Assignment : Financing an ExpansionAfter twelve (12) years, your business is wildly successful with...

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Assignment : Financing an ExpansionAfter twelve (12) years, your business is wildly successful with multiple locations throughout the region. You are now ready to think really big. You want to purchase a huge competitor. (Note: You determine whether the competitor is a privately or publicly held company.) To expand, you will need additional capital from the debt or equity market, or both.Write a five to seven (5-7) page paper in which you:1. Use one (1) of the valuation techniques identified in Chapters 10 and 11 to calculate the value of the competitor you wish to purchase. Note: You will have to make assumptions; however, your assumptions need to be rationally supported. 2. Analyze the various financial tools available to you to determine the tools that will be most helpful in assessing whether your company can afford to purchase the competitor. Support your response.	Imagine you can indeed afford to purchase the competitor; however, you will need an additional $100 million.3. Examine the options available to you to finance the competitor through the debt market, recommending the best alternative as a result of your analysis. Provide support for your recommendation.4. Examine the options available to you to finance the competitor through the equity market, recommending the best alternative as a result of your analysis. Provide support for your recommendation.5. Conduct a cross comparison of your debt and equity examinations to determine where to ideally obtain the additional $100 million funding needed to make the purchase and the approach that you would take to securing the funds. Provide support for your recommendation.

Shakeel · Accepted Answer

Introduction
Amazon.com, Inc. is an American an electronic commerce company with headquarters in Seattle, Washington. It is the largest Internet-based retailer in the United States. Amazon.com started as an online bookstore but soon diversified, selling DVDs, blue CDs, video downloads/streaming, MP3 downloads/streaming, software, video games, electronics, apparel, furniture, food, toy and jewelry. The company also produces consumer electronics-notably, Amazon Kindle e-book readers, TV, Phone - and is a major provider of cloud computing services. Amazon also sells certain low end products like USB cables under its in-house brand Amazon basic.
Amazon has separate retail websites for United States, United Kingdom & Ireland, France, Canada, Germany, The Netherlands, Italy, Spain, Australia, Brazil, Japan, China, India and Mexico. Amazon also offers international shipping to certain other countries for some of its products. In 2011, it had professed an intention to launch its websites in Poland and Sweden.
Valuation of Amazon Inc.
The valuation of Amazon Inc is carried on by discounting of Free Cash Flow (FCF) method. Under this method, the expected free cash flow (FCF) of the firm is discounted by the Weighted Average Cost of Capital (WACC) to get the intrinsic value of the firm.
From the Cash flow statement of past five years, the free cash flow to the firm is extracted as follows –
	
	
	
	
	in USD million
	
	2019
	2018
	2017
	2016
	2015
	Free Cash Flow, FCFF
	21,653
	17,296
	6,479
	9,706
	7,331
	Free cash flow growth rate
	25.19%
	166.95%
	-33.25%
	32.40%
	
	
	
	
	
	
	
	Average growth rate
	8.11%
	
	
	
	
Growth rate in year 2018 is excluded here because of abnormal growth rate.
Now, to get the intrinsic value of firm, WACC is required that needs to be calculated.
Calculation of WACC
The weighted average cost of capital (WACC) is overall cost of capital of company that has different sources of capital like debt, equity, preference shares etc in different weight age of whole capital. The WACC is calculated by using the formula - 
WACC = (E/E+D) rE + D/(E+D) rD (1-TC)
Where,		E = Market value of equity
		D = Market value of debt
		rE = Cost of equity and
		rD = Cost of debt
		TC = Tax rate
The cost of equity of Amazon is found by using the CAPM model.
The Capital Asset Pricing Model (CAPM) is a linear relationship between the expected rate of return on company’s stock and the systematic risks inherited in the stocks. Mathematically it is represented as
E(r) = Rf + β (Rm – Rf)
Where,

Assignment : Financing an Expansion After twelve (12) years, your business is wildly successful with multiple locations throughout the region. You are now ready to think really big. You want to...

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