Question

In: Accounting

Choose your favorite publicly-traded company other than Facebook that we did in class. Then, do the...

Choose your favorite publicly-traded company other than Facebook that we did in class. Then, do the following: 1) Calculate its beta using three-year historical prices 2) Calculate its re (cost of equity) 3) Calculate its rd (cost of debt) 4) Find out how much debt is has (see balance sheet and the notes that accompany it) 5) Calculate its market capitalization 6) Using the above information, calculate its WACC Please show all of your computations and submit the Excel file.

Expert Solution

Answer: I am choosing Amazon Inc.

Calculating Cost of Equity (Re) with the help of CAPM-

Re = Rf + Beta (Rm-Rf)

Where Re is cost of equity, Beta is the senstivity of return, Rf is risk free return, (Rm-Rf) is also called market risk premium.

Risk free rate of return = 10 year treasury constant maturity rate that is .62%

Market risk premium is 6% and Amazon's Beta is 1.54

Putting all the values in the formula, we get:

Re = .62% + 1.54 (6%)

Re = 9.86%

Calculating cost of debt (Rd)

Rd = Last year's interest expense / Book value of llast two years debt (Data as on Dec. 2019)

Rd = $1600 Million / $48175 Million

Rd = 3.3212%

Latest two years average Tax rate is 13.81%

Calculating WACC-

WACC = (% of Equity * cost of equity) + % of debt * Cost of debt (1-Tax rate)

WACC = .9517 * 9.86% + .0483 * 3.3212% (1-13.81%)

WACC = 9.52%

Note: Data is as per Dec. 2019.

Market capitalization = Number of shares outstanding * Current share price

Market capitalization = .504 Billion * 1900

As of today Amazon's market capitalization is $957.6 Billion.

ekkarill92 answered 2 years ago

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