Wk$6$Summative Assessment: Capital Structures Financial Plan

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As a$$manager of Amazon,$$you need to be able to determine larger funding sources by creating a financial plan to help reduce duplication of resources, identify requirements and risks, and determine various financing options. Completing this planning is an essential step for all businesses to take if they want to succeed.$$

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You decide to$$create a financial plan for leaders of Amazon to help$$distinguish between sources, requirements, and risks associated with various types of long$-$and short$-$term financing capital structure$$that your company can potentially use in the future.

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Assessment Deliverable

Draft a$3-$to$4-$page financial plan for your company. This plan should include sections for a business case and profit$-$and$-$loss statements for$2025,2026,$and$2027.$Include the following items:

Share the business case for growing the Fortune$500$company$,$ including its cost. For instance, you might state that the business case is to open$25$stores outside the U$.$S$.,$costing $$500$million$.$ The next step of the business case is to share the strengths and weaknesses of using a business loan, issuing additional shares of stock, or issuing bonds to fund the growth idea$($capital proposal$).$Lastly$,$ provide your preferred financing source and why.

A profit$-$and$-$loss statement for a$3-$year period in Microsoft Excel$(2025,2026,$and$2027).$

Project revenue for$2025,2026,$and$2027.$State realistic assumptions, such as growth per year, in your projections.

Estimate direct costs, including capital, marketing, labor, and supply, for$2025,2026,$and$2027.$

A conclusion that includes an explanation of what working through a financial plan can do for a company.

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Cost Estimation Total cost of the project would be $$10,000,000,000\mathrm{.}00$:

Department

Dollar Amount

Percentage of the Budget

R & D

$$1,500,000,000\mathrm{.}00$

$15\%$

Production

$$3,500,000,000\mathrm{.}00$

$35\%$

Marketing

$$2,500,000,000\mathrm{.}00$

$25\%$

Distribution

$$2,500,000,000\mathrm{.}00$

$20\%$

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Strengths and Weaknesses of Funding Sources

$1.$ Borrowing $($Business Loans$)$

Strengths:

Ownership remains intact; no dilution of shareholder control.

Interest on loans is tax$-$deductible.

Fixed repayment schedules allow for predictable cash flow management.

Weaknesses:

Increases financial leverage $($higher debt$-$to$-$equity ratio$).$

Interest costs may rise in a high$-$interest$-$rate environment.

Repayment is mandatory regardless of business performance, increasing financial risk.

$2.$ Issuing Additional Shares $($Equity Financing$)$

Strengths:

No repayment obligation, reducing the immediate strain on cash flow.

Allows access to significant amounts of capital for long$-$term projects.

Lower financial risk compared to debt.

Weaknesses:

Dilution of existing shareholders' ownership and voting rights.

Potential drop in share price if the market perceives over$-$issuance negatively.

Higher cost of capital compared to debt due to the expected rate of return from investors.

$3.$ Issuing Bonds

Strengths:

Fixed interest rates provide cost predictability.

Bonds are long$-$term debt instruments, suitable for large$-$scale projects.

No dilution of ownership.

Weaknesses:

Requires strong creditworthiness to issue bonds at favorable rates.

Obligations to pay interest and principal on maturity, regardless of business performance.

Costs related to underwriting and issuance can be significant.

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Associated Risks of Each Funding Source

$1.$ Business Loans

Risks:

Rising interest rates can increase repayment costs if the loan has a variable rate.

Inability to meet repayment obligations may lead to financial distress or bankruptcy.

Higher debt levels reduce flexibility for future financing.

$2.$ Issuing Additional Shares

Risks:

Market dilution may cause existing shareholders to sell shares, reducing market value.

Increased shareholder expectations can pressure management to deliver higher returns.

Over$-$reliance on equity financing can make the company less efficient in managing capital.

$3.$ Issuing Bonds

Risks:

Credit rating downgrades can lead to higher borrowing costs.

Market fluctuations may reduce investor demand, making issuance less feasible.

Early redemption penalties and refinancing risks exist if rates drop later.

Recommendation for the Best Funding Method

Based on Amazon$$s scale and objectives, issuing bonds would be the most viable funding option for the following reasons:

Amazon has strong credit ratings, allowing it to issue bonds at favorable rates.

Bonds provide long$-$term capital without diluting ownership.

The predictable interest rates align well with Amazon's cash flow from operations.

Bonds are a preferred method for funding large$-$scale projects like data centers and energy infrastructure.