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Amazon: Capital Structure and Valuation FIN330: Corporate Finance Winston Regnier Southern New Hampshire University

Running Head: AMAZON CAPITAL STRUCTURE AND VALUATION

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Capital Structure While Amazon’s has seen its shares appreciate 178.5% since 2017’s year-end, Amazon’s capital structure consists largely of debt. Debt is broken down into two categories: current liabilities, or debt that will be paid off within 12 months; and long-term liabilities, or the remaining debt that will not be paid out within 12 months. Amazon’s financial statements show that they have $126.385 billion in current liabilities. However, the company has a current ratio of 1.05 which indicates that the company would have the ability to pay their current liabilities in full if the debts immediately became due. The company’s long-term liabilities are steadily growing with $31.816 billion in bank-issued debt and another $69.537 billion in other miscellaneous long-term debt, a 34.5% increase over the prior year. Amazon has $93.404 billion in equity with $40.848 billion coming from stocks issued and $52.551 billion in retained earnings, or the cumulative net income from all previous periods. Dividend Policy Amazon does not currently pay dividends to its stockholders. The company has chosen to reinvest their earnings into the business focusing on growing their free cash flow per share. Although Amazon has not paid any dividends, it has not negatively impacted their shareholders as Amazon is seen as a premier growth stock which is proven by their approximately 34.5% stock generated returns per year. Amazon’s focus on increasing their free cash flow allows the company to reinvest their income into growth and expansion such as the acquisition of Whole Foods in 2017, developing a radically different grocery store experience with the opening of Amazon Go in 2018, expansion into Turkey in 2018, and planning to open a secondary headquarters building in a few years. If Amazon were to shift to paying dividends, then such projects would not be able to be accomplished as easily due to lack of funding (Caplinger, 2015).

Running Head: AMAZON CAPITAL STRUCTURE AND VALUATION

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Cost of Capital Amazon has two sources of funding for their operations and investments: long-term debt, and shareholder’s equity. The weighted average cost of capital (WACC) is the calculation of a company’s cost of capital where each capital category is proportionately weighted incorporating common stock, bonds, and any long-term debt. The WACC can be compared against the returns on investments to understand the value that the investment created in return to the cost of the investment. Due to Amazon’s high leverage ratio and aggressive capital structure, the company has seen tremendous growth and offers the lowest cost of capital due to its tax deductibility. Maximizing Value One of the basic and largely prevailing theories of corporations is that they exist to maximize the shareholders’ profits. While many economists agree with this to a point, there is much debate of the value of short-term versus long-term profit is the overall goal. Amazon’s focus is on the long-term success of the company and as such reinvests their profits into the business for further growth and expansion to increase their future profit potential. A company should seek to minimize the cost of capital and financial risk whenever possible; however, financial risk will ultimately occur in the variability in earnings per share (EPS) due to the change in capital structure. This is in direct relation to leverage where the higher the leverage is the greater the financial risk so the company would need to raise the value of the company to maintain an ideal capital structure.

Running Head: AMAZON CAPITAL STRUCTURE AND VALUATION

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Current Value Amazon has become the top company is growth opportunities where it surpassed a $1 trillion valuation in 2020 (Palmer, 2020). Amazon has become the global standard in the ecommerce marketplace where the continue to increase their market value by acquiring other businesses and expanding their customer base. Amazon had previously reached a $1 trillion valuation in September 2018 where it became the second U.S. company to achieve such a milestone. According to valuation calculations based off the next 5-years of business, the net present value of Amazon is $300.213 billion whereas other analysts have valued Amazon at a much larger valuation due to its growth potential and diversification. Assumptions and Estimations Amazon’s revenues have been increasing over time and estimating future revenue growth at 29% is conservative in comparison to their prior year growth rates but has had an almost consistent net profit margin of approximately 5.48%. If the trend is sustained, then the company will surpass $1.381 trillion in revenue by 2025 and $81 billion in operating income. All other items on the valuation were calculated using prorated values from prior year data and determining an average growth rate. As Amazon has proven to be very likely to reinvest their profits into future investment for the company, the valuation has included this as an assumption.

Running Head: AMAZON CAPITAL STRUCTURE AND VALUATION

References Bowman, J. (2017, August 20). Amazons Strategy Is a Perfect Example for Growth Investors. Retrieved March 20, 2021, from https://www.fool.com/investing/2017/08/20/amazonsstrategy-is-a-perfect-example-for-growth-i.aspx Caplinger, D. (2015, Mar. 01). Why Don't These Winning Stocks Pay Dividends? Retrieved from The Motley Fool: https://www.fool.com/investing/general/2015/03/01/why-dontthesewinning-stocks-pay-dividends.aspx DePillis. (2018, October). Amazon’s extraordinary evolution. CNN. https://edition.cnn.com/interactive/2018/10/business/amazon-historytimeline/index.html Gershgorn, D., Griswold, A., Murphy, M., Coren, M. J., & Kessler, S. (2017, August 20). What is Amazon, really? Retrieved March 20, 2021, from https://qz.com/1051814/what-is- amazon-really/ Hsiao, A. (2017, August 06). EBay Explained for the Non-eBayer. Retrieved March 20, 2021 from https://www.thebalance.com/what-is-ebay-1140195 Kim, T. (2017, Oct. 27). Amazon just added a FedEx. Stock up nearly $62 billion in a single day.Retrieved from CNBC.com: https://www.cnbc.com/2017/10/27/amazon-just-added-afedex-stock-up-nearly-62billion-in-a-single-day.html Intelligence, B. (2017). Amazon accounts for 43% of US online retail sales. Business Insider. Retrieved March 20, 2021 from http://www.businessinsider.com/amazonaccounts-for-43-of-us- online-retail-sales-2017-2 Kim, E. (2017). Amazon just shared new numbers that give a clue about how many Prime

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Running Head: AMAZON CAPITAL STRUCTURE AND VALUATION

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members it has. Business Insider. Retrieved March 20, 2021 from http://www.businessinsider.com/amazon- gives-clue-number-of-prime-users-2017-2 Kline, D. (2017). This Is What Amazon Worries About. The Motley Fool. Retrieved March 20, 2021 from https://www.fool.com/investing/2017/05/24/this-is-whatamazon-worries-about.aspx Knight, W. (2017). At Amazon Warehouses, Humans and Machines Work in Frenetic Harmony. MIT Technology Review. Retrieved March 20, 2021 from https://www.technologyreview.com/s/538601/inside-amazons-warehouse-humanrobot- symbiosis/ Mergent Intellect. (2021). Amazon.com - Income Statement. Retrieved March 18, 2021, from https://www-mergentintellectcom.ezproxy.snhu.edu/index.php/search/companyFinancials/884745530#

Sabanoglu, T. (2021, December 01). U.S. Amazon market share 2021. Retrieved March 16, 2021 from https://www.statista.com/statistics/788109/amazon-retail-market-share-usa/ SBI Invest. (n.d.). WACC | AMZN | Amazon Com Inc | SBInvest. Https://Www.Sbinvest.Biz/Contract/AMZN/Wacc?Lang=en. Retrieved April 1, 2021, from https://www.sbinvest.biz/contract/AMZN/wacc?lang=en

Soper, T. (2017). Amazon surpasses 350,000 employees, up 43% from last year. GeekWire. Retrieved March 20, 2021 from https://www.geekwire.com/2017/amazon-surpasses-350000- employees-43-lastyear/

Running Head: AMAZON CAPITAL STRUCTURE AND VALUATION

Team, T. (2015, October 09). A Comparative Look At The Valuation Of Amazon, Alibaba and eBay. Retrieved March 20, 2021 from https://www.forbes.com/sites/greatspeculations/2015/10/09/a-comparative-look-atthe- valuation-of-amazon-alibaba-and-ebay/2/#99745a39ecac Tuovila. (2021, April 11). Capital Structure Definition. Investopedia. https://www.investopedia.com/terms/c/capitalstructure.asp Wei, J. (2016, May 30). Is Amazon Going to Be Worth $6,000 Per Share? (AMZN). Retrieved March 20, 2021, from http://www.investopedia.com/articles/markets/053016/amazongoing-be-worth-6000-share-amzn.asp

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