Question

Can you please compute the WACC of Amazon using their current financials

-show all work

-show where numbers came from

Answer 1

formula for WACC =

E / (E + D)

*

Cost of Equity

+

D / (E + D)

*

Cost of Debt

*

(1 - Tax Rate)

= .9693* 13.13% + 0.0307 * 3.1919% * (1 - 28.405%)

= 12.8%

where,

1. Weights:
Generally speaking, a company's assets are financed by debt and equity. We need to calculate the weight of equity and the weight of debt.
The market value of equity (E) is also called "Market Cap (M)". As of today, Amazon.com Inc's market capitalization (E) is $839447.410 Mil.
The market value of debt is typically difficult to calculate, therefore, we use book value of debt (D) to do the calculation. It is simplified by adding the latest two-year average Current Portion of Long-Term Debt and Long-Term Debt & Capital Lease Obligation together. As of Mar. 2018, Amazon.com Inc's latest two-year average Current Portion of Long-Term Debt was $0 Mil and its latest two-year average Long-Term Debt & Capital Lease Obligation was $26569.5 Mil. The total Book Value of Debt (D) is $26569.5 Mil.
a) weight of equity = E / (E + D) = 839447.410 / (839447.410 + 26569.5) = 0.9693
b) weight of debt = D / (E + D) = 26569.5 / (839447.410} + 26569.5) = 0.0307

2. Cost of Equity:
we used Capital Asset Pricing Model (CAPM) to calculate the required rate of return. The formula is:
Cost of Equity = Risk-Free Rate of Return + Beta of Asset * (Expected Return of the Market - Risk-Free Rate of Return)
a) we used 10-Year Treasury Constant Maturity Rate as the risk-free rate. It is updated daily. The current risk-free rate is 2.93000000%.
b) Beta is the sensitivity of the expected excess asset returns to the expected excess market returns. Amazon.com Inc's beta is 1.70.
c) (Expected Return of the Market - Risk-Free Rate of Return) is also called market premium. required market premium to be 6%.
Cost of Equity = 2.93000000% + 1.70 * 6% = 13.13%

3. Cost of Debt:
we used last fiscal year end Interest Expense divided by the latest two-year average debt to get the simplified cost of debt.
As of Dec. 2017, Amazon.com Inc's interest expense (positive number) was $848 Mil. Its total Book Value of Debt (D) is $26569.5 Mil.
Cost of Debt = 848 / 26569.5 = 3.1916%.

4. Multiply by one minus Average Tax Rate:
we used the latest two-year average tax rate to do the calculation.
The latest Two-year Average Tax Rate is28.405%.