Problem: Current Yield to Maturity (YTM) on a U.S. Government bond that matures based on the Treasury Bill Rate for 1 year is 0.10 and for 13 weeks is 0.02.
For Amazon.com the following is assumed:
Beta 0.77
RF 5%
RF = 1
RM =5
RM - RF= 4
What is the cost of equity for Amazon.com?
Based on the Betas of Ebay and Overstock.com compute their cost of equity. How does each compare to Amazon.com. Is it surprising that Ebay and Overstock have a higher or lower cost of equity?
Do you think your Amazon.com should have a lower or a higher cost of capital than the average organization which is 8.2%?
Explain how would you go about finding the cost of equity using the APT model and the dividend growth model for Amazon? What additional information might be needed that is not needed in using CAPM?