Kaplan Business School FIN203: Corporate Finance Individual Assessment

This assignment analyzes Amazon's financial performance, focusing on key aspects of corporate finance. Part A examines the cash conversion cycle, comparing Amazon and Walmart, and assessing the impact of a negative cash conversion cycle. It explores financing options, analyzes changes in Amazon's cash conversion cycle over time, and identifies significant financial risks. The assignment also includes calculations of bond market value and holding period return. Part B involves capital budgeting, analyzing the present value of free cash flow, calculating the net present value (NPV) of a project, determining the payback period, and discussing the limitations of cash flow forecasting. The analysis incorporates the internal rate of return (IRR) to evaluate project viability, with a recommendation on whether to accept the Amazon Go project. The assignment demonstrates the application of financial theories and the use of Microsoft Excel for financial calculations, providing insights into working capital management, risk assessment, and investment decision-making.

Running head: CORPORATE FINANCE
Corporate finance
Name of the Student
Name of the University
Author Note

CORPORATE FINANCE
Table of Contents
Part A:........................................................................................................................................2
Answer to requirement 1:...........................................................................................................2
Answer to requirement 2:...........................................................................................................2
Answer to requirement 3:...........................................................................................................3
Answer to requirement 4:...........................................................................................................3
Answer to requirement 5:...........................................................................................................4
Answer to requirement 6:...........................................................................................................4
Answer to requirement 7:...........................................................................................................5
Part B:.........................................................................................................................................5
Answer to requirement 1:...........................................................................................................5
Answer to requirement 2:...........................................................................................................6
Answer to requirement 3:...........................................................................................................6
Answer to requirement 4:...........................................................................................................6
Answer to requirement 5:...........................................................................................................7
Part 3:.........................................................................................................................................7
References list:...........................................................................................................................8

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Part A:
Answer to requirement 1:
Amazo
n
Walmar
t
Years 2014 2014
days of sales outstanding
(a) 23.02 5.15
days of sales inventory
(b) 48.27 45.73
days of payables outstanding
(c) 95.73 38.14
cash conversion cycle (CCC)
a + b -c -24.44 12.74
The cash conversion cycle of Amazon is -24.44 as against Walmart for which the
value is standing at 12.74. Figures of cash conversion cycle helps in determining the
efficiency of the working capital management of organization. It is desirable to have smaller
cash conversion cycle compared to longer cash conversion cycle. Working capital
management is positively impacted by the shorter cash conversion cycle as this has the
implication that receivables are collected as quickly as possible and delay in paying the
suppliers are slow. As the shorter cash conversion cycle lessens the time between payment
for the purchase of raw materials and collection of accounts receivables and thereby make the
working capital management efficient (Afrifa 2015).
Answer to requirement 2:
The negative cash conversion cycle of Amazon implies that revenue are generated
from the customers before the payments are made to the suppliers for the purchase of

CORPORATE FINANCE
inventory. Operations can be financed in an interest free manner and this negative value seem
to be sustainable. For any business, cash conversion cycle is considered an important metric
as it helps in measuring the time for which the funds are tied up in the business. For a
company waiting to invest in new products would love to see lower cash conversion cycle, as
it will be able to determine the efficiency at which the inventory is converted into sales and
then cash (Aminu and Zainudin 2015). Therefore, availability of cash would help company
investing in new products, as the operations will not be hindered.
Answer to requirement 3:
The two financing options available to Amazon for funding new project other than
cash are issuing the stocks and borrowing. By issuing stock, it is not required by the company
to make repayment of debt as no money is owed to the investors. Issuing stock comes with
disadvantages as well, as it is required by the company to give away their ownership and
have to make dividend payments. One of the main advantages of borrowing by Amazon
would be deduction in tax for interest paid and the saved money can be used for the business
growth. There is more flexibility and greater freedom when a company choose to borrow
compared to equity financing. The disadvantages of borrowing by Amazon include the
impacts created on its credit rating, as the company with considerable amount of debts are
considered risky (Afrifa and Tingbani 2018).
Answer to requirement 4:
Amazon
year 2014 2018
days of sales outstanding (a) 23.02 26.14
days of sales inventory (b) 48.27 45.05
days of payables outstanding (c) 95.73
100.1
8
cash conversion cycle (CCC) a + b -c -24.44 -

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28.99
From the above table, it can be observed that the cash conversion cycle of Amazon in
year 2018 is -28.99 as against -24.44 in year 2014 indicating that the value reduced further.
This increase in negative value of cash conversion cycle implies that the company is efficient
in converting its inventory into sales and then into cash (Turner and Coote 2018). Therefore,
it can be inferred that the efficiency of company has increased in year 2018 as against 2014.
Answer to requirement 5:
The three most significant risks faced by Amazon are inventory risk, risk of failure in
integrating, maintaining and making acquisitions, investment, and risk of significant
fluctuation in the growth rate and operating results. The operating results of the company can
be adversely affected by inventory risk attributable from the rapid change in product life
cycle, new product launches, seasonality, and change in consumer spending and demand
pattern, spoilage and other factors. There are considerable inventory level products and this
might cause inability to sell products in sufficient quantities. In addition to this, organization
might fail to develop, maintain and implement components of commercial relationship and
the amount of service can be limited, as the company requires having substantial
infrastructure capacity and complex arrangements. In addition to this, additional risk is also
imposed by the strategic alliance and commercial agreements. The growth rate of the
company might not be forecasted accurately and there might be decrease in the percentage of
growth rate and doubts about its sustainability (ir.aboutamazon 2019). All the identified risks
are considered unsystematic as such risk can occur at any point that might cause widespread
disruption.

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Answer to requirement 6:
Face Value 1000
Coupon Rate 4.5%
Yield to maturity 5.0%
Year of computation of Market
Price
2019
Year of maturity 2020
Market value at the end of 2019 995.24
The above table shows that the present value of price of bond in year 2019 and the
price is computed at $ 995.24.
Answer to requirement 7:
Market price at the beginning of June
2014
324.78
Market price at the beginning of June
2019
1893.6
3
Total Capital Appreciation 1568.8
5
Holding period return 483%
The approximate holding period return for Amazon when the shares are sold in 2019
is 483%. The financial performance of an asset or the company is provided by the holding
period return as it requires investment appreciation. Figures of holding period return of
Amazon implies that there has been significant increase or appreciation in the shares of the
company held indicating that the investment has appreciated (Atseye et al. 2015).

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Part B:
Answer to requirement 1:
Present value of total amount of free cash flow that would be generated by opening
3000 stores over the time of 10 years is reducing year on year. It can be observed that in the
first year and second year of operation, the free cash flow generated is $ 1834.82 and $
1638.23 respectively. This reduced to $ 1462.61 to $ 797.85 in the third and ninth month of
operation indicating that the total amount of present cash flow from operations through the
life of project reduced.
Answer to requirement 2:
Given the speculative nature of Amazon, the discount rate used by Amazon would be
12% and hence the computation of net present value of the project is done by taking cost of
capital at value of 12% and not 5%. The NPV of the project has been calculated at $ 1933.37
and it is observed that the value is positive and using the rule of acceptance and rejection, it
can be inferred that the project should be accepted (Dang et al. 2018). This is so because the
present value of future cash flow is more than the amount invested initially.
Answer to requirement 3:
The payback period for the project is 4.87 and the figure is indicative of the fact that
the initial amount invested in the project would be recovered in 4 years and 87 days.
Therefore, in a period of two years, it will not be possible for the company to recover the
initial investment made. The target set by the company to recover the initial amount invested
in a period of two years does not seems to be realistic (Jacob et al. 2016).

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Answer to requirement 4:
The forecasted figure of the cash flow of the Amazon Go project is that such figures
can be inaccurate and there can be wrong estimation of the cash flow. For the project to rely
on the rough and inaccurate estimates of the cash flow would be one of the major
disadvantages of the cash flow of the project. Irrespective of the valuable information of the
company at the given point of time, the forecasting of the cash flow involves some degree of
probability and a probable figure cannot be relied upon completely. The inaccuracy in the
probability will increase with increase in forecasting period (Abor 2017).
Answer to requirement 5:
The determination of the facts that would help in deciding about the acceptance and
rejection of the project comes from the figures of internal rate of return, net present value and
payback period. It can be observed from the figures that net present value of the project is
positive indicating that the project should be accepted. In addition to this, it can be also
observed that the internal rate of return is higher than the required rate of return of the cost of
capital. The internal rate of return is computed at 16% compared to 12% as the discounting
factor or the cost of capital. Therefore, from the general rule of the factors of net present
value and internal rate of return, it is recommended that the project should be accepted.
Looking at the payback period figure, it can be observed that the initial amount invested can
be recovered during the life of the project (Foley and Manova 2015). Therefore, from the
overall analysis of the figures, it is recommended that the project of Amazon Go should be
undertaken.
Part 3:
Part A of the assignment required to have theoretical knowledge and answer using
theories and its implications. I learnt about the importance and cash conversion cycle and

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importance of cash flow for the organization. Part A required me to answer about cash
conversion cycle and its importance to the working capital management. I have been able to
determine the efficacy of the working capital management of Amazon using the figures of
cash conversion cycle. Different types of risks that I studied such as systematic and
unsystematic helped me in segregating different risks faced by the organization. Part B of the
assignment was completed using the Microsoft excel and its function for determining the net
present value and payback period. I arranged all the elements in the excel sheet that is needed
for computing NPV and Internal rate of return. I computed NPV figures first and then
proceeded with computing internal rate of return and payback period.
References list:
Abor, J.Y., 2017. Evaluating Capital Investment Decisions: Capital Budgeting.
In Entrepreneurial Finance for MSMEs (pp. 293-320). Palgrave Macmillan, Cham.
Afrifa, G. and Tingbani, I., 2018. Working capital management, cash flow and SMEs’
performance. Int. J. Banking, Accounting and Finance, 9(1).
Afrifa, G.A., 2015. Working capital management practices and profitability of AIM listed
SMEs. Journal of Enterprising Culture, 23(01), pp.1-23.
Amazon.com, Inc. - IR. (2019). Annual reports, proxies and shareholder letters |
Amazon.com, Inc. - IR. [online] Available at: https://ir.aboutamazon.com/annual-reports
[Accessed 10 Sep. 2019].
Aminu, Y. and Zainudin, N., 2015. A review of anatomy of working capital management
theories and the relevant linkages to working capital components: A theoretical building
approach. European Journal of Business and Management, 7(2), pp.10-18.

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Andor, G., Mohanty, S.K. and Toth, T., 2015. Capital budgeting practices: A survey of
Central and Eastern European firms. Emerging Markets Review, 23, pp.148-172.
Atseye, F.A., Ugwu, J.I. and Takon, S.M., 2015. Determinants of working capital
management. International Journal of Economics, Commerce and Management, 3(2), pp.1-
11.
Dang, C., Li, Z.F. and Yang, C., 2018. Measuring firm size in empirical corporate
finance. Journal of Banking & Finance, 86, pp.159-176.
Foley, C.F. and Manova, K., 2015. International trade, multinational activity, and corporate
finance. economics, 7(1), pp.119-146.
Jacob, M., Johan, S., Schweizer, D. and Zhan, F., 2016. Corporate finance and the
governance implications of removing government support programs. Journal of Banking &
Finance, 63, pp.35-47.
Turner, M.J. and Coote, L.V., 2018. Incentives and monitoring: impact on the financial and
non-financial orientation of capital budgeting. Meditari Accountancy Research, 26(1),
pp.122-144.
Wasiuzzaman, S., 2015. Working capital and firm value in an emerging
market. International Journal of Managerial Finance, 11(1), pp.60-79.