Table 1 Amazon Estimated Free Cash Flows to the Firm | Year | 1996 | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007-after | | 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | Revenue Growth Rate | 2981.41% | 300.00% | 200.00% | 160.00% | 125.00% | 100.00% | 50.00% | 30.00% | 20.00% | 10.00% | 6.00% | 6.00% | Revenues | 15,746 | 62,984 | 188,952 | 491,275 | 1,105,369 | 2,210,738 | 3,316,108 | 4,310,940 | 5,173,128 | 5,690,441 | 6,031,867 | 6,393,779 | Operation Margin | -37.97% | -14.67% | -2.03% | 3.87% | 6.88% | 8.24% | 9.20% | 9.59% | 9.78% | 9.90% | 9.90% | 10.00% | EBIT | -5,979 | -9,240 | -3,836 | 19,012 | 76,049 | 182,165 | 305,082 | 413,419 | 505,932 | 563,354 | 597,155 | 639,378 | Taxes Rate | 0.00% | 0.00% | 0.00% | 0.00% | 27.06% | 35.00% | 35.00% | 35.00% | 35.00% | 35.00% | 35.00% | 35.00% | Taxes | - | - | - | - | 20,582 | 63,758 | 106,779 | 144,697 | 177,076 | 197,174 | 209,004 | 223,782 | EBIT(1-t) | -5,979 | -9,240 | -3,836 | 19,012 | 55,467 | 118,407 | 198,303 | 268,722 | 328,856 | 366,180 | 388,151 | 415,596 | NINV=(NCS+ΔWC-D) | 5,078 | 26,081 | 77,838 | 218,335 | 491,253 | 818,756 | 818,756 | 736,880 | 638,629 | 383,178 | 252,897 | 268,071 | FCFF | -11,057 | -35,320 | -81,674 | -199,322 | -435,786 | -700,349 | -620,452 | -468,158 | -309,774 | -16,998 | 135,253 | 147,525 | Total Reinvestment | Change in Revenue | 15,235 | 78,242 | 233,514 | 655,005 | 1,473,760 | 2,456,267 | 2,456,267 | 2,210,640 | 1,915,888 | 1,149,533 | 758,692 | 804,213 | Sales/Capital Ratio | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | 3 | Reinvestment (NINV) | 5,078 | 26,081 | 77,838 | 218,335 | 491,253 | 818,756 | 818,756 | 736,880 | 638,629 | 383,178 | 252,897 | 253,327 |
Assumptions (Table 1)
Revenue Growing rates
1. We used the growing rates in the last trailing 12 months because we consider these to be more relevant for high growth firms such as Amazon
2. Because the Web Retailing, the bigger market in which Amazon operate, has a geometric mean of growth of about 340% for the nest five years, we consider that it is reasonable to assume that Amazon hyper growth rates will last a little bit longer than those of a similar firm in a mature market. However, because the barriers of entry are low and Amazon competitive advantage is not yet proven to be sustainable for long periods of time we will limit the hyper growth in the next five years to a sixth of the growth incurred in 1996.This conservative approach is also due to the fact that existing players such as Barnes and Nobles and Boarders already announced their intentions to enter the market and their experience and resource can eat up a lot of Amazon potential pie.
Operations Margin
1. Because Amazon business model is more similar to other specialty online-stores than to the traditional brick and mortar book retailers, we considered to use a long term operation margin of 10% which is representative for specialty online-stores in the long run. Thus in our model we assume that Amazon will reach 10% operation margin in year 2006. While this may seem a low margin for a company with low inventory and fixed investments costs, we take in consideration the low barrier to entry of this segment and the low price strategy Amazon has undertaken. Both these factors will drive higher than average operating margins in the long term.
Total Reinvestment
1. We assume a Sales to Capital Ratio of 3 for the next decade based on the fact that for specialty retailers the average for this ratio was 3.46 and 2.99 for retail stores. Sales to capital ratio = Change in revenues / (NCs +ΔNWC - Depreciation) = Δ Rev-NINV.

Table 2. Amazon Estimate cost of debt ) | Year | Beta | Cost of Equity | Pre-tax Cost of Debt | Tax Rate | After-tax Cost of Debt | Debt-Ratio | Cost of Capital | 1 | 1.60 | 12.90% | 8.00% | 0.00% | 8.00% | 1.00% | 12.85% | 2 | 1.60 | 12.90% | 8.00% | 0.00% | 8.00% | 1.00% | 12.85% | 3 | 1.60 | 12.90% | 8.00% | 0.00% | 8.00% | 1.00% | 12.85% | 4 | 1.60 | 12.90% | 8.00% | 27.06% | 5.84% | 1.00% | 12.83% | 5 | 1.60 | 12.90% | 8.00% | 35.00% | 5.20% | 1.00% | 12.82% | 6 | 1.48 | 12.42% | 7.80% | 35.00% | 5.07% | 3.80% | 12.14% | 7 | 1.36 | 11.94% | 7.60% | 35.00% | 4.94% | 6.60% | 11.48% | 8 | 1.24 | 11.46% | 7.40% | 35.00% | 4.81% | 9.40% | 10.83% | 9 | 1.12 | 10.98% | 7.20% | 35.00% | 4.68% | 12.20% | 10.21% | 10 | 1.00 | 10.50% | 7.00% | 35.00% | 4.55% | 15.00% | 9.61% | 11-after | 1.00 | 10.50% | 7.00% | 35.00% | 4.55% | 15.00% | 9.61% |

Assumptions
Beta Estimation
1. For the first five years, we assume Amazon beta equals the average beta of the internet firms because its success is tied to the success of web commerce. After five years we assume beta will decrease converging to 1, the beta of the market.
Cost of Equity
1. We assume a market risk premium of 4% which is consistent with the more conservative research.
2. We use as risk free rate the return on treasury bond rate of 6.5%.
Pre-tax Cost of Debt
1. We assume Amazon's cost of debt for the first five years to be equal to the risk free rate (treasury bond) plus a default spread of 1.5%, which is the default spread for the BBB rating bonds; rating that is higher than what Amazon will receive on its bond at the current state. After the first five years, we assume the pretax cost of debt will start decreasing till 7% in year 10 because the company situation will likely improve. This low pretax debt cost assumption will not influence the company in the first years because the D/V ratio is very small during this period.
Tax Rate
1.We assumed an average corporate rate of 35%. However, because Amazon will have losses in the first years, the tax rate varies from 0% to 35% due to the tax credit carry forward.
Debt/Assets Ratio
1. Although Amazon has no interest baring debt outstanding at the moment, we assume a minimum 1% debt ratio for the first five years. As the company matures, we assume the the debt ratio will converge toward that of traditional retailers in stable growth, 15%.

Table 3. Amazon's Price Per Share Valuation | Year | FCFF | Terminal Value | Cost of Capital | Present Value | 1 | (35,320) | | 12.85% | (31,298) | 2 | (35,320) | | 12.85% | (27,734) | 3 | (81,674) | | 12.85% | (56,829) | 4 | (435,786) | | 12.83% | (268,896) | 5 | (700,349) | | 12.82% | (383,112) | 6 | (620,452) | | 12.14% | (311,982) | 7 | (468,158) | | 11.48% | (218,810) | 8 | (309,774) | | 10.83% | (136,029) | 9 | (16,998) | | 10.21% | (7,085) | 10 | 135,253 | 4,089,385 | 9.61% | 1,688,056 | 11 | 147,525 | | 9.61% | | Value of Operating Assets of the firm | 246,280 | Value of Cash and Non-operating assets | 7,162 | Value of Firm | 239,118 | Value of Outstanding Debt | 8,959 | Value of Equity | 230,159 | Nr of Common Shares Outstanding | 17,352,406 | Price Per Share | 13 | | | | | |

Terminal Value Assumptions
1. In calculating the terminal value we assumed a stable 6% growth from 2006 and after.
2. We assumed a ROC of 19%, which is higher than the cost of capital because we believe that Amazon’s competitive advantage consolidated in the first 10 years will continue to generate excess returns for a long period. This rate is also consistent with our computed ROC of 19.52% in year 10. Using the ROC of 19% and the growth rate of 6%, we obtain a stable reinvestment rate of 31.5% (reinvestment rate=growth rate/ ROC).