Analysis Of The Future Prospects Of Inc.

1170 Words Nov 23rd, 2015 5 Pages
With the use of five firm valuation models, this analysis will assess the future prospects of Inc. (NASDAQ: AMZN) as an equity investment, an attempt to assign a true fair market valuation on the firm. This analysis will also detail the methodology of each model, including its purpose and potential shortcomings. We will also analyze the necessary components of each model, as well as test the sensitivity of each. Finally, we will show how we arrive at a fair market value of $531 per share (20.5% below AMZN’s current market price of $668.45), and set a 1-year price target of $689, representing an upside of 3.1% from current prices.
Required Rate of Return Before we dive into valuation, it is imperative that we assess a risk appropriate required rate of return, before clouding that with rate with results from the models. This analysis will use three rates of return to evaluate the value at varying levels of confidence. Our aggressive rate of 9.76%, is constructed using a simple capital asset pricing (CAPM) model where the risk free rate reflects current 10-year U.S. Treasury rates (2.27%) , 5-year regression tested beta against the S&P500 (1.2011) , and an equity risk premium (ERP) (6.63%). For a full breakdown including capital structure and cost of debt, see Exhibit A. Since Amazon is a riskier investment than many of its peers, a more conservative WACC was also calculated using the Fama-French (FFM) model to calculate a cost of equity. The model includes the…

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