In February 2014, Netflix took out a $400 million loan. Netflix is using these f
ID: 2481846 • Letter: I
Question
In February 2014, Netflix took out a $400 million loan. Netflix is using these funds to help to create original programming, such as its hit series "House of Cards," and to expand to Europe. Netflix is a publicly-held company trading on NASDAQ under the symbol NFLX. On March 10, 2014, Netflix common stock was selling for about $438.38 per share. As of December 31, 2012. Netflix had more than 55,587,000 shares of common stock outstanding. 1. What is the impact on Netflix's accounting equation from borrowing the $400 million? 2. Rather than borrowing the $400 million, Netflix could have issued common stock. Using the market price given in the article, how many shares of common stock would Netflix had to have issued to realize $400 million (ignore underwriting and broker fees)? 3. What are some possible reasons that Netflix chose to borrow the $400 million rather than issue stock?Explanation / Answer
Solution.
1. Showing the effect of Netfix's accounting equation from borrrowing the $400 million.
Acconting equation :-
Assests = Liabilities + Capital (Equity)
+ $400 million = + $400 million + nil
The accounting equation as per the available stock in Netfix is given below :
Assests = Liabilities + Capital (Equity)
(55,587,000X$438.38) $243,668,229,060 = 0 + $243,668,229,060
Borrowing $400mllion + $400,000,000 = + $400,000,000 + 0
New Equation 244,068,229,060 = $400,000,000 + $243,668,229,060
2. The number of shares Netfix had to issue to realise $400 million is given below:
Number of shares = Amount realise / Market price of share
= 400,000,000 / 438.38
= 912,450
3. There are some possible reason that Netfix chose to borrow the $400 million rather than issue stock these are given below :
1. The Netfix can issue the bonds
2. It can issue the debentures
3. It can issue bonus shares
4. It can issue preference shares