Firm Financial Analysis Project (Netflix – NFLX)
TextBook can be accessed here: https://bookshelf.vitalsource.com/#/user/signin
Firm = Netflix
The project is divided into six parts which are described below. You should place each part into its own section with page break for each new section.
Part 1 (Netflix History and Overview) –
Develop an overview/history of Netflix, as well as the industry Netflix operates in. You should include information that describes the market structure and competition in the industry, along with the position of Netflix within this industry – i.e., is the firm one of the leaders or is it a niche player? Is the firm one of the medium-size firms in the industry?
Part 2 ( End-Point Financial Analysis ) –
Using historical financial statements (income statements and balance sheets) for Netflix, analyze the financial performance and changes to the firm over a ten-year time period using an end-point analysis framework similar to that used in the analysis of Coca-Cola (Attached for example). You should calculate the same ratios and financial measures as were provided for the Coca-Cola case.
Next, you will identify the major changes in Netflix’s financial performance over this time period. Include an analysis of: 1) overall changes/growth in the firm’s revenues, assets, and liabilities; 2) common-size statements; 3) ratio analysis; and 4) analysis using the DuPont model.
You will be required to provide the conclusions regarding which way the major ratio categories are trending. An acceptable conclusion might be, for example: “profitability has increased over the last five years as evidenced by increasing net margin and gross margin ratios. This is the result of a decrease in cost of goods sold, higher margins because of increased market share, etc.” You should also research the notes to your company’s 10K to determine the probable causes of these changes (“Leverage increased because the company issued $50M in bonds to pay for a plant expansion.”).
Part 3 (Working Capital Analysis)
Using the same financial statements from your Financial Analysis (Part II), provide an analysis of the Netflix’s working capital policy and changes to this policy over a ten-year period. Your working capital analysis should include the following: 1) overall level and change in WC over the time period and the factors that caused these changes; 2) calculation of the Cash Conversion Cycle for the beginning and ending period and a discussion of causal factors and implication of these changes; 3) overall assessment of the firm’s working capital policy (i.e., is it conservative, moderate, or aggressive?). Compare your results to the firm’s industry averages.
Part 4 (Determination of WACC)
Using the principles and tools outlined in the textbook (Attached), form an estimate of the Weighted Average Cost of Capital (WACC) for NetFlix. In order to complete this task, you will need to do the following:
Determine the cost of debt: Using information from the firm’s website, annual report, the website Investing in Bonds and the library database sources, determine the ‘average’ rating of Netflix bonds and the current YTM on a composite of these bonds. Based on this information, estimate the current cost of debt for Netflix. Explain the approach and procedure you used to make your determination and what this number means.
Determine the cost of equity: Determine the required rate of return for your firm using the CAPM. Explain the approach and procedure you used (and justification for the sources of inputs used for your model) to make your determination and the meaning of this required rate of return.
Determine the capital structure of Netflix: Determine the market value of the firm’s debt and equity. Explain the approach and procedure you used and use these values to determine the weights for the WACC.
Finally, provide an overall explanation for your results and how Netflix will use this WACC. There are resources available in the Content area that will help guide your determination of WACC.
Part 5 (Stock Valuation)
In chapter 9, we learned how the dividend-discount model can be used to determine the value of a firm’s equity, or the current price of a share of stock. Use this model to estimate the value of a share of your firm’s stock and compare this estimate to the current market value. To do this, you will need to do the following:
1 – Estimate Netflix stock price using the dividend-discount model: Use an investment source and find: 1) the current dividend; 2) analyst’s estimate growth rate for the next five to ten years; 3) an alternative growth estimate using the firm’s historical growth rate or the formula “g=ROE x b”.
2 – Use your estimate of the cost of equity in the WACC for the rE part of your formula: Combine the above information into the dividend-discount model (DDM).
3 – Compare your result to the current market price of your firm’s stock. Provide analysis and an explanation of how they compare and explain any differences you observe.
Part 6 (Capital Budgeting Analysis, Capital Structure Analysis and Funding Growth Strategies, and Bibliography and Data)
Capital Budgeting Analysis
You have been asked to evaluate a potential acquisition of a smaller privately owned competitor. The acquisition candidate produces an EBITDA of 10% of your current EBITDA and is offered to your firm at a price of multiple of 8 times EBITDA. Assume the following:
-Current debt costs you 8% and you can raise additional debt at this rate today. The loan is to be amortized over 7 years.
-Current return on equity is 15%
-Current WACC is 10%
-Tax rate is 30% (constant)
-80% of the purchase price is considered depreciable assets – to be depreciated over ten years on a straight-line basis with no residual values.
-Residual value for this operation is to be 2x current EBITDA in year ten.
Create an after-tax cash flow analysis to answer the following:
-Economic analysis: is this a fundamentally sound investment?
-Using the tax cash flows and no debt (pure equity), is the prospect a positive NPV using ROE as the hurdle rate?
-Using the after tax cash flows and the firm’s WACC, is this project desirable? Explain how you came to this conclusion.
Capital Structure Analysis and Funding Growth Strategies
Imagine your firm has some attractive investment opportunities that it is considering. The capital budgeting process has been completed and found that these projects have a positive NPV and are desirable. The firm must raise financing for the projects in the amount equal to 5% of the current level of its total assets. As you know, these funds can come from a number of sources: operations, short-term debt, long-term debt (new bond issues), or equity (new stock issues).
Your task is to decide where funds for these projects should come from based on your knowledge of the firm and your knowledge of the current state of the economy (i.e., level of interest rates, state of the stock market, future prospects for the economy/firm). This section is worth 80 points. Your analysis should answer the following questions:
1 How much must your firm raise for the investments to be undertaken?
2 How will you determine where the funds should come from? Provide analysis for the following areas:
* Current capital structure of the firm, specifically, you must cite how some of the ratios you calculated in Part II will influence your decision.
* Federal Reserve policy and interest rates, meaning what are current borrowing interest rates and what direction do you believe these will trend in the near future?
* Stock price and state of the stock market, meaning are current stock prices high? Low? How could a firm’s financing choice(s) be impacted?
* Working capital policy
* Profit/loss situation and operating cash flows
—–NOTES FOR THIS ASSIGNMENT —–
Sources and Formatting: (20 points) – Due Week 8, along with your Completed Project
Remember to include a properly formatted APA bibliography page. All direct and paraphrased quotations within your paper are to be properly notated. All sources of information are to be properly identified.
As an appendix to your paper, copy and paste the financial statements from which you derived all your ratios, percentages, and any other quantitative data. Do not just provide a link.
The paper will be prepared in APA format and is to be double-spaced. Composition is an important part of your paper. Multiple grammar, spelling and/or punctuation errors will decrease your ability to communicate clearly your ideas to your audience.
Your final project should be formatted as a MS Word (.doc/.docx) file that has been edited carefully for grammar and style, and include a cover page and a complete bibliography and index of data.
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