on the specific capital structure of the company selected. Weighted Average Cost of Capital (WACC) For Amazon STEP 1: Use CAPM Model to determine Cost of Equity for Amazon CAPM Model: ERi (Expected Return on Investment)= Rf (Risk-Free Rate) + Bi (Beta of Investment) * { ERm (Expected Market Return-Rf (Risk-Free Rate)} U.S. 3 Month Treasury Bill Return: 2.417% = Risk-Free Rate (Rf) Amazon Beta (Bi) 3Y Monthly = 1.71 Historic Market-Risk Premium=4.5% Use S&P 500 return minus T-Bill rate to solve for market risk premium instead ERm ERi= .02417 + 1.71(.045) ERi= .02417 + .08235 = .10112 OR 10.112% = Amazon Cost of Equity STEP 2: Determine Cost of Debt for Amazon Cost of Debt=Effective Interest Rate * (1-Tax Rate) Effective Interest=Annual Interest/Total Debt Obligations*100 = $484 Million/$9.3 Billion= 0.052 * (1-.35)= 0.052*.65=0.0338 = 3.38% STEP 3: Determine Weighted Average Cost of Capital (WACC) for Amazon Step 4: Determine the weight of Debt using book value = debt ratio Step 5: Determine the weight of equity using book value = equity ratio Step 6: Solve for WACC
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