Description
Scenario
You graduated from college three months ago and have landed a job with TBMV & Associates Financial. Part of your training is to attend a business seminar. It just so happens that you attend one where Brian Olsavsky, CFO of Amazon, is the guest speaker. One of Brian’s main messages revolves around all his success and how Amazon will continue to grow.
You are a firm believer that history repeats itself. It is your belief that the next big risk taker will come along soon, and Amazon will be a thing of the past. In friendly conversation at your table, you state your thoughts and conclude Brian must not share your same belief.
Unbeknownst to you, his secretary is seated at your table. Giggling, she asks what you mean. You tell her that William Pollard stated that “learning and innovation go hand in hand. The arrogance of success is to think that what you did yesterday will be sufficient for tomorrow.” Then you proceed to tell her that Brian does not take enough risks. His secretary goes back to Brian with what you have said. Brian would like to know what you meant and your thoughts, so he hires your firm to do a risk evaluation. When you arrive back to your office, you are given Amazon’s data file and instructed to evaluate the financial risk of Amazon.
Instructions
Using Microsoft Word, create a financial proposal that addresses the following:
- Explain Amazon’s financial risk, cost of capital, and risk reward from historical data.
- Interpret Amazon’s financial information using Capital Asset Pricing Model (CAPM).
- Devise strategies for Amazon to achieve investment high returns and low risk using Modern Portfolio Theory (MPT).
Explanation & Answer
View attached explanation and answer. Let me know if you have any questions.
View attached explanation and answer. Let me know if you have any questions.
Outline
Topic: Risk Evaluation
Amazon's Financial Risk, Cost of Capital, and Risk-Reward
One of Amazon's financial hazards is the unpredictability of profit. For a time in the early to mid2010 timeframe, Amazon was unable to maintain net profits because its profit margins were too tight.
A net loss was recorded for the firm in 2012 and 2014. A net profit margin of 3.7 percent was the
company's greatest prior to 2019. As a consequence of Amazon's aggressive pricing, its gross margins
are confined to a narrow band of low values. Pessimistic commentators, on the other hand, question if
the corporation has the valuation power to provide the yields necessary to legitimize the company's
continuing development. There are legitimate reasons for some investors to be wary about Amazon's
future investments due to its history of backing duds, such as the doomed smartphone industry. For
Amazon to be a worthwhile investment, it must be able to earn a profit and expand rapidly in a sector
that is becoming more competitive. Risky but necessary for the bull argument
1. CAPM
2. Modern Portfolio Theory
3. References
1
Risk Evaluation
Student’s Name
Department + University
Course Number and Name
Instructor
Date
2
Amazon's Financial Risk, Cost of Capital, and Risk-Reward
One of Amazon's financial hazards is the unpredictability of profit. For a time in the
early to mid-2010 timeframe, Amazon was unable to maintain net profits because its profit
margins were too tight. A net loss was recorded for the firm in 2012 and 2014. A net profit
margin of 3.7 percent was the company's greatest prior to 2019. As a consequence of
Amazon's aggressive pricing, its gross margins are confined to a narrow band of low values.
Pessimistic commentators, on the other hand, question if the corporation has the valuation
power to provide the yields necessary to legitimize the company's continuing development.
There are legitimate reasons for some investors to be wary about Amazon's future investments
due to its history of backing duds, such as the doomed smartphone industry. For Amazon to be
a worthwhile investment, it must be able to earn a profit and expand rapidly in a sector that is
becoming more competitive. Risky but necessary for the bull argument (Bowman, 2016).
Another financial concern for Amazon is limiting sales growth. It is unusual for
Amazon's yearly revenue growth measures to go below 20%, and it is not uncommon for them
to surpass 40% in the last decade. Investors and experts have grown more bullish as a
consequence of this accomplishment. This pattern has been influenced by a number of causes.
With each year that passes, it becomes more difficult to continue fast development (Bowman,
2016).
A company's WACC is the average rate it would pay all of its investors to finance its
assets. It's often referred to as the company's COC. All except the most essential corporate
assets are financed by borrowing money and selling shares of stock. In order to arrive at
WACC, which represents the average cost, each of these financing sources has been weighted
according to how it will be used.
3
𝑊𝐴𝐶𝐶 = 𝐸 / (𝐸 + 𝐷) ∗ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐸𝑞𝑢𝑖𝑡𝑦 + 𝐷 / (𝐸 + 𝐷) ∗ 𝐶𝑜𝑠𝑡 𝑜𝑓 𝐷𝑒𝑏𝑡 ∗ (1
− 𝑇𝑎𝑥 𝑅𝑎𝑡𝑒)
= 0.9577 ∗ 7.98% + 0.0423 ∗ 2.2318% ∗ (1 − 14.415%) = 7.72%
Amazon's WACC is at 7.11 percent. The ROIC for Amazon.com is 13%. So long as its
investments outpace its costs of raising funds, the organization is considered profitable. It has a
lot of money in the bank.
Hackers are Amazon's reward for taking a risk. Amazon's greatest danger is from
outsiders, namely hackers. As a consequence, no business can provide an assurance that its
security will be safe. Having your business shut down or your credit card informati...
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