WEIGHTED AVERAGE COST OF CAPITAL for Amazon (WACC)
with financial statements, details of cost of capital and valuation calculations, table summarizing the inputs and assumptions used for estimating WACC Estimate the components of the cost of capital for your company using market data.
a) For the cost of common stock, analyze using the dividend growth model and CAPM. To determine Beta, first use published sources. Next, calculate your own beta estimate using regression analysis with 52 weeks of daily data. See the textbook's website to download the regression tool kit from Chapter 6. If the published estimates and the results of your regression analysis differ, justify your final choice of Beta for the WACC determinations. b) Calculate the cost of preferred stock
The cost of preferred stock is $0.00 because Amazon does not pay dividends and does not have any preferred stock.
c) Calculate the cost of debt. Recall that you do NOT use the coupon rate, but instead use the YTM for each bond issue.
d) Determine the appropriate weights for each of the categories using market values.
e) Calculate the company's WACC.
f) In your opinion, has the company minimized its WACC? What could it differently? Recall that more debt increases the risk of bankruptcy and more equity means the flotation costs of issuing stock.
Amazon has minimized their weighted average cost of capital, since they do not payout dividends. In addition, since Amazon does not have any preferred stock to pay investors for investment and capital funding projects, their cost of capital is minimized. Amazon has never declared or paid cash dividends on common stock.
What could it do differently?
Amazon has invested in marketable fixed income securities which are short term and intermediate term securities and AAA-rated money market securities. Amazon could suffer losses in principles if forced to sell securities that have declined in the market value due to changes in the interest rates.