AWS is contemplating a significant strategic shift in operations to become a firm focused on corporate wellness services. This is an industry expected to maintain strong growth in coming years due to an increased awareness of the benefits of preventative health measures. If the strategy is pursued AWS expects to earn total free cash flows of $3.5 b in the first year (T1), with growth of 20% in the following year and 15% growth in the third year. After that, it is expected that the growth rate will fall to 6 percent indefinitely. Pursuing this strategy would require an investment of $4.50 b immediately. AWS's current beta is 1.25 while similar firms focused on corporate wellness have beta's that average .75. If the strategy is pursued the company will receive the vast majority of its free cash flow from the corporate wellness division. Currently, market conditions are such that the 1 year T bill rate is 0.75%, the T bond rate is 2.5% and the expected market risk premium is 5.0%. AWS carries 23 billion in outstanding debt and has 3.5 b of excess short term investments on hand. With the shift in operations, AWS plans to pay off its debt immediately and carry only equity in the future. If AWS is currently worth $125 billion, should it undertake the shift in strategy?

a. What is the required return if AWS makes the investment?

b. What is the expected value of the investment?

Answer rating: 100% (QA)

Answer Part a The required return expected return on equity Ke Risk free rate aver... View the full answer