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Mod 9 VALUATION of equity

Mod 9 VALUATION of equity. SPECIALTY RETAIL - AMAZON Sophie Yu Section 2. Recap - WACC. 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 Cost of Enterprise Capital =

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Mod 9 VALUATION of equity

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  1. Mod 9VALUATIONof equity SPECIALTY RETAIL - AMAZON Sophie Yu Section 2

  2. Recap - WACC • 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%

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

  4. Abnormal enterpriseenterpriseincomegrowthmodel

  5. CHOOSING A VALUATION MODEL

  6. VALUE OF EQUITY • VEnt – VD = Veq • For AMAZON, • Debt due within one year $0 • Long-term debt $3,191 • Preferred Stock $0 • Noncontrolling interest $0 • Excess cash $(7,169) • NFL (=VD ) $(3978) • Therefore, for Amazon the value of equity is: • $109,082 - $(3,978) = $113,060

  7. Equity valuation using dividend discount model • The Company has not paid any dividends since 2010. • Therefore, we cannot apply dividend discount model here. • Earnings per share growth rate: • Book Value per share growth rate:

  8. Equity Estimate using Residual Income Model Solve g: g=0.0704

  9. What is the long-term growth in Earnings and sales? • CIt+1=$27.51

  10. Sensitivity ANALYSIS The enterprise value is extremely sensitive to both g and rEnt. Based on the table above, Amazon probably over-valued in the market.

  11. Questions?

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