Author’s Name(s)
Department Name, University Name
Finance
Professor’s Name
February 11, 2021

Table of Contents
Introduction 3
Description of the Capital Structure 4
Weighted Average Cost of Capital 7
Shares of Debt and Equity 7
Cost of Equity 8
Cost of Debt 8
Cost of Capital 9
Capital Budgeting Techniques 9
Working Capital Management 11
Recommendations and Conclusions 12
References 13
Appendixes 14
Appendix 1. Amazon.com, Inc. Consolidated Statement of Operations 14
Appendix 2. Amazon.com, Inc. Consolidated Balance Sheets 15
Appendix 3. Amazon.com, Inc. Consolidated Statement of Cash Flows 16
Appendix 4. Amazon.com, Inc. Weighted Average Cost of Capital 17
Appendix 5. Amazon.com, Inc. Valuation 18
Appendix 6. Amazon.com, Inc. Sensitivity Analysis 19

Evaluation of Investment Decisions and Working Capital Management
Introduction
Amazon.com, Inc. (Amazon) is an international company operating primarily within the internet retail industry. Amazon was employing 1,298,000 individuals as of December 31, 2020 (Yahoo Finance, 2021). The location of the company’s headquarters is Seattle, WA of the United States of America. Jeffrey P. Bezos is the current Chairman, Chief Executive Officer (CEO), and President of Amazon. Mr. Bezos founded the company in 1994 (Yahoo Finance, 2021). Amazon generated the majority of its sales revenue or 61.20 percent in its North America segment, 27.05 percent in its International segment, and 11.75 percent in the AWS segment (see Figure 1).
Figure 1. Amazon Sales Revenue by Segment

The total sales revenue of the company reached $384,064 million in the fiscal year (FY) 2020 (Amazon.com, Inc., 2020). Amazon has been actively using a mix of debt and equity for raising capital. In particular, the company’s debt ratio ranged between 0.7890 and 0.7092 between FY 2016 and FY 2020 respectively. The shares of Amazon trade on the NasdaqGS stock exchange (Nasdaq, Inc., 2021). The following sections will cover the capital structure of Amazon, its weighted average cost of capital, valuation, working capital management, as well as the recommendations and conclusions based on the preceding findings. Such an approach will utilize the combination of data and information to ensure the high accuracy of the recommendations provided. 

Description of the Capital Structure
The capital structure of an organization reflects the shares of debt and equity within its balance sheet. When considering the capital structure of Amazon, it is possible to observe that the firm has been using on debt over equity within its capital structure. In particular, the part of total liabilities in the capital structure reached 70.92 percent in FY 2020. The share of debt has been declining since the peak level of 78.90 percent in FY 2017 over the past five-year period (see Figure 2). At the same time, it is vital to note that the share of current liabilities remained prevalent in the structure of current liabilities ranging between 53.81 percent in FY 2019 and 68.34 percent in FY 2016 (see Appendix 2). The remaining long-term debt was declining from the peak value of 18.84 percent in FY 2017 to 9.91 percent in FY 2020. This decline was stemming partially from the appearance and growth of the long-term lease obligations reported by Amazon. In particular, the value of the long-term lease liabilities grew from $9,650 million in FY 2018 to $52,573 million in FY 2020. The latter figure represented 16.37 percent of the total asset value against 9.91 percent for the long-term debt in the same reporting period. Thus, it is possible to note the changes made to the business model of the company with the switching focus towards the long-term leases. In this context, it is essential to conduct further investigation into the lease agreements and their possible connections with the current owners and managers of Amazon.
Figure 2. Amazon Capital Structure

The equity component of Amazon’s capital structure has been increasing since its lowest level of 20.45 percent in FY 2015 (see Appendix 2). The two main components of the company’s equity were retained earnings and additional paid-in capital. The value of retained earnings grew from $2,545 million in FY 2015 to the peak level of $52,551 million in FY 2020. The retained earnings represent the portion of net income retained by the company instead of its use for share repurchases and dividend payouts. It is vital to note that Amazon does not pay dividends to its shareholders as a value distribution method. The additional paid-in capital account value grew from $13,394 million in FY 2015 to $42,865 in FY 2020. Companies create additional paid-in capital through the issues of new shares since the value represents the variance between implied par value and share capital (CFI Education Inc., 2021). Therefore, it is possible to note that Amazon has been relying heavier on the issue of shares versus the long-term debt issues for financing its growth and operations. Furthermore, the rising share and value of the long-term lease liabilities have demonstrated an additional source of long-term debt via the respective lease agreements.  The firm’s capital structure used for determining the cost of capital takes into account the market value of equity, rather than the book value of equity. Thus, the calculation of Amazon’s value of equity includes multiplication of the company’s market share price by the number of outstanding shares. Amazon stated that the company did not have any preferred shares outstanding as of December 31, 2020 or any of the preceding years. Therefore, the company’s capital structure includes solely only book value of debt and common equity. 

Table 1. Capital Structure of Amazon, FY2016 – FY2020
Item / Year Unit 31-Dec-16 31-Dec-17 31-Dec-18 31-Dec-19 31-Dec-20
Number of shares outstanding #m 474 480 487 494 500
Market share price $ 749.87 1169.47 1501.97 1847.84 3256.93
Market value of equity $m $355,438 $561,346 $731,459 $912,833 $1,628,465
Book value of debt $m $7,694 $24,743 $23,495 $23,414 $31,816
Weight of equity % 97.88% 95.78% 96.89% 97.50% 98.08%
Weight of debt % 2.12% 4.22% 3.11% 2.50% 1.92%

The capital structure analysis shows that the share of equity was prevalent in the capital structure of Amazon between FY2016 and FY2020. The share of the company’s equity in the capital structure of Amazon peaked at 98.08 percent versus the lowest share of debt at 1.92 percent. Such a capital structure entails that the market value of the firm’s equity will play the determining role in the total cost of the firm’s capital. 

Weighted Average Cost of Capital
The weighted average cost of capital (WACC) is an essential indicator reflecting the average rate at which the company is able to raise funds. The two main sources of capital are debt and equity. Thus, the main components of the WACC are the shares of debt and equity, as well as their respective costs (Vernimmen, Quiry, Dallocchio, Fur, & Salvi, 2017).
Shares of Debt and Equity
The first step in determining the WACC requires calculating the market cost of equity (see Appendix 4). This step includes multiplication of the market share price by the number of shares outstanding:
(1) Market value of equity = 500.00 million $3,256.93 million = $1,628,465.
The second step requires determining the cost of debt by using its book value reported in the most recent reporting period FY 2020. The book value of debt for Amazon reached $31,816 million as of the end of FY 2020. Given the values of debt and equity, it is possible to determine their respective shares:
(2) Share of equity = $1,628,465 million / ($31,816 million + $1,628,465 million) = 98.08%.
(3) Share of debt = $31,816 million / ($31,816 million + $1,628,465 million) = 1.92%.
Given the prevalence of the market equity value over the book value of debt, the former will have a larger impact on the WACC against the latter.
Cost of Equity
The third step requires determining the cost of equity. The calculation of the cost of equity is possible using the capital asset pricing model (CAPM). The CAPM uses the firm’s beta, market risk premium, as well as the risk-free rate (Berk & DeMarzo, 2017). The beta of Amazon reached 1.14 (Yahoo Finance, 2021). The risk-free rate reached 0.04 percent reflecting the 3-Months U.S. Treasury bill rate (U.S. Department of the Treasury, 2021). The total equity risk premium for the U.S. reached 4.72 percent as of January 2021 (Damodaran, 2021). Given these input data, it is possible to calculate the cost of equity for Amazon:
(4) Cost of equity (CAPM) = 0.04% + 1.14 * 4.72% = 5.42%.
Cost of Debt
The fourth step entails determining the after-tax cost of debt. This calculation implies using the bonds issued by the company in FY2020 (see Table 2).
Table 2. Amazon Cost of Debt (CUS: 023135AW6)
Current price $ $98.50
Face value $ $100.00
Callable $ Yes
Current date date 26-Jun-20
Next call date date 5-Dec-23
Coupon rate $ 6.91%
Yield to Maturity (YTM) $ 7.03%

Next, it is necessary to amend the cost of debt using the corporate tax rate. In this regard, the effective corporate tax rate of Amazon reached 19.26 percent in FY 2020 based on the pretax income and corporate tax expense of the corporation:
(5) After-tax cost of debt = 7.03% * (1 – 19.26%) = 5.68%.
Cost of Capital
The four main components, including the costs and shares of debt and equity, allow determining the WACC:
(1) WACC = 98.08% * 5.42% + 1.92% * 5.68% = 5.43%.
Therefore, the WACC for Amazon reached 5.43 percent as of February 2021.
Capital Budgeting Techniques
The capital budgeting techniques used for calculating the fair value of Amazon were the discounted cash flow (DCF) used for determining the Net Present Value (NPV) of the projected cash flows and the Internal Rate of Return (IRR) for the projects. The methods utilize the WACC for the discounting purposes accordingly. Both methods implied utilizing projections based on the historical data and the terminal year with a terminal growth rate of 2.0 percent. The sales revenue growth rate used for capital budgeting reached 29.95 percent reflecting the average sales growth rate in the five most recent reporting periods. The net income margin reached 3.92 percent also reflecting the mean value. The capital expenditure (CAPEX) reached 6.93 percent of the total sales revenue.
Table 3. Discounted Cash Flow Analysis
Item / Year 2021* 2022* 2023* 2024* 2025* 2026*
Net sales $501,698 $651,966 $847,243 $1,101,008 $1,430,782 $1,459,398
Net earnings $19,675 $25,568 $33,226 $43,178 $56,110 $60,286
Net Working Capital (NWC) $10,344 $13,443 $17,469 $22,701 $29,501 $30,091
Change in the NWC $3,996 $3,098 $4,026 $5,232 $6,800 $590
Long-term assets $131,079 $170,339 $221,359 $287,661 $373,821 $381,297
Depreciation and amortization $33,683 $43,771 $56,882 $73,919 $96,059 $97,980
CAPEX $34,751 $45,160 $58,686 $76,263 $99,106 $101,088
Sales growth 29.95% 29.95% 29.95% 29.95% 29.95% 2.00%
Net income margin 3.92% 3.92% 3.92% 3.92% 3.92% 4.13%
NWC, from sales revenue 2.06% 2.06% 2.06% 2.06% 2.06% 2.06%
Long-term assets 26.13% 26.13% 26.13% 26.13% 26.13% 26.13%
Depreciation and amortization 25.70% 25.70% 25.70% 25.70% 25.70% 25.70%
CAPEX, from revenue 6.93% 6.93% 6.93% 6.93% 6.93% 6.93%
Free cash flow $14,610 $21,081 $27,395 $35,601 $46,264 $56,588
Discount factor 0.95 0.90 0.85 0.81 0.77 1.00
Discounted FCF $13,858 $18,967 $23,380 $28,819 $35,523 $56,588
Net Present Value of Cash Flows $120,547
Present value of terminal value $1,684,878
Long-term debt $31,816
Fair value $1,653,062
IRR 25.3%
Shares outstanding 500.00
Value of equity per share $3,306.12

In case the company decides to acquire another large tech company for $80.0 billion, the company would be able to provide the IRR of 25.3 percent. The DCF capital budgeting methods produced the fair value of $3,306.12 per share of Amazon respectively (see Appendix 5). It is possible to note that both values exceed the market share price of Amazon of December 31, 2020, that reached $3,256.93. The sensitivity analysis shows that the discount rate of 5.0 percent and below would guarantee the fair value of Amazon exceeding its market share price as of December 2020 (see Appendix 6).
Working Capital Management
Working capital management is crucial for the company in terms of its short-term liquidity and adequate short-term debt management. In particular, the cash element of the working capital management determines the company’s ability to operate within the framework of seasonality and its ability to cover the short-term obligations. Similarly, managing receivables and payables provides adequate timing for cash inflows and cash outflows.
Table 4. Working Capital of Amazon
Item / Year Unit 2016 2017 2018 2019 2020
Cash and cash equivalents $m $19,334 $20,522 $31,750 $36,092 $42,122
Marketable securities $m $6,647 $10,464 $9,500 $18,929 $42,274
Inventories $m $11,461 $16,047 $17,174 $20,497 $23,795
Accounts receivable, net and other $m $8,339 $13,164 $16,677 $20,816 $24,542
Total current assets $m $45,781 $60,197 $75,101 $96,334 $132,733
Accounts payable $m $25,309 $34,616 $38,192 $47,183 $72,539
Accrued expenses and other $m $13,739 $18,170 $23,663 $32,439 $44,138
Unearned revenue $m $4,768 $5,097 $6,536 $8,190 $9,708
Total current liabilities $m $43,816 $57,883 $68,391 $87,812 $126,385
Current ratio # 1.04 1.04 1.10 1.10 1.05
Working capital $m $1,965 $2,314 $6,710 $8,522 $6,348

While an organization might benefit from the longer average payment period and shorter average collection period, it also needs to take into account the interests of its counterparties. In this context, large corporations, similar to Amazon, are able to have a greater impact on the working capital management with its agent because of its sheer size.
Figure 3. Amazon Working Capital Management

Thus, it was possible to observe strong capital management at Amazon based on its liquidity position. The current ratio of the company remained slightly above 1.0, suggesting that the company was maintaining sufficient liquidity to cover its short-term liabilities without excess cash reserves.
Recommendations and Conclusions
The analysis has shown the strong position of Amazon based on its historical financial performance, current market position, and future growth prospects. The company’s valuation has indicated that its fair value is above the current market value, implying the “strong buy” recommendation. In particular, the fair value per share of the company based on the NPV of the future cash flows reached $3,306.12 against $3,256.93 of the market share price as of December 31, 2020. Therefore, the positive NPV and the IRR exceeding the discount rate imply that investing in the company is a commercially viable project. The higher fair value versus the market share price implies an undervalued position of the company. Therefore, the “strong buy” recommendation entails that the company’s share price will continue growing over time. Furthermore, the company’s strong and consistent working capital management, along with the balanced approach towards the capital structure implies further strengthening of the corporation on a global scale in general and within its core markets, sectors, and industries in particular. The company is able to maintain sufficient working capital to meet its short-term liquidity needs and avoid additional costs associated with debt funding. Amazon was also showing strong financial performance in terms of the company’s sales revenue and net income despite the general economic downturn amid the global pandemic in FY2020. The outlook remains positive for the company based on the historical financial performance and current position of the company. Thus, the company may undergo its investment projects considering its strong working capital management approaches and healthy capital structure.

References
Amazon.com, Inc. (2020). Annual Report. Amazon.com, Inc. Retrieved February 13, 2021, from https://d18rn0p25nwr6d.cloudfront.net/CIK-0001018724/336d8745-ea82-40a5-9acc-1a89df23d0f3.pdf
Berk, J., & DeMarzo, P. M. (2017). Corporate Finance. London, United Kingdom: Pearson.
CFI Education Inc. (2021). Additional Paid In Capital. Retrieved February 14, 2021, from CFI: https://corporatefinanceinstitute.com/resources/knowledge/accounting/additional-paid-in-capital/
Damodaran, A. (2021, January 8). Country Default Spreads and Risk Premiums. Retrieved February 14, 2021, from Stern: http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/ctryprem.html
Nasdaq, Inc. (2021). Amazon.com, Inc. Common Stock (AMZN). Retrieved February 13, 2021, from Nasdaq: https://www.nasdaq.com/market-activity/stocks/amzn
U.S. Department of the Treasury. (2021, February 14). Daily Treasury Yield Curve Rates. Retrieved February 14, 2021, from Treasury: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield
Vernimmen, P., Quiry, P., Dallocchio, M., Fur, Y. L., & Salvi, A. (2017). Corporate Finance: Theory and Practice. Hoboken, New Jersey, United States: John Wiley & Sons.
Yahoo Finance. (2021, February). Amazon.com, Inc. (AMZN). Retrieved February 13, 2021, from Yahoo Finance: https://finance.yahoo.com/quote/AMZN/profile?p=AMZN

Appendixes
Appendix 1. Amazon.com, Inc. Consolidated Statement of Operations
Ended on 31-Dec-20 31-Dec-19 31-Dec-18 31-Dec-17 31-Dec-16 31-Dec-15
Total net sales $ 386,064 $ 280,522 $ 232,887 $ 177,866 $ 135,987 $ 107,006
Operating expenses:
Cost of sales 233,307 165,536 139,156 111,934 88,265 71,651
Fulfillment 58,517 40,232 34,027 25,249 17,619 13,410
Technology and content 42,740 35,931 28,837 22,620 7,233 5,254
Marketing 22,008 18,878 13,814 10,069 16,085 12,540
General and administrative 6,668 5,203 4,336 3,674 2,432 1,747
Other operating expense (income), net (75) 201 296 214 167 171
Total operating expenses 363,165 265,981 220,466 173,760 131,801 104,773
Operating income 22,899 14,541 12,421 4,106 4,186 2,233
Interest income 555 832 440 202 100 50
Interest expense (1,647) (1,600) (1,417) (848) (484) (459)
Other income (expense), net 2,371 203 (183) 346 90 (256)
Total non-operating income (expense) 1,279 (565) (1,160) (300) (294) (665)
Income before income taxes 24,178 13,976 11,261 3,806 3,892 1,568
Provision for income taxes (2,863) (2,374) (1,197) (769) (1,425) (950)
Equity-method investment activity, net of tax 16 (14) 9 (4) (96) (22)
Net income $ 21,331 $ 11,588 $ 10,073 $ 3,033 $ 2,371 $ 596
Basic earnings per share $ 42.64 $ 23.46 $ 20.68 $ 6.32 $ 5.01 $ 1.28
Diluted earnings per share $ 41.83 $ 23.01 $ 20.14 $ 6.15 $ 4.90 $ 1.25

Appendix 2. Amazon.com, Inc. Consolidated Balance Sheets
Ended on 31-Dec-20 31-Dec-19 31-Dec-18 31-Dec-17 31-Dec-16 31-Dec-15
Current assets:
Cash and cash equivalents $ 42,122 $ 36,092 $ 31,750 $ 20,522 $ 19,334 $ 15,890
Marketable securities 42,274 18,929 9,500 10,464 6,647 3,918
Inventories 23,795 20,497 17,174 16,047 11,461 10,243
Accounts receivable, net and other 24,542 20,816 16,677 13,164 8,339 6,423
Total current assets 132,733 96,334 75,101 60,197 45,781 36,474
Property and equipment, net 113,114 72,705 61,797 48,866 29,114 21,838
Operating leases 37,553 25,141 0 0 0
Goodwill 15,017 14,754 14,548 13,350 3,784 3,759
Other assets 22,778 16,314 11,202 8,897 4,723 3,373
Total assets 321,195 225,248 162,648 131,310 83,402 65,444
Current liabilities:
Accounts payable 72,539 47,183 38,192 34,616 25,309 20,397
Accrued expenses and other 44,138 32,439 23,663 18,170 13,739 10,384
Unearned revenue 9,708 8,190 6,536 5,097 4,768 3,118
Total current liabilities 126,385 87,812 68,391 57,883 43,816 33,899
Long-term lease liabilities 52,573 39,791 9,650 0 0 0
Long-term debt 31,816 23,414 23,495 24,743 7,694 8,235
Other long-term liabilities 17,017 12,171 17,563 20,975 12,607 $ 9,926
Commitments and contingencies (Note 7)
Stockholders’ equity:
Common stock, $0.01 par value: Authorized shares – 5,000 Issued shares – 507 and 514 Outstanding shares – 484 and 491 5 5 5 5 5 5
Treasury stock, at cost (1,837) (1,837) (1,837) (1,837) (1,837) (1,837)
Additional paid-in capital 42,865 33,658 26,791 21,389 17,186 13,394
Accumulated other comprehensive income (loss) (180) (986) (1,035) (484) (985) (723)
Retained earnings 52,551 31,220 19,625 8,636 4,916 2,545
Total stockholders’ equity 93,404 62,060 43,549 27,709 19,285 13,384
Total liabilities and stockholders’ equity $ 321,195 $ 225,248 $ 162,648 $ 131,310 $ 83,402 $ 65,444

Appendix 3. Amazon.com, Inc. Consolidated Statement of Cash Flows

31-Dec-20   31-Dec-19   31-Dec-18   31-Dec-17   31-Dec-16   31-Dec-15

Statement of Cash Flows [Abstract]
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, BEGINNING OF PERIOD $ 36,410 $ 32,173 $ 21,856 $ 19,934 $ 15,890 $ 14,557
OPERATING ACTIVITIES:
Net income 21,331 11,588 10,073 3,033 2,371 596
Adjustments to reconcile net income to net cash from operating activities:
Depreciation and amortization of property and equipment
and capitalized content costs, operating lease assets, and other 25,251 21,789 15,341 11,478 8,116 6,281
Stock-based compensation 9,208 6,864 5,418 4,215 2,975 2,119
Other operating expense (income), net (71) 164 274 202 160 155
Other expense (income), net (2,582) (249) 219 (292) (20) 250
Deferred income taxes (554) 796 441 (29) (246) 81
Changes in operating assets and liabilities:
Inventories (2,849) (3,278) (1,314) (3,583) (1,426) (2,187)
Accounts receivable, net and other (8,169) (7,681) (4,615) (4,780) (3,367) (1,755)
Accounts payable 17,480 8,193 3,263 7,100 5,030 4,294
Accrued expenses and other 5,754 (1,383) 472 283 1,724 913
Unearned revenue 1,265 1,711 1,151 738 1,955 1,292
Net cash provided by (used in) operating activities 66,064 38,514 30,723 18,365 17,272 12,039
INVESTING ACTIVITIES:
Purchases of property and equipment (40,140) (16,861) (13,427) (11,955) (7,804) (5,387)
Proceeds from property and equipment sales and incentives 5,096 4,172 2,104 1,897 1,067 798
Acquisitions, net of cash acquired, and other (2,325) (2,461) (2,186) (13,972) (116) (795)
Sales and maturities of marketable securities 50,237 22,681 8,240 9,677 4,733 3,025
Purchases of marketable securities (72,479) (31,812) (7,100) (12,731) (7,756) (4,091)
Net cash provided by (used in) investing activities (59,611) (24,281) (12,369) (27,084) (9,876) (6,450)
FINANCING ACTIVITIES:
Proceeds from short-term debt, and other 6,796 2,273 768 16,228 621 353
Repayments of short-term debt, and other (6,177) (2,684) (668) (1,301) (354) (1,652)
Proceeds from long-term debt 10,525
Repayments of long-term debt (1,553)
Principal repayments of finance leases (10,642) (9,628) (7,449) (4,799) (3,860) (2,462)
Principal repayments of financing obligations (53) (27) (337) (200) (147) (121)
Net cash provided by (used in) financing activities (1,104) (10,066) (7,686) 9,928 (3,740) (3,882)
Foreign currency effect on cash, cash equivalents, and restricted cash 618 70 (351) 713 (212) (374)
Net increase (decrease) in cash, cash equivalents, and restricted cash 5,967 4,237 10,317 1,922 3,444 1,333
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH, END OF PERIOD $ 42,377 36,410 32,173 21,856 19,334 15,890

Appendix 4. Amazon.com, Inc. Weighted Average Cost of Capital
Item Unit Value
Shares outstanding #m 500.00
Share price, December 2020 $ $3,256.93
Market capitalization (equity) $m $1,628,465
Current portion of LT debt $m $0
LT debt, FY 2020 $m $31,816
Total book value of debt $m $31,816
Total value of debt $m $31,816
Share of equity % 98.08%
Share of debt % 1.92%
Risk-free rate % 0.04%
Beta # 1.14
Market risk premium % 4.72%
Cost of equity % 5.42%
LT debt, FY 2019 $m $23,414
Interest expense, FY 2020 $m -$1,647
Cost of debt % 7.03%
Effective corporate tax rate % 19.26%
After-tax cost of debt % 5.68%
WACC % 5.43%

Appendix 5. Amazon.com, Inc. Valuation

Appendix 6. Amazon.com, Inc. Sensitivity Analysis
Cost of equity Value of equity per share
5.43% $3,306.12
1.00% -$12,744.86
2.00% $163,643.60
3.00% $10,916.49
4.00% $5,616.93
5.00% $3,767.73
6.00% $2,826.80
7.00% $2,256.91
8.00% $1,874.73
9.00% $1,600.64
10.00% $1,394.46
11.00% $1,233.73