Question

I need to answers this questions in relation to the LATEST DATA OF AMAZON COMPANY:

• If your firm’s actual debt ratio is different from its “recommended” debt ratio, how should they get from the actual to the optimal? In particular,
  • Should they do it gradually over time or should they do it right now?
  • Should they alter their existing mix (by buying back stock or retiring debt) or should they take new projects with debt or equity?
• What type of financing should this firm use? In particular,
  • Should it be short or long term?
  • What currency should it be in?
  • What special features should the financing have?

Answer 1

Year 2017: Debt/equity (leverage ratio) = (long term debt+other long term liabilities)/total shareholders equity = 45718/27709 = 1.65

Year 2018: Debt/equity = 1.16

Well the recommended debt/equity ratio can be between 0.8 to 1

Amazon has reduced its debt/equity ratio from 1.65 (2017) to 1.16(2018), which is a positive sign. It can further bring it to zone of 1, to improve the companys solvency ratio.

It can be done gradually over time by raising more equity by diluting stake.

They should retire debt by raising fresh equity. They should take new projects by using equity.

If the company does not want to issue fresh equity, it should go for long term debt. It should not go for short term funding as thee current liabilities in terms of account payables are already high.

Since amazon operates throughout the world, they should use Dollar or Yen funding. This is because (A) interest rates in dollar and yen are less (B) these currencies ae liquid in nature, and can be converted into the local currency where the project is being put up.