Conversion Cycle Article 2022

Running Head: Corporate Finance
Finance
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Corporate Finance
Contents
Part A: Company Financing........................................................................................... 1
1) Amazon’s Cash Conversion Cycle as Compared to Other Retailers in 2014 and its Working
Capital Management................................................................................................. 1
2) Significance of Negative Cash Conversion Cycle for a Company wanting to experiment with
Investing in New Products that could Fail or Succeed........................................................1
3) Financing Options available with Amazon except Cash: Advantages and Disadvantages.......2
i. Debt Financing............................................................................................. 2
ii. Issue of stocks.............................................................................................. 2
4) Amazon’s Cash Conversion Cycle in 2014 and 2018...................................................3
5) Three Significant Risks faced by Amazon in 2018......................................................3
6) Bond Price in 2019............................................................................................. 4
7) Holding Period Return........................................................................................ 4
Part B: Capital Budgeting.............................................................................................. 5
1) Free Cash Flows Generated by Amazon’s 3000 new stores over the 10
years................................................................................................................... 5
2) NPV.............................................................................................................. 5
(i) A WACC of 12%........................................................................................... 5
(ii) A WACC of 5%............................................................................................ 5
3) Payback Period............................................................................................. 5
4) Weaknesses of Cash Flows Estimated in the Article.....................................6
5) Decision Regarding Opening 3000 new AmazonGo Stores..........................6
Part C: Personal Reflection............................................................................................ 7
References:............................................................................................................ 8
Appendix................................................................................................................ 9

Running Head: Corporate Finance
Part A: Company Financing.
1) Amazon’s Cash Conversion Cycle as Compared to Other Retailers in 2014
and its Working Capital Management
It is very necessary for any business to have a good amount of cash for carrying out its
business operations effectively and meet the urgent liabilities or any other type of liabilities.
There is a metric called cash conversion cycle (CCC) which shows the time taken by the
company to convert its investment into inventory and then to cash. In any business, firstly the
cash is converted to inventory, then accounts receivable and at the end back to cash (Chron,
n.d.). CCC is calculated by adding inventory turnover days and days of sales outstanding and
finally days of payable outstanding are subtracted. In 2014, Amazon experienced a negative
cash conversion cycle which stood at -30.6 days whereas other retailers like Walmart and
Costco which are considered to be super-efficient had their CCC in single digits (Fox,
2014).
Amazon’s negative cash conversion cycle shows that the company is able to generate revenue
from the customers much before it needs to pay the due amount to suppliers for inventories
among many other things. In other words, the company is financing its daily operations and
working capital needs using the borrowed amount from suppliers and the best part is
company is not even required to pay interest on it. Therefore, negative cash conversion cycle
of Amazon speaks about the strong management team which is managing the working capital
amazingly well.
2) Significance of Negative Cash Conversion Cycle for a Company wanting to
experiment with Investing in New Products that could Fail or Succeed
Earlier, it was believed that the companies operating in low- tech industries has the capability
to generate more cash than the companies operating in any other industry. It was believed so
because low-tech industries have faithful (addicted) customers. The examples of low tech
industries include tobacco, groceries, gaming etc.
Now, the myth has been broken by Amazon which operates in often- fickle markets but still
is a cash machine. All these cash are being utilised by the company to finance its increasing
growth. The company is utilising the borrowed amount from suppliers to finance its new
experiments. By new experiments we mean, Amazon is using the suppliers’ money to invest
in new products. For example, Amazon launched Amazon Fire phone which did not go well
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