The Financial Condition And Economic Environment Of...

In this analysis we will investigate the financial condition and economic environment of Amazon.com, Inc., and the online retail goods industry, to assess and assign an appropriate weighted average cost of capital (WACC) for the firm. This analysis will examine each component of capital funding through the lens of multiple models, and consider the validity and sensitivity of each underlying lever. Lastly, this analysis will calculate a risk-appropriate cost of capital to be used in an enterprise firm valuation. Capital Structure Before we look into the costs of the firm’s capital funding, let us first consider the sources and structure under which Amazon operates. On a market value basis, Amazon’s current structure consists of 7.9% debt†¦show more content†¦Cost of Debt Financing As we look into the debt financing Amazon has opted to raise, it is important to separate the long-term bond issues from lease obligations as each requires special attention and in Amazon’s case, assignment of different required rates of return. For the long-term bond issues, we have elected to use a market pricing model – in yield-to-maturity (YTM) terms – as this represents the current market cost of raising debt capital at each given term to maturity. For the capital, financing and operating lease obligations, we chose to assign a risk appropriate market comparable rate. To do this, we took the various credit ratings assigned to Amazon, and applied a composite interest rate based on current market conditions. Using the ratings Baa1 from Moody’s, AA- from Standard and Poors, and BBB+ from Morningstar, we were able to assign composite estimate interest rates of 5.19%, 4.13% and 4.12% respectively. The Baa1 and BBB+ rates were retrieved from the St. Louis Federal Reserve database, while the AA- rating was an averaged rate using the AA (3.99%) and A (4.26%) ratings from Bondsonline.com to fully capture the AA- rating. When selecting the eventual rate to be used in our model, we opted to use the Moody’s rating and Baa1 and composite interest rate of 5.19% for several reasons. First, Amazon has been increasing its relative debt financing allocation