M
Given these considerations, we modeled the effects of modestly increasing leverage. The
present value of interest tax shields far outweighs the already negligible probability-weighted
distress costs.
As a result, our valuation analysis indicates shareholder wealth could be maximized through a
higher debt ratio, as the additional tax benefits more than compensate for any marginal increase
in financial risk.
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