Question

Suppose Amazon Inc. pays no dividends but spent $ 2.95 billion on share repurchases last year. If​ Amazon's equity cost of capital is 7.6 %​, and if the amount spent on repurchases is expected to grow by 6.4 % per​ year, estimate​ Amazon's market capitalization. If Amazon has 428 million shares​ outstanding, what stock price does this correspond​ to?

Answer 1

Answer:

Market Capitalization =  $261.567 Billion

Stock Price per share = $611.137 per share

Explanation:

given data

spent = $2.95 billion

equity cost of capital ke = 7.6 %​ = 0.076

grow =  6.4 % per​ year  = 0.064

shares​ outstanding = 428 million = 0.428 Billion

to find out

Amazon’s Market Capitalization  and stock price

solution

first we get here Amazon's market capitalization that is express as

Market Capitalization = Cash Flow (1 + g) ÷  (Ke - g)    ..............1

here g is grow rate and ke is equity cost of capital

Market Capitalization = $\frac{2.95(1+0.064)}{(0.076-0.064)}$

Market Capitalization =  $261.567 Billion

and

Stock Price per share  will be as

Stock Price per share = $\frac{Market\ Capitalization}{shares\ outstanding}$   ..................2

Stock Price per share = $\frac{261.567}{0.428}$

Stock Price per share = $611.137 per share