Intro Amazon has a beta of 0.8. The risk-free rate is 2.9% and the expected return on the S&P500 is 4%. Part 1 What is Amazon's cost of equity? 4+ decimals Submit Part 2 Now assume that the expected market risk premium is 4%. What is Amazon's cost of equity? 3+ decimals Submit
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
![### Financial Education: Calculating Cost of Equity for Amazon
#### Intro
Amazon has a beta of 0.8. The risk-free rate is 2.9% and the expected return on the S&P 500 is 4%.
#### Part 1
**Question:** What is Amazon's cost of equity?
**Input Field:**
- Expected response with 4 or more decimal places.
**Submit Button:**
- Blue button labeled 'Submit'.
#### Part 2
**Question:** Now assume that the expected market risk premium is 4%. What is Amazon's cost of equity?
**Input Field:**
- Expected response with 3 or more decimal places.
**Submit Button:**
- Blue button labeled 'Submit'.
### Explanation
In financial analysis, the **cost of equity** is the return that investors expect for holding a company's stock. To calculate the cost of equity using the Capital Asset Pricing Model (CAPM), use the following formula:
\[ \text{Cost of Equity} = \text{Risk-Free Rate} + \beta \times (\text{Expected Market Return} - \text{Risk-Free Rate}) \]
By solving Part 1 and Part 2, you can understand how changes in market conditions affect the cost of equity for Amazon.](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F75fb4f79-5bfb-4902-85d2-e1edc76b1d17%2Fb57faf51-2365-44f8-8285-87dc4a5a5eca%2Fcjih3lk_processed.jpeg&w=3840&q=75)
Step by step
Solved in 2 steps with 1 images
