FINM Finance - Question and Answer
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Running head: FINM FINANCE
FINM Finance
Name of the student
Name of the university
Student ID
Author note
FINM Finance
Name of the student
Name of the university
Student ID
Author note
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1FINM FINANCE
Table of Contents
Part A...............................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................2
Question 3....................................................................................................................................2
Question 4....................................................................................................................................4
Question 5....................................................................................................................................5
Question 6....................................................................................................................................5
Question 7....................................................................................................................................6
Part B...............................................................................................................................................6
Question 1....................................................................................................................................6
Question 2....................................................................................................................................6
Question 3....................................................................................................................................7
Question 4....................................................................................................................................7
Question 5....................................................................................................................................8
Part 3................................................................................................................................................8
Question (a).................................................................................................................................8
Table of Contents
Part A...............................................................................................................................................2
Question 1....................................................................................................................................2
Question 2....................................................................................................................................2
Question 3....................................................................................................................................2
Question 4....................................................................................................................................4
Question 5....................................................................................................................................5
Question 6....................................................................................................................................5
Question 7....................................................................................................................................6
Part B...............................................................................................................................................6
Question 1....................................................................................................................................6
Question 2....................................................................................................................................6
Question 3....................................................................................................................................7
Question 4....................................................................................................................................7
Question 5....................................................................................................................................8
Part 3................................................................................................................................................8
Question (a).................................................................................................................................8
2FINM FINANCE
Question (b).................................................................................................................................8
Question (c).................................................................................................................................8
Reference.......................................................................................................................................10
Appendix........................................................................................................................................11
Question (b).................................................................................................................................8
Question (c).................................................................................................................................8
Reference.......................................................................................................................................10
Appendix........................................................................................................................................11
3FINM FINANCE
Part A
Question 1
CCC (cash conversion cycle) is the financial metric that measures the efficiency with
which the cash of the entity is tied up in the accounts receivable and inventories and time it takes
for making payment towards account payable. In other words, it assesses the efficiency with
which the working capital is managed (Vox 2019). Considering the details of source 2, it is
recognized that Amazon’s CCC is -30.6 days and the reason for the same is that the entity takes
long time is paying the suppliers and it is 95.8 days. Conversely, retailers like Walmart and
Costco’s CCC is 38.5 days and 30.1 days respectively. Only Apple can is comparable with
Amazon with -44.5 days of CCC. Hence, it can be stated that working capital of Amazon is not
managed efficiently (Ir.aboutamazon.com 2019).
Question 2
If an entity wants to experiment with new products it will require investment for the same
that can be arranged through holding the cash. This can be done through delay in making
payment to the suppliers and collecting cash from the debtors in shorter time. Hence, it will not
require to borrow from outside or issue any new stock for additional fund. Rather the entity can
use the cash available with it to enter into new sector and upgrading the products offered by it
(Harvard Business Review 2014).
Question 3
If Amazon cannot use the cash for funding the new project, it has other 2 options to raise
the required fund as follows –
Part A
Question 1
CCC (cash conversion cycle) is the financial metric that measures the efficiency with
which the cash of the entity is tied up in the accounts receivable and inventories and time it takes
for making payment towards account payable. In other words, it assesses the efficiency with
which the working capital is managed (Vox 2019). Considering the details of source 2, it is
recognized that Amazon’s CCC is -30.6 days and the reason for the same is that the entity takes
long time is paying the suppliers and it is 95.8 days. Conversely, retailers like Walmart and
Costco’s CCC is 38.5 days and 30.1 days respectively. Only Apple can is comparable with
Amazon with -44.5 days of CCC. Hence, it can be stated that working capital of Amazon is not
managed efficiently (Ir.aboutamazon.com 2019).
Question 2
If an entity wants to experiment with new products it will require investment for the same
that can be arranged through holding the cash. This can be done through delay in making
payment to the suppliers and collecting cash from the debtors in shorter time. Hence, it will not
require to borrow from outside or issue any new stock for additional fund. Rather the entity can
use the cash available with it to enter into new sector and upgrading the products offered by it
(Harvard Business Review 2014).
Question 3
If Amazon cannot use the cash for funding the new project, it has other 2 options to raise
the required fund as follows –
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4FINM FINANCE
1. Debt finance – it is arranging money from outside in exchange of interest percentage on
the borrowed amount that is to be paid along with the principal amount. However, it has
negative implications as higher debt amount may put additional burden on growth of the
entity (Coleman, Cotei and Farhat 2016)
Advantages –
Tax – interest expenses on borrowing is a deductible expense under tax
Control – raising amount through borrowing is temporary and the relationship with the
lender ends as soon as the borrower makes the payments. Hence, it has no association
with the entity’s ownership.
Disadvantages –
Generally the borrowers are required to provide some collateral against the loan they
have applied for. This can be notable issue for the entity with inadequate asset for
providing as collateral (Coleman, Cotei and Farhat 2016)
Qualification – borrower is required to have specified credit rating to apply for the loan.
2. Equity financing – it is an approach of raising finance through issuing new stock.
Investors for the shares are considered as shareholders of the entity as they receive
ownership in the entity (Goh et al. 2017).
Advantages –
Less burden – under equity finance the entity is not required to make any regular
payment and the shareholders are made payment only when the entity earns profit
1. Debt finance – it is arranging money from outside in exchange of interest percentage on
the borrowed amount that is to be paid along with the principal amount. However, it has
negative implications as higher debt amount may put additional burden on growth of the
entity (Coleman, Cotei and Farhat 2016)
Advantages –
Tax – interest expenses on borrowing is a deductible expense under tax
Control – raising amount through borrowing is temporary and the relationship with the
lender ends as soon as the borrower makes the payments. Hence, it has no association
with the entity’s ownership.
Disadvantages –
Generally the borrowers are required to provide some collateral against the loan they
have applied for. This can be notable issue for the entity with inadequate asset for
providing as collateral (Coleman, Cotei and Farhat 2016)
Qualification – borrower is required to have specified credit rating to apply for the loan.
2. Equity financing – it is an approach of raising finance through issuing new stock.
Investors for the shares are considered as shareholders of the entity as they receive
ownership in the entity (Goh et al. 2017).
Advantages –
Less burden – under equity finance the entity is not required to make any regular
payment and the shareholders are made payment only when the entity earns profit
5FINM FINANCE
Credit issues – even if the entity lacks creditworthiness with poor credit history equity is
preferable as compared to debt financing (Goh et al. 2017).
Disadvantages –
Sharing of profit – shareholders are required to pay the share of profit from business. It is
worthwhile if the entity is benefitting from value they are bringing as, however at the
same time the entity is losing its ownership to some extent.
Potential conflict – sharing the ownership and working with others may result into
conflict of interest if differences are there regarding the management style, vision and
manner in which the business is operating (Goh et al. 2017).
Question 4
On the basis of the annual data for the year 2018, Amazon’s CCC is -28.53 days and the
same is decreased from -30.6 days for the preceding period. It is indicating that Amazon’s
Credit issues – even if the entity lacks creditworthiness with poor credit history equity is
preferable as compared to debt financing (Goh et al. 2017).
Disadvantages –
Sharing of profit – shareholders are required to pay the share of profit from business. It is
worthwhile if the entity is benefitting from value they are bringing as, however at the
same time the entity is losing its ownership to some extent.
Potential conflict – sharing the ownership and working with others may result into
conflict of interest if differences are there regarding the management style, vision and
manner in which the business is operating (Goh et al. 2017).
Question 4
On the basis of the annual data for the year 2018, Amazon’s CCC is -28.53 days and the
same is decreased from -30.6 days for the preceding period. It is indicating that Amazon’s
6FINM FINANCE
relationship with its suppliers has not been enhanced much as payments made to the suppliers
have just been dropped from 95.8 days to 95.49 days (Ir.aboutamazon.com 2019)
Question 5
3 major risks those Amazon is facing are –
Strong competition – this risk is considered as unsystematic as the entity is exposed to
strong competition that is specific to the segment or industry
Risk of foreign exchange – this is systematic risk as the same is related to overall market.
This risk is associated with the international stores, services and products offered and
significant losses or gains in re-measurement of intercompany balances.
Risk associated with inventories – this is unsystematic risk as the risk arises from
seasonality, launching of new product, rapid changes in the product pricing and cycles,
changes in the pattern of consumer demand and their spending and changes in the tastes
of consumers (Ir.aboutamazon.com 2019)
Question 6
Price of bond in the year 2019 today is $907.03
Question 7
relationship with its suppliers has not been enhanced much as payments made to the suppliers
have just been dropped from 95.8 days to 95.49 days (Ir.aboutamazon.com 2019)
Question 5
3 major risks those Amazon is facing are –
Strong competition – this risk is considered as unsystematic as the entity is exposed to
strong competition that is specific to the segment or industry
Risk of foreign exchange – this is systematic risk as the same is related to overall market.
This risk is associated with the international stores, services and products offered and
significant losses or gains in re-measurement of intercompany balances.
Risk associated with inventories – this is unsystematic risk as the risk arises from
seasonality, launching of new product, rapid changes in the product pricing and cycles,
changes in the pattern of consumer demand and their spending and changes in the tastes
of consumers (Ir.aboutamazon.com 2019)
Question 6
Price of bond in the year 2019 today is $907.03
Question 7
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7FINM FINANCE
HPR (holding period return) = (Income + (closing value – opening value)/opening value) * 100
HPR = (0 + (1775.07 – 312.55) / 312.55) * 100 = 467.93%
From the above it can be identified that the HPR is 467.93% and it indicates that during 5
years period stock of Amazon is earning of 467.93% which is notably good (Finance.yahoo.com
2019)
Part B
Question 1
Free cash flow –
Question 2
While the cost of capital is 5%, the NPV comes as $7248.01 million whereas at 12% cost
of capital NPV comes as $2424.85 million.
If the speculative nature of Amazon venture is taken into account, it can be suggested that
the entity shall use 12% as rate of discount. The reason behind the same is that with higher risks
level discount rate also increases. However, with both discount rates IRR comes as 17% that
HPR (holding period return) = (Income + (closing value – opening value)/opening value) * 100
HPR = (0 + (1775.07 – 312.55) / 312.55) * 100 = 467.93%
From the above it can be identified that the HPR is 467.93% and it indicates that during 5
years period stock of Amazon is earning of 467.93% which is notably good (Finance.yahoo.com
2019)
Part B
Question 1
Free cash flow –
Question 2
While the cost of capital is 5%, the NPV comes as $7248.01 million whereas at 12% cost
of capital NPV comes as $2424.85 million.
If the speculative nature of Amazon venture is taken into account, it can be suggested that
the entity shall use 12% as rate of discount. The reason behind the same is that with higher risks
level discount rate also increases. However, with both discount rates IRR comes as 17% that
8FINM FINANCE
signifies even with higher rate of discount that is 12%, project will be able to earn profit
(Leyman and Vanhoucke 2016).
Question 3
Project’s discounted period for payback is 7.37 years at 12% discount rate whereas the
discounted period for payback is 5.58 years at 5% discount rate. However, it is mentioned that
the target payback period is 2 years that is not realistic as it is not possible for the project to
recover the initial amount within that period even with the discount rate of 5% (Leyman and
Vanhoucke 2016).
Question 4
Weaknesses regarding the estimation of cash flows are as follows –
Cash flows are only projection and it may not be received in actual
Capital cost is required to be guessed and if actual capital cost is changed cash flows will
also be altered.
Forecasting of revenues is made based on the visitor’s average number. However, in
reality number may vary (Leyman and Vanhoucke 2016).
Therefore, forecasted cash flows are not reliable. However, for analysing forecasted
outcomes regarding any project before starting the project there is no better approach and the
investor therefore is required to depend on the forecasting of cash flows.
Question 5
Based on parts 1 – 4 it is suggested that Amazon shall take up the project as under both
capital cost rate NPV is positive, IRR is more than the cost of capital and discounted payback
signifies even with higher rate of discount that is 12%, project will be able to earn profit
(Leyman and Vanhoucke 2016).
Question 3
Project’s discounted period for payback is 7.37 years at 12% discount rate whereas the
discounted period for payback is 5.58 years at 5% discount rate. However, it is mentioned that
the target payback period is 2 years that is not realistic as it is not possible for the project to
recover the initial amount within that period even with the discount rate of 5% (Leyman and
Vanhoucke 2016).
Question 4
Weaknesses regarding the estimation of cash flows are as follows –
Cash flows are only projection and it may not be received in actual
Capital cost is required to be guessed and if actual capital cost is changed cash flows will
also be altered.
Forecasting of revenues is made based on the visitor’s average number. However, in
reality number may vary (Leyman and Vanhoucke 2016).
Therefore, forecasted cash flows are not reliable. However, for analysing forecasted
outcomes regarding any project before starting the project there is no better approach and the
investor therefore is required to depend on the forecasting of cash flows.
Question 5
Based on parts 1 – 4 it is suggested that Amazon shall take up the project as under both
capital cost rate NPV is positive, IRR is more than the cost of capital and discounted payback
9FINM FINANCE
period is lower than the project’s useful life. However, if the management’s policy of recovering
the initial investment in 2 years is targeted, Amazon shall not take up the project.
Part 3
Question (a)
Part A of the assignment is regarding the cash conversion cycle, options for raising
additional fund, valuation of bond and computation of holding period return. While I was
practicing the class case study 1, I got thorough knowledge of CCC and its computation step. It
helped me a lot for computing and analysing the CCC of Amazon. Further, it helped me in
identifying the alternatives those can be used for raising additional fund by the entity.
Question (b)
For part B, 1st I have computed the free cash flow of the intended project. After
computing the free cash flow, I have computed the IRR and discounted payback period through
using the formula in excel. After completing the computation I have analysed the project in
accordance with the computation outcome.
Question (c)
For preparing the case study 2 in better way, I will go through the case study 1 once again
and will try to solve the issues I have faced in case study 1 so that for case study 2 I do not
encounter the same issues again. It will definitely help me to prepare the case study 2 in better
way.
period is lower than the project’s useful life. However, if the management’s policy of recovering
the initial investment in 2 years is targeted, Amazon shall not take up the project.
Part 3
Question (a)
Part A of the assignment is regarding the cash conversion cycle, options for raising
additional fund, valuation of bond and computation of holding period return. While I was
practicing the class case study 1, I got thorough knowledge of CCC and its computation step. It
helped me a lot for computing and analysing the CCC of Amazon. Further, it helped me in
identifying the alternatives those can be used for raising additional fund by the entity.
Question (b)
For part B, 1st I have computed the free cash flow of the intended project. After
computing the free cash flow, I have computed the IRR and discounted payback period through
using the formula in excel. After completing the computation I have analysed the project in
accordance with the computation outcome.
Question (c)
For preparing the case study 2 in better way, I will go through the case study 1 once again
and will try to solve the issues I have faced in case study 1 so that for case study 2 I do not
encounter the same issues again. It will definitely help me to prepare the case study 2 in better
way.
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Need help grading? Try our AI Grader for instant feedback on your assignments.
10FINM FINANCE
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 27 Jan. 2020].
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 27 Jan. 2020].
Ir.aboutamazon.com. 2019. [online] Available at:
https://ir.aboutamazon.com/static-files/0f9e36b1-7e1e-4b52-be17-145dc9d8b5ec [Accessed 27
Jan. 2020].
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 27 Jan. 2020].
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 27 Jan. 2020].
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 27 Jan. 2020].
Ir.aboutamazon.com. 2019. [online] Available at:
https://ir.aboutamazon.com/static-files/0f9e36b1-7e1e-4b52-be17-145dc9d8b5ec [Accessed 27
Jan. 2020].
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 27 Jan. 2020].
11FINM FINANCE
Appendix
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