Using Yahoo Finance and the latest annual report of the AMAZON company, answer the following questions:
Calculate the company’s growth rate using the formula we discussed in class. (2 points)
(you can find the formula from attached file)
Capital is external funds raised from investors and used to grow a company’s business. I. Long-term debt II. Preferred stock III. Common equity Risk/Return Key Rule The HIGHER the Risk, the HIGHER the Return!! The LOWER the Risk, the LOWER the Return!! HIGH RETURN with NO RISK = BS!!! Therefore, relationship between Risk and Return is Positive or Direct. The Capital Components are ranked above from least to most risky. Capital Components Capital components are sources of funding that come from investors. Accounts payable, accruals, and deferred taxes are not sources of funding that come from investors, so they are not included in the calculation of the cost of capital. We do adjust for these items when calculating the cash flows of a project, but not when calculating the cost of capital. Bond Prices Current price of a bond is determined by Current interest rate environment (YTM). Relationship between bond prices and interest rates –>Higher Interest rates = Lower Bond Prices. Therefore, an Inverse or Indirect Relationship. I. Calculating the Cost of Debt Interest rate required on new debt issuance = yield to maturity (YTM) on outstanding debt. Use coupon rate of debt if YTM is not known. Flotation costs small, so ignore. Interest is tax deductible, so the after tax (AT) cost of debt is: rd AT = rd BT(1 – T) *BT= before tax cost of debt. Example 1 --Calculate the after-tax cost of debt if the company’s current YTM is 10% and they are in the 40% tax bracket. rd AT = 10%(1 – 0.40) = 6%. How do you solve for YTM? Example 2 -- A 15-year, $1,000 12% semiannual bond sells for $1, XXXXXXXXXXWhat’s rd? TI-83+ Calculator APPS 1(Finance) -- ENTER 1(TVM Solver) – ENTER N= 15*2 I=?? Pmt. = 1000*(.12/2) PV = XXXXXXXXXX FV=1000 Move Cursor to I% ALPHA ENTER ? I= 5% semi-annual, or 5x2=10% Annual. Casio fx-9860GII Calculator MENU TVM EXE F2 (Compound Interest) N= 15*2 I=?? Pmt. = 1000*(.12/2) PV = XXXXXXXXXX FV=1000 EXE F2 (for I%) ...
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