Question

For the company: Amazon- Articulate how the cost of capital is defined and measured. Define the cost of capital and how it appears to be measured in your selected firm. Present value. Calculate present value using applicable present value tables.

Answer 1

Amazon has an optimum mix of debt financing and equity financing in its overall capital structure so the cost of capital of the company is completely manageable at this point of time because the return on investment is very high when it is compared to the cost of capital. So, the differential between cost of capital and return on investment is very high in order to fuel its growth.

Cost of capital is a combination of cost of common equity and cost of preference share as well as cost of debt financing into the overall capital structure

It is to be adjusted with the risk in order to find out how much risk weighted cost of company is bearing in order to yield a certain level of returns so it is a very highly used parameter in order to decide whether to undertake a project or not because if the overall return of the project is higher than the cost of capital then only the project is to be undertaken because any project which have a higher return on investment tha cost of capital, would add value to the firm.

Present value is the value of all cash inflows which will be accruing in the future using a discounting rate of return or it is mostly discounted using the cost of capital.