Question

You have estimated that Amazon Corporation's free cash flows in the current year will be $235 million with future free cash flows growing at 2% per year. The company has nonoperating assets of $114 million and nonoperating liabilities of $344 million. The weighted average cost of capital is 9% and there are 51 million shares of common stock outstanding. What would be the implied value of the company's common stock? Present your answer to two decimal places, e.g., $23.45.

Answer 1

To calculate the implied value of Amazon Corporation's common stock, you use the Gordon Growth Model to determine the present value of future free cash flows, adjust for non-operating items, and divide by the number of shares, resulting in an implied stock value of $53.22 per share.

Step-by-step explanation:

To determine the implied value of Amazon Corporation's common stock, we first need to calculate the enterprise value by estimating the present value of future free cash flows and adjusting for non-operating assets and liabilities. The given free cash flows for the current year are $235 million, and they are expected to grow at a rate of 2% per year indefinitely. Using the weighted average cost of capital (WACC) of 9% as the discount rate, we perform a calculation known as the Gordon Growth Model:

Enterprise Value = Free Cash Flow / (WACC - Growth rate) = $235 million / (0.09 - 0.02) = $2,944.44 million.

Then, we adjust for nonoperating assets and liabilities:

Adjusted Enterprise Value = Enterprise Value + Nonoperating Assets - Nonoperating Liabilities = $2,944.44 million + $114 million - $344 million = $2,714.44 million.

Finally, we divide this value by the number of shares outstanding to find the value per share:

Value per Share = Adjusted Enterprise Value / Number of shares = $2,714.44 million / 51 million shares = $53.22 per share.

Therefore, the implied value of Amazon Corporation's common stock would be $53.22 per share.