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Question 3 (2o marksi In 1999, Amaron the is carsidering launching a new e-commerce business specialing in cleac computing services the project is tentatively named
Question 3 (2o marksi In 1999, Amaron the is carsidering launching a new e-commerce business specialing in cleac computing services the project is tentatively named Amaron Web Services (hencelorth 'AWS') To assess the feasibility of AWS, Amaron's Cro has identitied Oracle Corp. (Airst Olicir as a comparable fiem that has similar business risk and estimated the following information) - Oraclo has equity and debt, respectively, worth $20 billion and $40 billion. - Oracle's equity beta and debt beta, respectively, are estimated at 1.8 and 01. - Oracle's marginal tax rate is estimated at 299 . Amaron CFO is trying to determine the weighted average cost of capital for AWS. He believes that Amazon's cost of debt, estimated at 7%, should apply to AWS's debt financing. AWS is expected to maintain a target leverage ratio of 50% and face a marginal tax rate of 20% in the foreseeable future. Assume that the risk-free rate is 5% and the market risk premium is 10%. Answer questions a) and b) below: a) [10 marks] To help Amazon CFO complete his analysis, calculate the following two items, i) the unlevered asset beta and ii) AWS's debt beta. For full credit, you must show the steps/calculation toward your results: - Oracle's marginal tax rate is estimated at 25\%. Amazon CFO is trying to detemine the weighted arverage cost of capita) for AWs: He believes thin Amazon's cost of debt, estimated at 7%, should apply to AWs's dnbt financing AWs is expected to maintain a target leverage ratio of 50% and face a marginal tax rate of 20% in the foreseeabie future. Assume that the risk-free rate is 5% and the market nisk premium is 10% in Answer questions a) and b) below. a) [10 marks] To help Amazon CFO complete his analysis, calculate the following two hems in the unlevered asset beta and ii) AWS's debt beta. "For full credit. you must show the steps/calculation toward your results. b) [10 marks] Determine the weighted average cost of capital (WACC) for AWS. In case you are unsure about your results in part a, assume that unlevered asset beta u=1.0. and AWS's debt beta Daws=0.3. *For full credit, you must show the steps/calculation toward your results. Question 3 (2o marksi In 1999, Amaron the is carsidering launching a new e-commerce business specialing in cleac computing services the project is tentatively named Amaron Web Services (hencelorth 'AWS') To assess the feasibility of AWS, Amaron's Cro has identitied Oracle Corp. (Airst Olicir as a comparable fiem that has similar business risk and estimated the following information) - Oraclo has equity and debt, respectively, worth $20 billion and $40 billion. - Oracle's equity beta and debt beta, respectively, are estimated at 1.8 and 01. - Oracle's marginal tax rate is estimated at 299 . Amaron CFO is trying to determine the weighted average cost of capital for AWS. He believes that Amazon's cost of debt, estimated at 7%, should apply to AWS's debt financing. AWS is expected to maintain a target leverage ratio of 50% and face a marginal tax rate of 20% in the foreseeable future. Assume that the risk-free rate is 5% and the market risk premium is 10%. Answer questions a) and b) below: a) [10 marks] To help Amazon CFO complete his analysis, calculate the following two items, i) the unlevered asset beta and ii) AWS's debt beta. For full credit, you must show the steps/calculation toward your results: - Oracle's marginal tax rate is estimated at 25\%. Amazon CFO is trying to detemine the weighted arverage cost of capita) for AWs: He believes thin Amazon's cost of debt, estimated at 7%, should apply to AWs's dnbt financing AWs is expected to maintain a target leverage ratio of 50% and face a marginal tax rate of 20% in the foreseeabie future. Assume that the risk-free rate is 5% and the market nisk premium is 10% in Answer questions a) and b) below. a) [10 marks] To help Amazon CFO complete his analysis, calculate the following two hems in the unlevered asset beta and ii) AWS's debt beta. "For full credit. you must show the steps/calculation toward your results. b) [10 marks] Determine the weighted average cost of capital (WACC) for AWS. In case you are unsure about your results in part a, assume that unlevered asset beta u=1.0. and AWS's debt beta Daws=0.3. *For full credit, you must show the steps/calculation toward your results
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