Steve has gathered information on the Web about Amazon’s (AMZN) history of sales

Question

Steve has gathered information on the Web about Amazon’s (AMZN) history of sales and profit margins. Based on this information, he believes that Amazon will have sales of $45 billion next year, with a profit margin of 3.0%. He also notes that Amazon has 454 million shares outstanding, and he expects the P/E ratio to remain at its current value of 85. Help Steve calculate the following. Hints: You will need equations 8.1, 8.2, and 8.5. “Net profit” and “After-Tax Earnings” are the same thing.

a.    If Amazon hits the sales and profit margin targets given, what will its net profit be next year? Do not round this answer.

b.    Given this net profit and the number of shares outstanding, find the expected earnings per share (EPS) for 2013. You may round to the nearest cent if you wish.

c.    Given this EPS estimate and Steve’s assumption about the P/E ratio, calculate the value of a share of Amazon stock.

Explanation / Answer

A. Future after-tax earnings = estimated sales for year x net profit margin expected

                                                             = $ 45 billion x 3.0% = $1.35 billion

B. EPS = after tax/book value of equity * book value of equity/shares outstanding = ROE x book value per share

                                                            = 454 million x 85 = 38,590 million

C. Estimated share price at EOY = EPS estimated * est. P/E/ ratio

                                                                   = 38,590 * 85 = 32,80,150

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