Kaplan Business School FINM4000: Finance Individual Assignment

This assignment analyzes Amazon's financial performance based on its annual reports and working capital management. It examines Amazon's cash conversion cycle, free cash flow, and the advantages and disadvantages of debt and equity financing. The solution includes calculations for cash flow, net present value (NPV), internal rate of return (IRR), and discounted payback period. It also assesses the financial risks faced by the company, including competition and data security. Furthermore, the assignment provides calculations for bond valuation and holding period return, concluding with a discussion on the project's feasibility based on discounted payback period. The analysis utilizes financial data to evaluate Amazon's performance and investment potential, offering insights into its financial strategies and risk management.

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CORPORATE
FINANCE

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Part A:
Part 1:
As per the source 2, the cash conversion cycle of Walmart is in single digits whereas in the
case of Amazon, the same was -30.6 days. The company has a free cash flow available in its
hands. Hence, in the case of the business, the free cash flow would remain positive when the
customers pay their dues quickly. The company is able to repay its suppliers and manage its
inventory efficiently. If the company has a negative cash conversion cycle, then it merely
means that the company requires a lesser amount of time in order to sell its inventory or to
produce the same from the raw materials. The company receives cash from the customers due
in time also that it is able to repay its suppliers for the raw materials that it has purchased.
The working capital like this is good since this means no blockage of capital in the business
(Soledea, 2020).
Part 2:
A negative cash conversion cycle would mean that the company has cash available cash in its
hand to use. All of this cash could be used for the purposes of financing the business
operations to ensure a continued growth for the company. Then the company does not need to
borrow funds from outside or issue stock. The company can keep on spending cash so as to
invest in new products and attack the new sectors and also upgrade new offerings. The
company would be able to experiment, launch new business, launch new products when it has
funds available with it which is possible through the working capital only.
Part 3:
The company operations could be financed either through debt or through equity.
The following are the advantages of using debt:
 Through debt, the company is able to retain control over its finances. The lending
company does not intervene in the day to day business operations of the borrower
company (Small business chron, 2020).
 The company pays interest on the amount borrowed which is liable for tax deduction.
 Through debt, the company knows the exact and the precise amount of principal and
the interest which is payable at the end of each month. This helps in making the
budget much easy and also helps in making the financial plans.

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The following are the disadvantages of financing through debt:
 The company should have a credit rating before borrowing money from outside.
 The company will be required to maintain a good financial discipline so that the
repayments of the capital and interest is made on time. When the company has only
debt invested into his business, then it is assumed to be at a more risk since it is prone
to fluctuating interest rates and this also, limits the access to equity financing by the
company at a certain point of time.
 When taking loan, the company will have to provide a collateral to the lender. This
could lead to putting some business assets of the company at some risk which could
affect the company operations (the hart ford, 2020).
The following are the advantages of equity financing:
 The equity raised is committed for some business operations and also for the intended
projects. The investors know that their hard money is doing well through the changes
in the share price in the stock market.
 The company shall not have to keep incurring costs of the servicing banks or the debt
finance which allows the company to use the capital for the business activities.
 The investors that invest into the business help the business in delivering value and
helps in the exploring and executing and undertaking new business expansions and
growth ideas.
 The investors are somehow prepared to provide the follow up funding of the business
as it grows (Ni business info, 2020).
The following are the disadvantages of equity financing:
 The process of raising capital is demanding, is very costly and also time consuming
and this may take up more time of the management due to which the management’s
focus may go hay wire.
 The investors that invest into the business does background check of the companies in
which they invest their money into. They assess the past results, information about the
company and invest their money.
 The management losses a certain power when they make they decide to raise funds
through equity.
 The company will have to provide some regular information to the investor in return
for their money invested into the business.

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 There are some legal and regulatory issues which have to be complied with when
raising finance (E finance management, 2020).
Part 4:
The following table shows the cash conversion cycle calculations for years 2018 and 2017:
Amazon
Particulars 2018 2017
(In millions in $)
Days inventory outstanding: 0.11936604 0.12287598
Average inventory
16,610.5
0
13,754.0
0
Cost of goods sold
1,39,156.0
0
1,11,934.0
0
Days sales outstanding: 0.06406755 0.0906741
Average accounts receivable
14,920.5
0
10,751.5
0
Total credit sales
2,32,887.0
0
1,18,573.0
0
Days payable outstanding: 0.26160568 0.26768006
Average accounts payable
36,404.0
0
29,962.5
0
Cost of goods sold
1,39,156.0
0
1,11,934.0
0
Cash conversion cycle
-
0.07817209
-
0.05412998

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The cash conversion cycle for the year 2013 were -30.6 days but for year ended 2018, the
same were -0.078 days which is good (Seeking alpha, 2020).
This merely mean that the company is able to generate revenue from the customers before it
needs to repay its suppliers for the inventory that it has purchased. But it is also true that the
cash cycle of this company has becomes less negative when compared over the period of 5
years but this trend is majorly due to the days sales outstanding increase and not days
payable. The company needs to keep growing since that drives the negative cash cycle even if
the business is not doing well, which is not the current case (Wall Street mojo, 2020).
Part 5:
The following are the risks that the company is exposed to:
 The company faces an increased amount of competition from its competitors across
the different industries. This includes the physical, e commerce and the omnichannel
etc. some of the competitors of the company have a great deal of resources and have
longer histories which means more customers and a better brand recognition which in
turn means more profitability due to loyal customers and recognition in the market.
This may help them in securing better spots for themselves in the eyes of the vendors
and they adopt an aggressive pricing. The competition may become even more with
the development of the new business models and entry from new and well backed up
competitors.
 The international operations of the company are major to the revenue and the profits
that are being earned. The company aims at expanding further but in some of the
international market regions, it does not have much operating expense due to which
the other companies succeed. The establishment, development and the maintaining of
the international operations would help in promoting the brand internationally.
 The company could be harmed by the data loss or security reasons. The company
transmits a huge amount of data which includes some personal information, the
failure to prevent which would lead to security breaches and which would expose he
customers to a great deal of risk. This will impact the profitability of the business
which would result in litigation and potential liability (Amazon, 2018).
All off the above are systematic risks.

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Part 6:
The following are the relevant calculations:
Particulars Amounts in $
Coupon to be received in 2020 45.00
Maturity of the bond in 2020 1,000.00
Total amount to be received in 2020
on maturity 1,045.00
YTM 5%
Current Price of the bond (ex
Coupon) 995.24
Current Price of the bond (cum
Coupon) 1,040.24
It could be said that the current price of the bond is $995.24 and he current price including
coupon is $1040.24.
Part 7:
The following are the relevant calculations:
Holding period
return
Income + (ending
price-beginning
price)/beginning
price)*100
Income 0
Jun-19 Ending price 1893.63
Jun-14 Beginning price 324.78
483.05

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%
The holding period return comes out to be 483% which is very good and an investment into
the company should have been made.
Part 2:
Part 1:
The following table shows the relevant calculations:
(Amounts in billions)
Particulars 0 1 2 3 4 5 6 7 8 9 10
Cash
inflow:
Revenue 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
Less: annual
costs 0.45 0.45 0.45 0.45 0.45 0.23 0.23 0.23 0.23 0.23
Les: annual
fixed costs 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
Less:
depreciation 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60
Net revenue 1.95 1.95 1.95 1.95 1.95 2.18 2.18 2.18 2.18 2.18
Less: taxes
@30% 0.59 0.59 0.59 0.59 0.59 0.65 0.65 0.65 0.65 0.65
Earnings
after taxes 1.37 1.37 1.37 1.37 1.37 1.52 1.52 1.52 1.52 1.52
Salvage

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value 1.00
Cash
outflow:
Initial
outlay 7
Total cash
outflow
-
7 - - - - - - - - - -
Total net
flow
-
7 1.37 1.37 1.37 1.37 1.37 1.52 1.52 1.52 1.52 2.52
Free cash
flow 7.44
Operating
cash flow-
capital
expenditure
The free cash flow being generated by the company comes out to be $7.44 billion.
Part 2:
(Amounts in billions)
Particulars 0 1 2 3 4 5 6 7 8 9 10
Cash
inflow:
Revenue

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4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
Less:
annual costs 0.45 0.45 0.45 0.45 0.45 0.23 0.23 0.23 0.23 0.23
Les: annual
fixed costs 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
Less:
depreciation 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60
Net revenue 1.95 1.95 1.95 1.95 1.95 2.18 2.18 2.18 2.18 2.18
Less: taxes
@30% 0.59 0.59 0.59 0.59 0.59 0.65 0.65 0.65 0.65 0.65
Earnings
after taxes 1.37 1.37 1.37 1.37 1.37 1.52 1.52 1.52 1.52 1.52
Salvage
value 1.00
Cash
outflow:
Initial
outlay 7
Total cash
outflow
-
7 - - - - - - - - - -
Total net
flow
-
7 1.37 1.37 1.37 1.37 1.37 1.52 1.52 1.52 1.52 2.52
IRR
At 12% $

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1.36
At 5%
$
4.69
The NPV comes out to be $1.36 billion at 12% discount rate and $4.69 billion at 5% discount
rate. Keeping in mind the speculative nature, the discount arte of 5% should be considered.
Part 3:
(Amounts in billions)
Partic
ulars 0 1 2 3 4 5 6 7 8 9 10
Cash
inflo
w:
Reven
ue
4.5
0 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50 4.50
Less:
annua
l costs
0.4
5 0.45 0.45 0.45 0.45 0.23 0.23 0.23 0.23 0.23
Les:
annua
l fixed
costs
1.5
0 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50 1.50
Less:
depre
ciatio
n
0.6
0 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60 0.60
Net

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reven
ue
1.9
5 1.95 1.95 1.95 1.95 2.18 2.18 2.18 2.18 2.18
Less:
taxes
@30
%
0.5
9 0.59 0.59 0.59 0.59 0.65 0.65 0.65 0.65 0.65
Earni
ngs
after
taxes
1.3
7 1.37 1.37 1.37 1.37 1.52 1.52 1.52 1.52 1.52
Salva
ge
value 1.00
Cash
outflo
w:
Initial
outlay 7
Total
cash
outflo
w
-
7 - - - - - - - - - -
Total
net
flow
-
7
1.3
7 1.37 1.37 1.37 1.37 1.52 1.52 1.52 1.52 2.52
Disco
unted

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payba
ck
perio
d
At
12% 1
0.8
9 0.80 0.71 0.64 0.57 0.51 0.45 0.40 0.36 0.32
-
7
1.2
187
5
1.088
1696
0.9715
80038
0.867
4822
0.7745
37658
0.771
3459
0.688
70168
0.614
91221
0.549
0288
0.812
1775
Disco
unted
payba
ck
perio
d
-
5.7
8 -4.69 -3.72 -2.85 -2.08 -1.31 -0.62 -0.00
8
years
The discounted payback period comes out to be 8 years. But the company requires the same
to be 2 years. Keeping in mind the fat of 2 years, the project should not be accepted. Also, the
target is not realistic since the payback period of 2 years is too less.
Part 4:
The cash flows estimated in the article are all predictions ad there is no certainty with regard
to the truthfulness of these figures. These are based on some or the other assumptions. The
future is uncertain and the company may or may not earn these figures. But since projections
have to be made, the figures in the article can be relied upon.
Part 5:
Based upon the above facts, the project should be accepted since the net present value is
positive, there is a positive free cash flow. Also, the payback period is 8 years which is still
less than the project life.

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But if the company is strict about the fact of discounted payback period of 2 years, then the
project should not be accepted.
Part 3:
Sub part a:
We were taught about the company financing. The part A deals with the cash conversion
cycle. This is every important lesson since it helps in the appropriate calculations which
shows the positivity of the working capital management of the company. The management of
this capital is of an utmost importance for the company since forms the backbone of the
business operations of the company. The lecture notes about the working capital decisions
have taught me the criticality of the cash conversion cycle.
Sub part b:
I went through each capital budgeting techniques that helped me in the assessment of each
method through which a capital budgeting decision could be undertaken. Now, I know the
calculations that are required to be made when a project is to be assessed.
Sub part c:
I would undertake analysis of more companies such as Walmart and also, would study more
techniques through which a better working capital decision could be taken. Further, I would
also undertake more techniques through which the capital decisions would be undertaken. I
would like to grasp more information about the techniques of working capital management
and through which the same could be fully utilised and efficiently managed.

CORPORATE FINANCE 14
References:
eFinanceManagement.com. (2020). Benefits and Disadvantages of Equity Finance. [online]
Available at: https://efinancemanagement.com/sources-of-finance/benefits-and-
disadvantages-of-equity-finance [Accessed 4 Feb. 2020].
Ir.aboutamazon.com. (2020). Annual report 2018. [online] Available at:
https://ir.aboutamazon.com/static-files/0f9e36b1-7e1e-4b52-be17-145dc9d8b5ec [Accessed 4
Feb. 2020].
nibusinessinfo.co.uk. (2020). Advantages and disadvantages of equity finance. [online]
Available at: https://www.nibusinessinfo.co.uk/content/advantages-and-disadvantages-
equity-finance [Accessed 4 Feb. 2020].
seekingalpha.com. (2020). Negative ccc. [online] Available at:
https://seekingalpha.com/article/3528986-understanding-amazons-cash-conversion-cycle
[Accessed 4 Feb. 2020].
Smallbusiness.chron.com. (2020). The Advantages and Disadvantages of Debt and Equity
Financing. [online] Available at: https://smallbusiness.chron.com/advantages-disadvantages-
debt-equity-financing-55504.html [Accessed 4 Feb. 2020].
soleadea.org. (2020). Cash Conversion Cycle EXPLAINED in 60 SECONDS. [online]
Available at: https://soleadea.org/cfa/cash-conversion-cycle [Accessed 4 Feb. 2020].
Thehartford.com. (2020). Advantages vs. Disadvantages of Debt Financing | The Hartford.
[online] Available at: https://www.thehartford.com/business-insurance/strategy/business-
financing/debt-financing [Accessed 4 Feb. 2020].
Wallstreet Mojo. (2020). Cash Conversion Cycle (Meaning, Examples) | Can it be Negative?.
[online] Available at: https://www.wallstreetmojo.com/cash-conversion-cycle/ [Accessed 4
Feb. 2020].