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Mod 8 VALUATION USING Abnormal enterprise income growth

Mod 8 VALUATION USING Abnormal enterprise income growth. SPECIALTY RETAIL - AMAZON Sophie Yu Section 2. Cost of equity capital using capm. E stimated β =0.903 Treasury Long-term rate=3. 4 2 % Market return rate Premium = 11.75 % For Amazon:

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Mod 8 VALUATION USING Abnormal enterprise income growth

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  1. Mod 8VALUATIONUSINGAbnormalenterpriseincomegrowth SPECIALTY RETAIL - AMAZON Sophie Yu Section 2

  2. Cost of equity capital using capm • Estimated β=0.903 • Treasury Long-term rate=3.42% • Market return ratePremium=11.75% • For Amazon: • Cost of Equity = 3.42%+0.903*(11.75%-3.42%)=10.94%

  3. Cost of debt capital • Interest Expense= $141 million • Average amount of interest-bearing debt=(3191+3084)/2=$3137.5million • Cost of Debt=(141/3137.5)*(1-0.37)=2.8% • On the Financial Statements: • “…hadaweightedaverageinterestrateof5.5%and6.4%asofDecember31,2013and2012…” • Astheweightedaverageinterestrateisdeclining,Iassumeinthefutureinterestwillalsodecreasegradually. • Conclusion:Costofdebt=4.5%

  4. Cost of enterprise capital • Market value of equity $164,252.66 million • Net financial obligations $(3,778.14) million • Market value of net operating assets $160,474.52 million • CostofEnterpriseCapital= • (164,252.66/160,474.52)*10.94%+(-3,778.14/160,474.52)*4.5% • =11.09%

  5. ASSUMPTIONS • Currently,Amazonhasa20%growthrate • However,itisnotgoingtogrowat20%forever • Accordingtoanalyst’sreport,Amazonisfacingproblemssuchasheavyinvestmentsinwarehouses,R&Dindeliverydrone,andincreasingcostintransportation • Nevertheless,mostoftheanalystsarestilloptimisticaboutAmazon’sfuture • Thus,Iassumethatinthenext20years,thesalesgrowthwillgraduallydropto10%andstayat10%foralongtime

  6. Abnormal enterpriseenterpriseincomegrowthmodel

  7. Valuing amazon-DCF Market Value = $357.35*454 = $162, 236.9

  8. Valuing amazon–Residualenterpriseincome Same Enterprise value for all three models

  9. CHOOSING A VALUATION MODEL

  10. Questions?

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