Summary of business
Amazon.com is the well-company online shop for goods and services. As the company, Amazon.com, Inc. was founded in 1994 by Jeff Befoz and incorporated in 1996 in Seattle, Washington, where it situates today too (Schneider, Technology Careers). The work of the company is divided into three segments: Amazon Web Services (AWS), North America, and International. Goods, offered with the company include service with buy custom essay online https://writology.com/buy-custom-essays electronic devices, healthy and organic food, clothing, automotive and industrial products, handmade merchandise; books, music, and movies whether it is a physical or electronic copy. As for the services, the company offers database offerings, publishing, advertising, fulfillment, certain digital content subscription, and co-branded credit cards. Since its foundation, the company was developing rapidly and successfully. As at October 2017 the company employed 541,900 people (Cakebread, International) and the company continues to grow.
SECTION A. Calculation of required rate of return.
In this section we were asked to undertake a number of calculations leading to
obtaining the required rate of return for the Amazon.com, Inc., taking into account that the investment horizon you are looking at is one year.
Question 1 (1 mark). Table 1 below contains information on the adjusted closing value of ASX All Ordinaries Index, which serves as a proxy for market in our calculations. Using the following information in the table, calculate standard deviation of returns over the period. Show all your calculations, including calculation of your monthly returns and mean return for the period. Please write your answers in the appropriate boxes.
Please use the following formula for your standard deviation calculation: <a href="лінк">анкор</a>
.
Table 1. Monthly values of ASX All ordinaries
Month
Closing Value
Return (%)
APR 17
5,724.60
25.28%
APR16
5,378.60
17.70%
APR 15
5,777.20
26.43%
APR 14
5,492.50
20.20%
APR 13
4,926.60
7.81%
APR 12
4,076.30
-10.80%
Mean return
14.44%
Standard deviation
Calculations
Answer (%)
13.2
The value of Beta is found by the next formula:
where the value of (Expected Return of the Market - Risk-Free Rate of Return) is also called Market Premium. Assuming that Market Premium=6%, Risk-Free Rate of Return=2.39% (GuruFocus, WACC), and the Market Return=6.57% (GuruFocus, ROC), the value of the Beta can be calculated.
Beta
Calculations
Answer
1.44
Question 2 (1 mark). Calculate required rate of return for the stock using CAPM and the following information. Please answer in the box provided.
The average annual rate of return on ASX All Ordinaries for the last five years was 28.81% (GuruFocus, Rate of Return). Current One year Treasury note yield is 0% and the expected raise of returns is 30%.
E(R)
Calculations
Answer
0+1.44*(28.81*1.3-0)
53.93
SECTION B. Financial statements analysis.
In this section, you will be asked to analyse one of the aspects of MCW’s performance whether it is liquidity, operating efficiency, profitability or financial risk. Moreover, you would be asked to estimate growth potential of the company. Please use the following summary of financial statements to answer all questions in this section.
In the table below, enter a summary of the financial statements with enough detail to answer all questions in this section. Your analysis should cover 2015 and 2016 only (or the two most recent years for which you have information).
$M
2016
2015
CURRENT ASSETS
Cash and cash equivalents
19,334
15,890
Receivables
8,339
5,654
Derivative financial instruments
-
-
Investments properties for sale
6,647
3,918
Investments in joint venture for sale
-
-
Other assets
11,461
10,243
Total current assets
45,781
35,705
CURRENT LIABILITIES
Payables
39,048
30,769
Interest bearing liabilities
-
-
Derivative financial instruments
4,768
3,118
Deferred tax assets
64
55
Total current liabilities
43,816
33,887
Net property income
21,838
29,114
Net earnings attributed to AMZN shareholders
4,916
2,545
Equity attributed to AMZN shareholders
19,285
13,384
Question 3 (1 mark). Calculate return on equity for 2015 and 2016. Please answer in the box provided. Please use end of year values of equity for your calculations.
ROE
Year
Calculations
Answer (%)
2015
2,545/13,384*100%
19,01
2016
4,916/19,285*100%
25,49
Question 4 (2 marks). Calculate current, quick and receivable turnover ratios for 2015 and 2016. Please answer in the boxes provided.
Calculations
Answer (% or X)
Curren tratio
2015
35,705/33,887*100%
105,36
2016
45,781/43,816*100%
104,48
Quick ratio
2015
(15,890+5,654)/33,887*100%
63,58
2016
(19,334+8,339)/43,816*100%
63,16
Receivables turnover
2015
29,114/(5,654+5,612)/2
1,29x
2016
21,838/(8,339+5,654)/2
0,78x
Question 6.
2015
Past Five Year Average
Industry Average
Current ratio
105,36%
108%
154
Quick Ratio
63,58%
75,8%
69%
Receivables Turnover
1,29x
1,83x
1,57x
Briefly discus MCW liquidity position and compare it to the industry average.
There has been a noticeable deterioration in the company’s ability to meet its immediate financial commitments using the company’s working capital. This is reflected in the company’s current ratio decreasing from an average of 108% to 105.36% and the quick ratio from an average of 75,8% to 63,58%. This is despite AMZN identifying assets to be sold over the following year and the increase of its cash position. The company is far less able to cover its current commitments with its working capital then the general industry participants who have over five times the coverage of AMZN. The company has made an improvement in the time it takes to collect money that is owed to it on account. This is revealed with the receivables turnover decreasing from an average of 1.29 times a year to 0.78 times.
Question 7. Calculate sustainable growth rate for 2015 and 2016. Please answer in the box provided. ROE for 2016 is 25,49% and EPS is 1.25 cents. EPS for 2015 is 4.9 cents. Because Amazon, Inc. does not pay dividends, the total dividend per share paid for the year is equals to 0 (GuruFocus, Dividends per Share). For 2015 ROE, use the value calculated in Question 4.
Sustainable growth rate
Calculations
Answer (%)
2015
19,01%*(4,9-0)/4,9
19,01
2016
25,49%*(1,25-0)/1,25
25,49
SECTION C. Stock valuation.
In this section, you will be asked to apply either multiple stage DGM or Present Value of FCFE model to calculate true value of the stock. Once calculated, you will be asked to interpret the results and make the investment recommendation.
Question 7. Calculate free cash flow for 2015. Please answer in the box provided.
Use the following information from your company’s financial statements for your calculations. Please note that negative items from cash flow statement mean cash outflows.
$,M
2016
2015
Current assets
45,781
35,705
Current liabilities
43,816
33,887
Net profit after one offs
2,911
3,763
Depreciation and amortisation
8,116
6,281
Cash flows from operations
16,443
11,920
Cashflows from investing activities
9,876
6,450
Cash flows from financing activities
2,911
3,763
Purchase of properties and capital expenditure
6,737
4,589
Repayment of borrowings
0,354
1,652
Proceeds from additional borrowing
0,621
0,353
Please write your calculations and the answers in the following boxes
FCFE, 2015
Calculations
Answer (m$)
2,911+8,116+6,737+((45,781-43,816)-( 35,705-33,887))+ 0,354+0,621
18,886
Question 8. Calculate value of your stock using multiple-stage PV of FCFE model. For that you should first (a) calculate PV of FCFE (15 marks) and second (b) calculate value of the stock (5 marks).
Assume that FCFE for 2016 is 19m$. Then, assume that the following growth rates in coming years. Due to improved economic condition you expect FCFE to have 8 percent growth in 2017-2019. In the period 2020-2022, you expect above normal growth of 4 percent. Finally, assume a sustainable growth rate is 1.8 percent from 2022 indefinitely (please note that this may or may not coincide with your actual answer in question 7). Finally assume required rate of return you calculated (in question 3) is 0.5 per cent.
PV of FCFE
Calculations
FCFE
PV
2017
(19,000*1.08)/1.02
$20,117.65
2018
(19,000*(1.08^2))/(1.02^2)
$21,301.04
2019
(19,000*(1.08^3))/(1.02^3)
$22,554.04
2020
(19,000*(1.08^3)*(1.04))/(1.02^4)
$22,996.28
2021
(19,000*(1.08^3) *(1.04^2))/(1.02^5)
$23,447.18
2020
(((19000*(1.08^3) *(1.04^3))/(1.02-1.005)/(1.02^5)
$1,625,761.41
Sum of the PV of all Cash Flows
$1,736,177.6
Answer (m$)
1,736,177.6
The number of shares equals 482,000,000.00 (GuruFocus, Forward Rate of Return).
Stock Value
Calculations
Answer ($)
1,736,177.6/482
3,602.03
Question 9 (2 mark). Based on the stock value calculated question 8 and current market price of the stock, make your investment recommendation. Briefly justify your recommendation comparing your stock to other companies in your industry group and the wider market. Write your answer in the box provided.
Current stock price equals $1,180.5 (Markets Insider, Amazon).
According to the presented calculations, the intrinsic stock value equals $3,602.03, while the current price on market is $1,180.5. Thus, currently the stock is traded far below its fair value, which means that it is undervalued. This means that it would be efficient to buy AMZN stocks at this time. Moreover, as the business section occupied by Amazon is highly trending, it would remain relevant for some long time. Summing up, I would recommend to buy AMZN stocks.