Corporate Finance You begin working at an investment bank with a group of analysts, and you are all asked tobuild Discount Cash Flow models to value Amazon. For the past 20+ years, the company’s freecash flows have been growing approximately 40% per year, and in 2020 reached $31Bn per year.The Beta of the company is 1.2, the risk-free interest rate is 5.25%, the market-implied market riskpremium is 4.5%. Do you think it is reasonable to use a 40% growth assumption to project free cashflows for each of the next six years, discount them using the cost of equity, and add the PV of theTerminal Value, which is based on a prediction of EBITDA in six years and an EBITDA multiple of 13(which is roughly representative of EBITDA multiples for tech). Do you feel this approach makessense or not? Explain why.
You begin working at an investment bank with a group of analysts, and you are all asked to
build Discount Cash Flow models to value Amazon. For the past 20+ years, the company’s free
cash flows have been growing approximately 40% per year, and in 2020 reached $31Bn per year.
The Beta of the company is 1.2, the risk-free interest rate is 5.25%, the market-implied market risk
premium is 4.5%. Do you think it is reasonable to use a 40% growth assumption to project free cash
flows for each of the next six years, discount them using the
Terminal Value, which is based on a prediction of EBITDA in six years and an EBITDA multiple of 13
(which is roughly representative of EBITDA multiples for tech). Do you feel this approach makes
sense or not? Explain why.
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