Capital, valuation and cost of capital

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Finance Assignment Question

 
In February 2015, Misha Filipovic, managing director of an investment bank, was considering the possible gains from increasing a $1.5 billion debt capitalisation of Netflix, Inc. It is your task to critically analyse and report whether Netflix should pursue this recapitalisation proposal. This will require you to critically assess the following:

1. Do you think Netflix’s debt level subsequent to the bond issue
appropriate? Why or why not?
2. What would you recommend to Netflix’s board of directors regarding:
     a) The level of flexibility or reserve?
     b) The mix of debt and equity?
     c) Any other issues you believe should be brought to the attention
         of the CEO and the board?
 
To guide you in your careful analysis, you may consider the effectiveness of the financing decision as it impacts on Netflix’s:
 
a) Earnings per share
b) Book and market price per share
c) Weighted average cost of capital (WACC)
d) Company’s objectives
 
To substantiate your arguments and recommendations, you MUST draw from the appropriate literature (both theoretical and empirical).
 

Finance Assignment Solution

 

Solution to Part 1:

Issuing the bond is a very crucial decision which company takes in a painstaking manner.
The company issue bond just to save the interest rate which is usually higher on financial instruments. While issuing the debt there is need of focusing on the equity of the company. The ideal situation for issuing the bond is that the company’s equity must be high so that they can cope with all the required obligations (Vallabhaneni, 2008) . If the company’s debt is higher than the equity then there is no possibility of issuing the bond as they can lose hold on their financial stability. Their liabilities can increase tremendously that can put the burden on business operations in the long run. Therefore the debt equity ratio always needs to be less than 1.

The debt situation of Netflix suggests that they can issue a bond and it is appropriate for them. The justification for the same is that in the current situation, the balance sheet of Netflix shows that the debt of the company is much lower than the equity of the firm. The debt is 200000 thousand dollars and total equity for the firm is 744,673 thousand dollars. Further, the firm is thinking to increase the amount of debt by 1.5 billion dollars and the amount of debt can reach to 3.5 billion dollars. It is subsequently lesser than the total equity which company possess……………

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