1
$\begingroup$

I'd like to estimate Amazon's after-tax cost of equity (Re) using both the DCF and CAPM approaches. Tons of info and resources on how to estimate Re using CAPM, but DCF, I see no relevant resources. How exactly can I do this?

I have an idea, can anyone confirm: Instead of using future cash flow for period n, I use projected revenue %growth?

$\endgroup$

closed as off-topic by Lliane, LocalVolatility, Helin, amdopt, skoestlmeier Mar 26 at 11:50

This question appears to be off-topic. The users who voted to close gave this specific reason:

  • "Basic financial questions are off-topic as they are assumed to be common knowledge for those studying or working in the field of quantitative finance." – Lliane, LocalVolatility, Helin, amdopt, skoestlmeier
If this question can be reworded to fit the rules in the help center, please edit the question.

  • $\begingroup$ My objective is to find the rate of return that investors require to purchase equity in Amazon (Re), then to use that in combination with CAPM to find WAAC. The standard way to find cost of equity is CAPM, I'm also seeing another method called Dividend Capitalization Model--but that's not what I'm looking for. Does a DCF method to find after tax Cost of Equity (Re) actually exist? $\endgroup$ – Karen Mar 11 at 5:21
  • $\begingroup$ The reason why I'm confused is because DCF tells me what my future cash value will be of a particular investment, or the share price in the case of a stock. It's a dollar amount. But I'm looking for an after tax rate of return. Perhaps my question should be, how do I go from the share price using DCF to a rate of return? $\endgroup$ – Karen Mar 11 at 5:45
  • $\begingroup$ The WACC is the discount rate used in the DCF model, solve the WACC for the current Amazon valuation then remove the debt part of the WACC to solve for Re $\endgroup$ – Lliane Mar 11 at 6:23
  • $\begingroup$ Ok, so I have: Amazon WACC = Re (E/Tot) + Rd (1-t) D/Tot | =Re(796.1/820.8)+.034(1-.21)(24.7/820.8) | =Re(.97)+.008 | Remember, Re is supposed to be (CAPM + DCF)/2 | Now how am I supposed to calculate WACC? $\endgroup$ – Karen Mar 11 at 7:10
  • $\begingroup$ If you have the future cash flows (CFn) and the total market value of debt + equity (MTM), you can solve for WACC : MTM = CF1/(1+WACC)+CF2/(1+WACC)^2...+CFn/(1+WACC)^n $\endgroup$ – Lliane Mar 12 at 1:43