Question

Suppose Amazon pays no dividends but spent $5 billion on share repurchases last year. If Amazon’s...

Suppose Amazon pays no dividends but spent $5 billion on share repurchases last year. If Amazon’s equity cost of capital is 12%, and if the amount spent on repurchases is expected to grow by 8% per year, estimate Amazon’s market capitalization. If Amazon has 6 billion shares outstanding, what stock price does this correspond to?

**please list out step by step actions, please show the formulas used, please DONT USE excel**

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Answer #1

The stock price is computed as shown below:

Payout in next year is computed as follows:

Amount on share repurchases last year (1 + growth rate)

= $ 5 billion x 1.08

= $ 5.4 billion

Equity value is computed as follows:

= Payout in next year / (equity cost of capital - growth rate)

= $ 5.4 billion / (0.12 - 0.08)

= $ 135 billion

The share price is computed as follows:

= Equity value / Number of shares outstanding

= $ 135 billion / 6 billion shares

= $ 22.50

Feel free to ask in case of any query relating to this question      

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