Question

Based on the information that you learned about capital structure and budgeting, determine what the optimal capital structure should be for Amazon. You will need to determine how much equity (common stock) the company will offer in the IPO and how much debt the company should assume in their global expansion to meet the goal of $50 million.

Provide your recommendation in a 500-word APA formatted paper.

Determine what capital structure will work best with your initial assessment. Describe the structure using the ratios.

Include the dollar amount of equity (common stock) the company should issue in the IPO and how much debt the company should use for this expansion to reach the $50 million goal. Explain your rationale. Please include NET PRESENT VALUE!!

Note: there is no single answer to the question of the firm’s optimal capital structure. Your assessment is weighted more heavily toward your logical explanation rather than having the correct values for debt and equity.

Answer 1

CAPITAL STRUCTURE

A well structured capital formation in a company is a vital and important responsibility of Management team, Capital structure can be described as the proportions of capital from equity shares, preference shares, debts, loans, etc which delivers the money to the company for their existence and expansion. In the above scenario we can see that Amazon company is aiming to have $50 Million expansion in their capital, and they are conducting an analysis how much will be the Debt and Equity ratio in the capital structure of the company, Accordingly the Debt and Equity ratios shows the relationship between the two corresponding capital and also comparing with the company's Assets. we have to maintain a good Ratio as 2:0 for debt and equity and also the Debt to Asset Ratio should be 1:0 because we should have proper assets in company in order to cover the debt responsibilities of the company. While issuing Initial public offers(IPO) to the public through a primary market we shouldn't make the full shares as equity shares. As I described above the proportion of the equity and debt should be like 2:0 ,hence the IPO Should be only in between $35m-$40m, Net Present Value(NPV) is the value of a money a now which would be receiving or paying in the future. we have to find out the NPV using the inflation rate of the economy, hence we have no such rate provided in the question we can assume the NPV rate as 10%, so NPV of $50m making in after 1 is now $45.45m. present value factor = 1/1.1=0.909 (50m*0.909=45.45m)