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FINM4000 Financial Accounting, Kaplan Business School, Australia

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Question 1: Company Financing

Part 1. According to Source 2 how did Amazon's Cash Conversion Cycle in 2014 compare to other retailers in that year? What does it say about Amazon's working capital management?

Answer: The company that could be regarded as being close to Amazon is Apple wherein the last year's cycle was longer than -44.5 days. The companies that invest an increased amount of money in their business are usually are the low technology companies that have faithful customers and have addicted customers that would go nowhere, the examples would include tobacco, gaming etc. now, there are mainly 2 cutting edge companies that often have such sort of the markets and they are termed as the cash machines. In the case of Amazon, this is the cash which is being used for the purposes of financing the company so that it can grow in the future. This is the company that does not require to borrow any money or borrow stock. It merely invest the amount that it has earned to invest in the new sectors and also upgrade its offerings. When the company has an immense amount of cash available at its disposal, then the company would be able to undertake all the experiments and also learn from its mistakes. Hence, for a company like amazon, this cash flow is of an utmost importance and the company has a good cash generating operating cycle due to which it has a good inventory management system. On an average, the company has a high inventory management which becomes that the company is able to collect more from the customers rather than when the payments have to be made to the suppliers. This is something which distinguishes Amazon from the companies like Walmart and Costco. The company Walmart has a high velocity o inventory management which is very similar to Costco with the limited selection which turns the inventory much faster.

The company under review takes about 95.8 days to pay off its suppliers when compared to Costco at 30.1 days and 38.5 days for Walmart. This rate may not remain for long since suppliers are careful about their payments. The recent annual and the quarterly reports suggest that the payable periods is shrinking and the cash conversion advantage of the company is narrowing with each passing day. This is because of the seasonal business of the company.

Part 2. According to Source 2 why is having a negative Cash Conversion Cycle important for a company wanting to experiment with investing in new products that could fail or succeed?

Answer: The main reason behind the negative cash flow is the difference between the top and the bottom lines that means an investment into the buildings, machines along with other things that have to be written down over the period of time in the statement of income but which is ignored when it comes to the calculation of the operating cash flows. This amount of the operating cash flow is much more than the net income of the company that has been investing a huge amount of money since it goes to strive for the retail domination which is not big surprise. The amount of the free cash flow is the part of the investment of the company even when it counts for the valuation of the money which is spent by the company towards depreciation and the amortisation over the period of years. This remains constant which is higher standing at an amount of $1 billion and is much more when compared with the amount of the net income which is a commendable thing to say. When the company calculates the amount of the free cash flow, it shows the amount of the cash that it has in hand. Hence, in the business where the business where the money can be realised quickly from the customers and the company is able to manage inventory quickly and the company is able to pay off its suppliers, then the free cash flow would be positive even when the net income amount reported in the statement of profit and loss. When the company has free cash flow in its hand, then it would be able to invest in the new ventures and in the launch of the new products. This is the reason as to why the free cash flows are better for the companies that are going to launch new products or the services.

Part 3. If Amazon couldn't use cash to fund its new projects, what two financing options would they have available to them? Discuss what advantages and disadvantages these financing options would have for Amazon.

Answer: As and when the company needs finances, the bank would be approached to get the finances. The banks serve as the major source of the capital of the business and till date, it is considered to be the most affordable source of the business finance. It may not be easier for the company to get a loan but once, the company gets it, and it serves to be beneficial for the company (American express, 2019). The company must have decent financials if it wants to get a loan. Further the company must have a very strong personal and business credit along with a profitable business that is able to generate enough revenue which would be able to cover the loan repayments and the interest thereon. The advantages include the guaranteed receipt of money by the business, amount of interest is fixed and it blends with the ageing of the assets of the company. But it has disadvantage of the fact that the bank has the charge of having a security over the assets of the company and serves as a collateral (NI business info, 2019).

Alternative option is financing through equity which means sale of shares of the company to the outsiders. The advantages include freedom from debt, business experience and contacts and follow up funding required.

The disadvantage include the personal relationships, time and money and shared ownership of the company (Business qld, 2019).

Part 4. Based on Source 1 (Annual Report) what is Amazon's Cash Conversion Cycle in 2018? How does this compare with the Cash Conversion Cycle in 2014 (Source 2) and what does it say about Amazon's supplier relationships?

Answer: The following table shows the relevant calculations:

 

 

Amazon

Particulars

 

2018

2014

 

 

(In millions in $)

Days inventory outstanding:

 

0.181804792

0.132250765

 

 

 

 

Average inventory

 

          16,047.00

            8,299.00

Cost of goods sold

 

          88,265.00

          62,752.00

 

 

 

 

Days sales outstanding:

 

0.096803371

0.063064683

 

 

 

 

Average accounts receivable

 

          13,164.00

            5,612.00

Total credit sales

 

       1,35,987.00

          88,988.00

 

 

 

 

Days payable outstanding:

 

0.392182632

0.262286461

 

 

 

 

Average accounts payable

 

          34,616.00

          16,459.00

Cost of goods sold

 

          88,265.00

          62,752.00

 

 

 

 

Cash conversion cycle

 

-0.113574469

-0.066971013

 

 

 

 

(Annual report 2018)

(Annual report 2014).

The above table shows that the company's ability to collect ash from its accounts receivables has deteriorated over the period when compared with the time taken to pay off its suppliers.

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Part 5. Based on Pages 6-14 of Amazon's Annual Report (Source 1) what do you believe are the three most significant risks facing Amazon in 2018? Are these risks systematic or unsystematic? Why?

Answer: The following are the significant risks that the company is exposed to:

1. The company faces some intense competition from its competitors due to the presence of an ever evolving and intense competition and due to the reason that the company has competitors all across the industries. This includes the physical, e-commerce etc. there are some of the competitors of the company that have a greater number of sources, longer histories and have a greater brand recognition especially when compared with the new launched products of the company in the new regions. And due to this, they would go on to secure some better terms from the vendors and also adopt an aggressive providing for its products. This competition may intensify even further due to the increased in the number of competitors that enters into the business combinations. Also, there are a number of enhanced technologies that are being used which may intensify the competition even further.

2. The company has been expanding in terms of sales, customer's geographical region etc. and this would mean more product and service offerings by the company which would put pressure on the management, operations, financial and other such resources. This would mean an increase in the complexity of the business and significant pressures on the management of the company.

3. The company has been expanding its products and the services to the newer geographical regions and countries of which it has no experience of and this would mean challenges being faced by the company and due to this, it may be subject to claims of the customers of these offerings and also disruptions (Amazon, 2018).

Part 6. Imagine that in 2007 you purchased an Amazon $1000 face value bond with a fixed annual coupon rate of 4.5% which matures at the end of 2020. Currently it is the end of 2019 and the bond has a yield to maturity of 5%. What would be the price of the bond today in 2019?

Answer: The following are the desired workings:

a)

If Annual Interest for 2019 has been received

 

 

Price of the bond =

(Annual Interest for 2020 + Maturity Value)/(1+YTM)

 

$

    995.24

 

 

 

 

 

 

b)

If Annual Interest for 2019 is yet to be received

 

 

Price of the bond =

(Annual Interest for 2019) + (Annual Interest for 2020 + Maturity Value)/(1+YTM)

 

$

 1,040.24

Part 7. Consider Source 3. If you bought Amazon shares at the beginning of June 2014 and sold them at the beginning of June 2019, what would be your approximate holding period return? (Assume no dividends.) What does this suggest about the investments that Amazon made from 2014 to 2019?

Answer: The following are the desired workings:

Period of Holding

5 years

 

 

 

 

 

 

 

 

Price at the beginning on June 2014

 

329.67

Close price pf 2nd June 2014

 

Price at the beginning on June 2019

 

1692.69

Close price of 3rd June 2019

1363.02

 

 

 

 

 

Holding Period Return

 

413%

 

 

Question 2: Capital Budgeting

Part 1. Based on the above information and sources what are the free cash flows generated by Amazon's 3000 new stores over the 10 year period (refer to your excel spreadsheet)?

Answer: The following table shows the desired calculations:

Particulars

0

1

2

3

4

5

6

7

8

9

10

 

(Amounts in $)

Cash inflow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

         6.00

Less: annual costs

 

       0.60

       0.60

       0.60

       0.60

       0.60

       0.30

       0.30

       0.30

       0.30

         0.30

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue

 

       5.40

       5.40

       5.40

       5.40

       5.40

       5.70

       5.70

       5.70

       5.70

         5.70

Less: 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

 

 

 

 

 

 

 

 

 

 

 

 

Less: taxes @30%

 

       0.99

       0.99

       0.99

       0.99

       0.99

       1.08

       1.08

       1.08

       1.08

         1.08

 

 

 

 

 

 

 

 

 

 

 

 

Earnings after taxes

 

       4.41

       4.41

       4.41

       4.41

       4.41

       4.62

       4.62

       4.62

       4.62

         4.62

 

 

 

 

 

 

 

 

 

 

 

 

Salvage value

 

 

 

 

 

 

 

 

 

 

         1.00

 

 

 

 

 

 

 

 

 

 

 

 

Cash outflow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial outlay

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash outflow

-7

0

0

0

0

0

0

0

0

0

0

 

 

 

 

 

 

 

 

 

 

 

 

Total net flow

-7

       4.41

       4.41

       4.41

       4.41

       4.41

       4.62

       4.62

       4.62

       4.62

         4.62

 

 

 

 

 

 

 

 

 

 

 

 

Free cash flow

 

 

 

 

 

 

 

 

 

 

        -5.37

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Part 2. Calculate the NPV for the new AmazonGo Stores assuming the cost of capital is 12% and 5%. Which discount rate should Amazon use given that this is a speculative venture?

Answer: The following table shows the desired calculations:

Particulars

0

1

2

3

4

5

6

7

8

9

10

 

(Amounts in $)

Cash inflow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

         6.00

Less: annual costs

 

       0.60

       0.60

       0.60

       0.60

       0.60

       0.30

       0.30

       0.30

       0.30

         0.30

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue

 

       5.40

       5.40

       5.40

       5.40

       5.40

       5.70

       5.70

       5.70

       5.70

         5.70

Less: 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

 

 

 

 

 

 

 

 

 

 

 

 

Less: taxes @30%

 

       0.99

       0.99

       0.99

       0.99

       0.99

       1.08

       1.08

       1.08

       1.08

         1.08

 

 

 

 

 

 

 

 

 

 

 

 

Earnings after taxes

 

       4.41

       4.41

       4.41

       4.41

       4.41

       4.62

       4.62

       4.62

       4.62

         4.62

 

 

 

 

 

 

 

 

 

 

 

 

Salvage value

 

 

 

 

 

 

 

 

 

 

         1.00

 

 

 

 

 

 

 

 

 

 

 

 

Cash outflow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial outlay

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash outflow

-7

0

0

0

0

0

0

0

0

0

0

 

 

 

 

 

 

 

 

 

 

 

 

Total net flow

-7

       4.41

       4.41

       4.41

       4.41

       4.41

       4.62

       4.62

       4.62

       4.62

         4.62

 

 

 

 

 

 

 

 

 

 

 

 

Net present value at 12%

 

 

 

 

 

 

 

 

 

 

16.38127

Net present value at 5%

 

 

 

 

 

 

 

 

 

 

26.44307

Since the 5% rate of return for the company is not much, it feels to be more realistic.

Part 3. What is the discounted payback period for the project and how does it compare to what the company is hoping for? Do you believe their target is realistic?

Answer: The following table shows the desired calculations:

Particulars

0

1

2

3

4

5

6

7

8

9

10

 

(Amounts in $)

Cash inflow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenue

 

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

       6.00

         6.00

Less: annual costs

 

       0.60

       0.60

       0.60

       0.60

       0.60

       0.30

       0.30

       0.30

       0.30

         0.30

 

 

 

 

 

 

 

 

 

 

 

 

Gross revenue

 

       5.40

       5.40

       5.40

       5.40

       5.40

       5.70

       5.70

       5.70

       5.70

         5.70

Less: 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

 

 

 

 

 

 

 

 

 

 

 

 

Less: taxes @30%

 

       0.99

       0.99

       0.99

       0.99

       0.99

       1.08

       1.08

       1.08

       1.08

         1.08

 

 

 

 

 

 

 

 

 

 

 

 

Earnings after taxes

 

       4.41

       4.41

       4.41

       4.41

       4.41

       4.62

       4.62

       4.62

       4.62

         4.62

 

 

 

 

 

 

 

 

 

 

 

 

Salvage value

 

 

 

 

 

 

 

 

 

 

         1.00

 

 

 

 

 

 

 

 

 

 

 

 

Cash outflow:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Initial outlay

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cash outflow

-7

0

0

0

0

0

0

0

0

0

0

 

 

 

 

 

 

 

 

 

 

 

 

Total net flow

-7

       4.41

       4.41

       4.41

       4.41

       4.41

       4.62

       4.62

       4.62

       4.62

         4.62

 

 

 

 

 

 

 

 

 

 

 

 

Discounted payback period

 

     -2.59

       1.82

 

 

 

 

 

 

 

 2 years

Yes, this target is realistic and it conforms to the wish of the company wherein it wanted to make an investment of 2 years.

Part 4. What are the weaknesses about how cash flows are estimated in the article? Can we rely on them in our analysis?

Answer: The cash flows mentioned in the article seems to be true since they have been picked from the annual report, but there is an issue with these which is the fact that the investment is for the future but these cash flows are all historical, so, it is kind of risky to state that the company would be able to generate profits in the future years since the cash flows given in the article are historical.

Part 5. Based on your analysis in parts 1-4 would you recommend Amazon undertake the project? Why or why not?

Answer: Yes, the company must undertake this project since it entails a positive net present for the company which means profits for the company.

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Question 3: Personal Reflection

Write a brief 200 to 300 word reflection on:

Part a) How Class Case Study 1 in Week 6 influenced your answers in Part A of this assignment.

Answer: We were taught about the cash conversion cycle of the company, the way in which it was calculated, the way these have a bearing on the profitability of the company. This proves to be beneficial since if the company has no cash in its hand, then it would not be in a position to explore more opportunities and hence, this would mean a successful business performance for the company.

Part b) The process you went through to complete Part B of this assignment.

Answer: With the help of the above listed understanding about the cash conversion cycle which was taught in class, I was able to calculate the cash conversion days of Amazon and also that of Apple. If I had no known the above, if the concepts would not have been cleared, then I wouldn't have calculated these numbers. So, it was an overall good experience getting to know this concept and its relevance for the business enterprise and the way in which the company's decisions are affected by it.

Part c) What you will do differently when preparing for Case Study 2 in Week 12 to get the best mark possible (as compared to your preparation in Case Study 1).

Answer: I would improve by the way of earning more concepts like these and would surf more information about this concept. I would look at the annual reports of more companies and calculate these days and then estimate their profitability.

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