Finance Answer 2022

Running head: FINANCE
Finance
Name of the student
Name of the university
Student ID
Author note

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Table of Contents
Part A...............................................................................................................................................2
Answer 1......................................................................................................................................2
Answer 2......................................................................................................................................2
Answer 3......................................................................................................................................2
Answer 4......................................................................................................................................4
Answer 5......................................................................................................................................5
Answer 6......................................................................................................................................5
Answer 7......................................................................................................................................5
Part B...............................................................................................................................................7
Answer 1......................................................................................................................................7
Answer 2......................................................................................................................................7
Answer 3......................................................................................................................................7
Answer 4......................................................................................................................................7
Answer 5......................................................................................................................................8
Reference.........................................................................................................................................9
Appendix........................................................................................................................................10

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Part A
Answer 1
Cash conversion cycle (CCC) is the metric used to analyse the times taken by the entity
in converting the investments in inventories in cash and is measured in days. Looking into the
details provided in source 2 it can be identified that the CCC of Amazon is -30.6 days and the
major reason behind the same is that Amazon takes significantly long time that is 95.8 days for
making payments to its suppliers. On the contrary, CCC of super-efficient retailers like Costco
and Walmart is as low as single digits. Only company that can be compared with Amazon is
Apple as it has CCC of -44.5 days (Harvard Business Review 2014)
Answer 2
Negative CCC is required for investing into new project as with delaying the payments to
creditors and collecting the dues from debtors in short span of time the company simply can use
its own cash for explosive growth. It does not need to borrow or issue any stock for requirement
of fund. Instead it can sue own cash for attracting the new sectors as well as upgrading the
offerings.
Answer 3
If Amazon does not have cash for funding it has 2 financing options as follows –
1. Equity finance – under this the capital is raised through issuing stock to the investors. In
exchange, the investors receive ownership in the entity. Advantages and disadvantage of
equity financing are as follows –
Advantages –

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 Credit problems – it is considered as less risky as no fixed instalment is due on equity
finance that can particularly be helpful for the start-up business that may not have
positive cash flow in beginning.
 Cash flow – it does not take out any funds out of business whereas the payment towards
debt take out funds from the cash flow of the entity which in turn reduces the growth of
finance
 Long term planning – equity investors have long term view as they are not in
expectation to receive any immediate return on the investment (Coleman, Cotei and
Farhat 2016)
Disadvantages –
 Loss on the control – owners need to give away a proportion of ownership in exchange
of equity investor’s fund and hence, they expect to have their say in decision making
 Cost – as the equity investors expect return on investment, owner of the business shall
be comfortable to share profit of the entity with them. Amount paid to them may higher
than the interest paid on borrowings ((Coleman, Cotei and Farhat 2016)
2. Debt finance – arranging fund through borrowing is known as debt financing. Through it
does not require giving up of any ownership significant amount of debt may inhibit the
company’s growth.
Advantages –
 Control – raising fund though loan is temporary and relationship comes to an end while
debt payment is made. Hence, it does not take away any ownership from the entity.

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 Taxes – interest paid on loan or borrowing is deducting under tax as an expense. On the
contrary payments of dividend to shareholders are not deductible (Goh et al. 2017)
Disadvantages –
 Collateral – lenders generally ask for certain assets to be held as collateral while
providing loan and borrower sometimes fall short of the same.
 Qualification – the borrower must have required credit rating to qualify for the loan (Goh
et al. 2017)
Answer 4
Based on annual report of 2018, CCC of Amazon is -28.53 days. The CCC of the
company reduced from -30.6 days to -28.53 days. It signifies that relationship with suppliers has
not been improved much as the payment days to suppliers have been reduced slightly from 95.8
days to 95.49 days (Ir.aboutamazon.com 2019)

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Answer 5
Most significant 3 risks are as follows –
 Intense competition – this is unsystematic risk as the competition face intense
competition which is specific to the industry
 Foreign exchange risk – it is systematic as the risk is associated with entire market
 Inventory risk - this is unsystematic risk as the competition face intense competition
which is specific to the industry or segment (Ir.aboutamazon.com 2019)
Answer 6
Price of bond in 2019 today is $ 907.03.
Answer 7
Holding period return (HPR) = (Income + (closing value – opening value)/opening value) * 100
Holding period return = (0 + (1775.07 – 312.55) / 312.55) * 100 = 467.93%
HPR of 467.93% suggests that in a period of 5 years only Amazon stock is earning return of
467.93% which is significantly good (Finance.yahoo.com 2019)

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Part B
Answer 1
Free cash flow –
Answer 2
At 12% cost of capital NPV is $ 2424.85 million and at 5% cost of capital NPV is 4
7248.01 million.
Considering the speculative nature of the venture Amazon shall use 12% discount rate as
with higher risk the discount rate goes up. However, at both the discounting rate the IRR is 17%
that suggests that even with higher discount rate of 12% the project will be profitable.
Answer 3
Discounted payback period of the project at 12% discount rate is 7.37 years and at 5%
discount rate 5.58 years. However, the target payback period is 2 years which is not realistic as
the project will not be able to recover the amount of initial investment even at the lowest
discounting rate of 5%.
Answer 4
Major weaknesses involved in the estimated cash flows are as follows –

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 The cash flows are estimated and in actual it may not be received
 Cost of capital is required to be guessed and with changes in actual cost of capital present
value of cash flows will also be changed (Leyman and Vanhoucke 2016)
 Revenues are based on the basis of average number of visitors. However in actual the
number may increase or reduce
Hence, reliance cannot be placed on estimated cash flows. However, to analyse expected
outcome of any project before starting the same no better approach is there and the investor need
to rely on cash flow estimation (Vox 2019)
Answer 5
On the basis of parts 1- 4 it is recommended that Amazon shall undertake the project as at
both the rate of capital cost the NPV is positive, IRR is more than capital cost and discounted
payback period is less than useful life of project. However, if Amazon wants o fulfil the
management policy regarding recovering the initial investment in 2 years, the project shall not be
accepted.

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Reference
Coleman, S., Cotei, C. and Farhat, J., 2016. The debt-equity financing decisions of US startup
firms. Journal of Economics and Finance, 40(1), pp.105-126.
Finance.yahoo.com. 2019. Yahoo is now part of Oath. [online] Available at:
https://finance.yahoo.com/quote/AMZN/ [Accessed 20 Sep. 2019].
Goh, B.W., Lim, C.Y., Lobo, G.J. and Tong, Y.H., 2017. Conditional conservatism and debt
versus equity financing. Contemporary Accounting Research, 34(1), pp.216-251.
Harvard Business Review. 2014. At Amazon, It’s All About Cash Flow. [online] Available at:
https://hbr.org/2014/10/at-amazon-its-all-about-cash-flow [Accessed 20 Sep. 2019].
Ir.aboutamazon.com. 2019. [online] Available at:
https://ir.aboutamazon.com/static-files/0f9e36b1-7e1e-4b52-be17-145dc9d8b5ec [Accessed 20
Sep. 2019].
Leyman, P. and Vanhoucke, M., 2016. Payment models and net present value optimization for
resource-constrained project scheduling. Computers & Industrial Engineering, 91, pp.139-153.
Vox. 2019. Amazon’s cashierless Go stores could be a $4 billion business by 2021, new research
suggests. [online] Available at: https://www.vox.com/2019/1/4/18166934/amazon-go-stores-
revenue-estimates-cashierless [Accessed 20 Sep. 2019].

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Appendix