Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

4. Robert Stansky, the portfolio manager of the Magellan Fund, was trying to ascertain the worth of Amazon.com and whether it should be purchased

image text in transcribed

4. Robert Stansky, the portfolio manager of the Magellan Fund, was trying to ascertain the worth of Amazon.com and whether it should be purchased for his portfolio. He was convinced that Amazon was an excellent company that would continue to benefit from the growth of e-commerce and that it would continue to be a leader in the sale of books and music and could be successful in expanding into other fields such as prescription drugs, electronics, toys, etc. But all the old valuation rules seem useless. One couldn't compute a P/E multiple because there were no earnings. Price-to-sales ratios made no sense because the stock sold on expectations of future, not current, sales. Stansky decided to value Amazon by estimating its worth 10 years from now and then discounting that value back to the present. He then made the following generous assumptions about Amazon's growth in the years ahead. Amazon's sales in year 2013: $80B Amazon's net after-tax profit margin in 2013: 1 percent (not bad for a low margin retailer). Number of shares outstanding in 2013: 400 million (assumes moderate issue of optioned shares to executives) Appropriate P/E in 2013: 25 (assumes Amazon will get a market multiple) Appropriate discount rate: 15 percent (Amazon is riskier than the general market) On the basis of these assumptions, how much per share should an investor be willing to pay for Amazon.com's common stock?

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Intermediate Accounting

Authors: Earl K. Stice, James D. Stice

18th edition

538479736, 978-1111534783, 1111534780, 978-0538479738

More Books

Students also viewed these Finance questions

Question

Show enthusiasm for the position (but not too much).

Answered: 1 week ago

Question

64. Consider a branching process having Answered: 1 week ago

Answered: 1 week ago