FIN203 - Corporate Finance - Company Financing - Capital Budgeting - Personal Reflection - Finance Assignment Help

Assignment Task:

FIN203: Corporate Finance Assignment Help

Assessment Description
Answer the questions below with reference to the following sources and submit:

Source 1: Apple Annual Report

Amazon 2018 Annual Report:

Source 2: Working Capital Management Amazon

At Amazon, It’s All About Cash Flow

The difference between the top and bottom lines here is mostly about investments in buildings, machines, and other things, which are written down over time in the income statement but ignored in calculating operating cash flow. That operating cash flow is much higher than net income at a company that has been investing huge amounts of money as it strives for global retail domination isn’t a big surprise, although the sheer size of the difference, and the sharp upward trajectory of the cash flow line, is still staggering.

Free cash flow does count all of Amazon’s investments — although it counts them when the money is spent instead of depreciating and amortizing them over subsequent years. That it has remained consistently higher (usually more than $1 billion higher) than net income is a remarkable and very important thing. With free cash flow, on the other hand, what counts is when the money actually changes hands. So if you have a business where your customers pay you quickly, you manage your inventory well, and you’re able to take your time in paying your suppliers, your free cash flow can be consistently positive even when your net income is not. Which is exactly the kind of business that Jeff Bezos and his colleagues have constructed at Amazon over the past decade.

According to my instructor in such matters, Harvard Business School finance professor Mihir Desai, the key metric of a company’s cash-generating prowess is the cash conversion cycle, which is days of inventory plus days sales outstanding (how long it takes your customers to pay you, basically), minus how many days it takes you to pay your suppliers. Super-efficient retailers such as Walmart and Costco have been able to bring their CCC down to the single digits. That’s impressive. But at Amazon last year, the CCC was negative 30.6 days.

Part A: Company Financing

1. According to Source 2 how did Amazon’s Cash Conversion Cycle in 2014 compare to other retailers in that year? What does it say about Amazon’s working capital management?

2. According to Source 2 why is having a negative Cash Conversion Cycle important for a company wanting to experiment with investing in new products that could fail or succeed? 

3. If Amazon couldn’t use cash to fund its new projects, what two financing options would they have available to them (see Source 2)? Discuss what advantages and disadvantages these financing options would have for Amazon. 

4. Based on Source 1 (Annual Report) what is Amazon’s Cash Conversion Cycle in 2018? How does this compare with the Cash Conversion Cycle in 2014 (Source 2)? 

5. Based on Pages 6-14 of Amazon’s Annual Report (Source 1) what do you believe are the three most significant risks facing Amazon in 2018? Are these risks systematic or unsystematic? Why? 

6. Imagine that in 2007 you purchased an Amazon $1000 face value bond with a fixed annual coupon rate of 4.5% which matures at the end of 2020. Currently it is the end of 2019 and the bond has a yield to maturity of 5%. What would be the price of the bond today in 2019? 

7. Consider Source 3. If you bought Amazon shares beginning of June 2014 and sold them beginning of June 2019, what would be your approximate holding period return? Assume no dividends. What does this suggest about the investments that Amazon made from 2014 to 2019?

Part B: Capital Budgeting
Read the article below and answer the following questions: Source 4: Amazon Go Amazon’s cashierless Go stores could be a $4 billion business by
2021, new research suggests The futuristic shops bring in more revenue than regular convenience stores. Rani MollaJan 4, 2019, 10:33am EST

Imagine based on the above article Amazon decides to open 3000 US stores (today) in 2019. Assume the spending to roll out the 3000 stores (from the article) would be incurred today. Assume the sales per year (for the 3000 stores) mentioned in the article would occur at the end of each year for 10 years. Due to the absence of cashiers and other staff annual variable costs would only be 10% of revenues in the first five years, and 5% of revenues in the final 5 years of the project as efficiencies increase. Annual fixed costs will be $1.5 billion per year for 10 years. In addition to the initial investment mentioned in the article, Amazon will need to secure the hardware and software capital to run the stores, which will cost an additional $7 billion today. All capital invested in the stores will be depreciated on a straight-line basis over 10 years to 0 and can be sold at the end of year 10 for $1 billion. Due to Amazon’s cash management policies, they want to recover their initial investment within 2 years. Assume all cash flows occur at the end of the year and all values are in USD. Assume the tax rate is 30% over the 10 years.

1. Based on the above information and sources what are the free cash flows generated by Amazon’s 3000 new stores over the 10 years (Refer to your excel spreadsheet)? 

2. Calculate the NPV for new AmazonGo Stores assuming the cost of capital is 12% and 5%. Which discount rate should Amazon use given that this is a speculative venture?

3. What is the payback period for the project and how does it compare to what the company is hoping for? Do you believe their target is realistic? 

4. What are the weaknesses about how cash flows are estimated in the article? Can we rely on them in our analysis? 

5. Based on your analysis in parts 1-4 would you recommend Amazon undertake the project? Why or why not? 

Part 3: Personal Reflection 
Please write a 200-300 brief reflection on:

a) How Class Case Study 1 in Week 6 influenced your answers in Part A of this assignment

b) The process you went through to complete Part B of this assignment

c) What you will do differently when preparing for Case Study 2 in Week 12 to get the best mark possible (as compared to your preparation in Case Study 1)

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