Investment Analysis Paper
Running head: INVESTMENT ANALYSIS
Investment Analysis Paper on Netflix, Inc. (NFLX)
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Investment Analysis Paper on Netflix, Inc. (NFLX)
Netflix, Inc. (NFLX) is a publicly-traded, retail entertainment company that offers television programs and movies to customers via direct-to-door delivery through its DVD service with over 100,000 titles, and through its Web-based streaming service. The company’s forwardlooking strategy includes efforts to increase access to its streaming service domestically and internationally, and to expand its content offerings through a mix of original program development and title acquisition (Netflix, 2014). The company operates three divisions: domestic streaming, international …show more content…
streaming, and domestic DVD-by-mail. NFLX releases financial information to investors and stakeholders through its investor resource website, as well as through SEC filings, webcasts, press releases phone call recordings, and a variety of other sources. Information is released to the public via the company’s social media channels.
Board of Directors
The proxy statement of Netflix, Inc. contains detailed biographies of prospective and current board members. These one-paragraph biographies outline the educational and professional qualification of each board member, and the relevance of their experience to the current operating model of NFLX (Netflix, 2014).
The proxy statement begins with an explanation of its many corporate governance processes, as well as the rules by which shareholders must abide (Netflix, 2014). The firm’s committees and their leaders/members are outlined in the proxy statement, and all efforts to avoid conflict of interest are detailed. Shareholder proposals are separated and detailed individually, and include information regarding the particular board members involved and
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influenced by the decisions proposed. There is space allowed at the end of each proposal for a
Netflix Opposing Statement that offers the opportunity for the company’s executive management to directly state any rebuttals to the board of directors’ proposals. The Compensation Discussion and Analysis section of the proxy statement spells out the company’s compensation policy and extensively discloses the compensation amounts of its officers.
Monitoring Potential of the Firm 's Board of Directors
The board of directors at Netflix, Inc. has an advanced monitoring capacity as the company is fairly transparent. In its Annual Statement, Netflix, Inc. discusses the many challenges that the business faced over the past year and the company’s responses to these challenges. The Risk Factors section of the report outlines the various risks the company faces and the potential effects of a faulty response to these risks to the overall business in great detail.
The Annual Report also includes financial explanations of the operational decisions made by company management and the rationale behind each major decision.
Strengths and Weaknesses of Board Structure
The NFLX board of directors is comprised of members with tenured and successful careers in both entertainment and technology, a clear strength of the board structure. There are seven members on the NFLX board of directors, and only two of them are women. The board composition shows a clear lack of diversity which is only compounded by the fact that there are zero minority board members, presenting a considerable weakness of the board structure.
Diversity in board composition provides key perspectives often missing from a homogenous board of white men, and can also be inspirational to the company’s diverse workforce (Carter,
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Simkins, & Simpson, 2003).
Ethical Concerns
Many board members serve simultaneously on boards of other companies, though not of direct competitors to Netflix, Inc. However, one can assume that there are potential opportunities for conflict to arise between the responsibilities of board members at NFLX and their responsibilities elsewhere. Another recognizable potential conflict of interest is Reed Hasting’s position as CEO and Chairman of the Board of Directors, which gives him an extreme amount of power and restricts the independent advisory capabilities of the board when attempting to hold executive management accountable.
Competitive Financial Ratio Comparison
Netflix, Inc. is an Internet television network that specializes in providing streaming television service with a great variety features, including no commercial advertising in program broadcasts and the ability to watch via tablet, TV, or computer. NFLX also provides direct-todoor DVD ordering services for subscription customers in the United States. Dish Network
Corporation is a broadcast satellite provider of subscription television services, and a direct competitor to Netflix, Inc. Both companies are publicly traded. Using the DuPont identity technique to take a closer look at return on equity (ROE) reveals consistencies in asset turnover and profit margin trends for both NFLX and Dish Network Corporation. Return on equity is an important financial ratio that measures the gains (or losses) of stock value to shareholders.
DuPont Identity
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The DuPont Identity is a ratio that measures return on equity so that firms can compare their efficiencies to those of their competitors in terms of stockholder value (Ross, Westerfield, &
Jaffe, 2013). The DuPont Identity measures three key components of return on equity (ROE): operating efficiency (profit margin), asset use efficiency (total asset turnover), and financial leverage (equity multiplier). The formula for the DuPont Identity is shown in Equation 1.
ROE = profit margin × total asset turnover × equity multiplier
(1)
Table 1: Raw Data for Netflix, Inc. (in millions)
Netflix
2011
2012
2013
Net income
$226
$17
$112
Revenue
$3,205
$3,609
$4,375
Assets
$1,831
$2,241
$3,059
Equity
$643
$745
$1,334
Table 2: Raw Data for Dish Network Corp. (in millions)
DISH
2011
2012
2013
$1,516
$637
$807
Revenue
$12,641
$14,048
$13,905
Assets
$11,470
$17,380
$20,376
Equity
($420)
$37
$977
Net income
Tables 1 and 2 show the financial data necessary to calculate the Dupont Identity measurements for both NFLX and DISH. Table 3 shows the DuPont Analysis of both companies.
Table 3: DuPont Analysis
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Netflix
DISH
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ROE
Profit Margin
Asset
Turnover
Equity
Multiplier
2011
35.04%
7.05%
1.75
2.84
2012
2.28%
0.47%
1.61
3.01
2013
8.38%
2.56%
1.43
2.29
2011
(360.49%)
11.99%
1.10
(27.31)
2012
1723.58%
4.53%
0.81
469.73
2013
82.27%
5.80%
0.68
20.86
Differences or Trends
Both companies experienced dramatic fluctuations in ROE between 2011 and 2012. The
DuPont Identity analysis shows DISH Network Corporation’s efforts to raise the level of equity in the firm by issuing over $4 billion in debt in 2012 and 2013. This caused a massive increase to its equity multiplier and brought ROE from negative to positive in a big way. Netflix maintained a fairly consistent equity multiplier from 2011 to 2013 but experienced a dramatic drop in profit margins in 2012, which rebounded in 2013 when the firm issued $500 million in debt to fund more projects and increase leverage.
Analysis of other key financial ratios, such as gross margin percentage, provide more information about the financial stability of these companies in relation to the results of the
DuPont Identity analysis. Gross margin analysis for both companies shows that Netflix, Inc. is much better at operational efficiency at the sales and delivery level than DISH Network
Corporation. DISH, on the other hand, maintains a greater cash flow than NFLX, which is most
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likely a reflection of Netflix’s investment in broadening its customer base and the continual purchase and development of new programming, as well as DISH’s multi-company umbrella model. Growth
The dividend growth model, which determines required return on investment, helps to establish an estimated growth rate for a firm. Netflix, Inc. does not pay out dividends; therefore no historical dividend data exists. The lack of dividend amount history makes the dividend growth model difficult, if not impossible, to apply to NFLX.
Dividend Growth Model
The dividend growth model establishes the estimated growth rate of a company using historical dividend information. The dividend growth model is shown in Equation 2, with constant growth assumed.
P0 = Div/(1+R) + Div(1+g)2/(1+R)2 + Div(1+g)3/(1+R)3 + … = Div/R-g
(2)
In Equation 2, P0 equals the present value of the stock investment, Div is the dividend yield at the end of the first period, R is the appropriate discount rate for the stock, and g is estimated rate of growth. With no dividend information available as NFLX does not pay out dividends, the dividend growth model is useless. However, an estimated growth rate is determinable for Netflix,
Inc.
NFLX does not pay out dividends because the company reinvests its earning back into the firm for use in capital investments and projects, therefore the firm growth rate model is
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preferable to the dividend growth model when measuring the growth potential of NFLX. The firm growth rate model uses earnings to calculate expected firm growth, or g, as shown in
Equation 3. g = retention ratio × return on retained earnings (ROE)
(3)
To calculate the estimated growth rate, retention ratio and return on retained earnings must be calculated first. Retention ratio is the amount of retained earnings to the amount of earnings this year (see Equation 4). retention ratio = retained earnings this year/earnings this year
For NFLX, the retention ratio is 1 since the firm retains all of its earnings. Next, the return on retained earnings is estimated based on historical return on equity (ROE).
Table 4: Growth Rate for Netflix, Inc.
Analysis
Formula
2013
ROE
Net income/ Equity
8.40%
Retention ratio
1 – (cash dividends/ net
1
income)
Growth rate in earnings (g)
Retention ratio x ROE
8.40% × 1 = 8.40%
Using the firm growth rate model, Netflix, Inc. shows an expected growth rate of 8.40%.
Issues with Using the Growth Model
Netflix, Inc. does not pay out dividends which makes using the dividend growth model extremely difficult. The dividend growth model uses historical and projected dividend payout
(4)
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amounts to determine estimated growth. However, with no dividend data available for NFLX, the equation is useless.
Reasonableness of Constant Growth
Financial data shows that NFLX posts earnings per share (EPS) and return on equity
(ROE) results that are highly variable (Morningstar, 2014). The unpredictability of both ROE and EPS for NFLX makes the firm’s stock a risky investment. In the last five years, Netflix,
Inc.’s EPS varied between 1.98 at its highest and 0.28 at its lowest. For reasons such as unpredictability of future EPS patterns, the analysts at Morningstar rate the stock as highly uncertain (Morningstar, 2014). It is not reasonable to assume constant growth for Netflix stock because it is a non-dividend paying firm that hedges its bets on attempting to radically increase stock value by investing in new growth opportunities each year.
Annual Report
The annual report of Netflix, Inc. outlines its future growth strategy and its current investments. The growth strategy of the company includes efforts to (a) produce and license inhouse original programming unique to the network; (b) increase content license ownership by purchasing rights to more shows not currently in the company’s catalog; and (c) continue international expansion of its streaming services. NFLX currently boasts more than 50 million subscribers in over 40 countries. The growth strategy of NFLX and its subsequent implications present real options for NFLX to maximize its investment and better build its operational infrastructure. INVESTMENT ANALYSIS
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Potential Real Options
Potential real options for the company exist as it continues to expand its operations internationally and reinvest its earnings back into the company. These real options include (a) the creation of original programming unique to the company; (b) opportunities for license expansion through the purchase of greater quantities of varied content; (c) expansion or abandonment of its
DVD-by-mail operations; and (d) continuance or abandonment of its international market expansion efforts.
Of the four real options identified, Netflix’s international market expansion efforts present the greatest opportunity to effect the firm’s overall health. In the 2013 annual report,
Netflix, Inc. (2014) stated that international operations require the investment of significant resources into foreign markets, many of which pose regulatory, economic, and political risks not similar to those of the United States. However, international operations provide NFLX with a huge competitive advantage over other Internet television networks, such as its closest streaming subscription competitor Hulu, Inc., who does not have any international operations. This makes
NFLX an international pioneer in the streaming television industry with significant competitive advantage over Hulu, Inc. and Dish Network Corporation.
Another serious real option presented to Netflix, Inc. is the possible abandonment of its
DVD-by-mail operations. The company anticipates continual decline in its DVD-by-mail subscriptions, yet anticipates that the division will eventually serve as a source of contribution profit that will help fund losses from its international expansion operations. Netflix, Inc.’s DVDby-mail service depends heavily on the United States Postal Service and the demand of DVDs
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over streaming content by current and potential subscribers; both of these dynamics make this division very risky. Of the six properties owned by the company, three are used to support the
DVD-by-mail operations. With the abandonment of the DVD division, these properties may be sold or repurposed to house more streaming technologies and systems increasing the support for domestic streaming. There are real options for increasing the value of investments through continued multinational operation expansion (Song, 2014), and by possibly abandoning DVDby-mail operations in favor of aggressively expanding international streaming services.
Capital Budgeting Process
Netflix, Inc.
does not pay out dividends, and all earnings are reinvested back into the firm. This means there is always capital on hand for project investment as long as NFLX posts earnings. Equity is available in the firm for it to take on any real option it may choose, and its three divisions are all capable of creating a new project that would affect the other lines of the business, as well as the particular division itself. The company is also adept at issuing debt by way of notes to increase capital and cash flow. However, Netflix, Inc. should be careful about maintaining an optimal debt/equity mix. The company’s past and current capital investment projects have been successful at generating sizable returns. NFLX has a 10-year average of
19.61% return on invested capital (Morningstar, 2014).
Beta
As noted by Ross, Westerfield, and Jaffe (2013), beta is a metric that “measures the responsiveness of a security to movements in the market portfolio” (p. 362). It is of critical importance to investors because it is a “measure of the systemic risk of the stock” (Patton &
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Verardo, 2012, p. 2789). Beta serves as an indicator of how a stock will perform in a volatile …show more content…
market.
If a stock has a beta of 5%, then it will perform 5 percentage points higher than the market when the market is up, and 5 percentage points lower than the market when the market is down. The larger the beta, the riskier the stock is to the investor’s portfolio (Ross et al., 2013).
The appropriate beta coefficient for Netflix, Inc. (NFLX) is 1.3 which means that the firm performs higher (or lower) than the overall market (Yahoo Finance, 2014; Google Finance,
2014). Beta is also an important part of the capital asset pricing model (CAPM) in the determination of expected return on a security.
Expected Return – CAPM
The capital asset pricing model (CAPM) calculates the expected return on a security. The model is widely adopted for asset pricing because “it offers powerful and intuitively pleasing predictions about how to measure risk and the relation between expected return and risk” (Fama
& French, 2004, p. 25). As the formula for expected return, CAPM uses beta as shown in
Equation 5.
RE = RF + b × (RM - RF)
(5)
In the equation, RE is the expected return, RF is the risk-free rate, b is the stock’s beta, and RM is the expected return on the market. The risk-free rate is the interest rate of an investment with no risk, an estimate represented by the current rate of U.S. Treasury bills (Ross et al., 2013). The current interest rate for 3-month U.S. Treasury bills is 0.01% (U.S. Department of the Treasury,
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2014).
The expected return on the market is the addition of the risk-free rate and the market risk premium (RP) as demonstrated by Equation 6.
RM = RF + RP
(6)
The average historical equity premium is 6.9%, so 7% is an estimate for the risk premium (Ross et al., 2013). Therefore, the current expected return on the market is 7.01% = .01% + 7%. With this information, the CAPM for Netflix, Inc. is calculated as .01% + 1.3 x (7% - .01%) = 9.10%.
The expected return on NFLX stock is 9.10%.
Dividend Growth Model versus CAPM
The dividend growth model depends on current and future dividend payout amounts to determine patterns in dividend activity and stock valuation (Ross et al., 2013). Netflix, Inc. currently does not pay dividends and has not done so in its history of operation. Therefore, the dividend growth model is all but useless in determining stock valuation as the amounts necessary are not available.
The capital asset pricing model (CAPM) is appropriate for calculating the expected return on NFLX stock and the risk associated with adding NFLX to a diversified portfolio. All of the necessary components of calculating expected return using CAPM for Netflix, Inc. are available.
The beta for NFLX is 1.3 which signals that the stock follows the movements of the market, but performs higher (or lower in times of downturn) than the market and carries a substantial level of risk. This is understandable considering that the expected return for Netflix, Inc. stock is 9.10%,
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much higher than the market premium of 7.01%, as indicated by the beta coefficient.
Debt and Equity
A company may use a combination of both debt and equity instruments to fund capital projects and investments (Ross et al., 2013. Both a firm’s market value of debt and market value of equity determine the firm’s value. These financial elements are necessary for the calculation of firm value and weighted average cost of capital (WACC).
Debt
For this analysis, the book value of debt represents the market value of debt. Netflix owns
$500 million dollars in long-term debt as a result of a recent issuance of notes, due in 2021, to increase capital (Netflix, 2014). The cost of debt is determined to be 5.37% (Netflix, 2014).
NFLX used the profits from the issuance of new debt to pay off outstanding debt with an 8.50% cost of debt, thus lowering the firm’s interest payment costs. Table 5 shows the current debt structure for NFLX.
Table 5: Debt Structure for Netflix, Inc.
Netflix, Inc.
2013
Long term debt
$500,000,000
Cost of Debt %
5.37%
Equity
The market value of equity is calculated by multiplying the number of outstanding shares by the current stock price (Ross et al., 2013). Equation 7 demonstrates this calculation for NFLX,
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with MVE representing the market value of equity.
MVE = (# of outstanding shares) (current stock price)
(7)
Using this equation, the market value of equity for NFLX is $27,937,908 = (60,761)($459.80).
When combined with the market value of debt for the company, one calculates a total value of
$527,937,908 for Netflix, Inc.
Weighted Cost of Capital
The weighted average cost of capital (WACC) is a metric that “weighs the cost of equity and cost of debt” (Ross et al., 2013). Financial analysts use WACC to determine the optimal debt-equity mix, or rather the appropriate rate of return “the firm must earn on its existing assists to maintain its value” (Block, 2011; Ross et al., 2013, p. 418). The WACC also takes taxes into consideration providing a more realistic and effective number. NFLX pays a current tax rate of
38.03% (Morningstar, 2014), and the return the market as established previously is 7.01%. The required rate of return, or WACC, for Netflix, Inc. is 3.63% (see Appendix A).
Capital Budgeting Assumptions
The WACC of a firm is useful in determining project feasibility and overall firm valuation, as well as net present value (Ross et al., 2013). Using the capital assets pricing model to determine WACC is particularly beneficial in reviewing NFLX as the firm does not produce the dividends necessary to use the dividend growth model. When considering new capital project investments, WACC provides a litmus test of required return to assist in financial decisions.
Difficulties in using WACC when investigating Netflix, Inc. include lack of stability due
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to the company’s penchant for taking on and paying off debt and the application of WACC for foreign divisions. As NFLX continues to pursue international operations and use equity and debt to fund these capital projects, the market value of the firm will vary significantly across countries and international markets (Errunza & Senbet, 1981).
However, the annual report of Netflix provides a detailed look into capital structure, including both debt and equity, and the ratios necessary to calculate WACC.
Competitive Review of Debt and Equity Mix
As both Netflix, Inc. and Dish Network Corporation are firms with leverage, in the form of debt sold in notes, an interested investor should expect returns greater than the market average due to the risk associated with levered equity (Ross, Westerfield, & Jaffe, 2013).
Dish Network Corporation (DISH) is a direct-broadcast satellite television provider located and operating in the United States, and a major Netflix, Inc. competitor.
Competitive Review
Dish Network Corporation maintains a market value of debt equaling $12,596,793,000 and a market value of equity of $23,555,730,000 (Dish Network Corporation, 2014). The firm’s shares currently sell for $58.53 with 460,600,000 shares outstanding. DISH’s corporate tax rate of 30.51% is 7.52 percentage points lower than NFLX’s. While enjoying a lower tax rate than
NFLX, DISH also owns a variety of auxiliary brands such as Blockbuster Video, which is currently languishing and the firm plans to close 300 stores across the country,
and
Dishanywhere, DISH’s subscriber-only streaming service. The required rate of return, or WACC, for Dish Network Corporation is 3.57% (see Appendix B), and the beta for the company is 0.40.
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Both the WACC and beta for DISH underscore the inability of the firm to develop its service offerings to create a significant competitive advantage. Operating in a market with a beta of 1, DISH is a stock that analysts expect to perform closely to the market but with underwhelming progress, as opposed to Netflix, Inc.’s riskier stock that promises greater losses and greater returns with a beta of 1.3. The market is aware of the potential for NFLX to pay out large returns with long-term value creation as a staple of the business, and the company’s stock is trading at $459.80 to DISH’s $58.83. The financial strength and operational advantages of
Netflix, Inc. over Dish Network Corporation are also evident when the WACC of both companies are compared. The required rate of return for Netflix, Inc. is 3.63%, and DISH’s required rate of return is 3.57% despite its incredible earnings versus its debt burden, which signals that NFLX is expected to perform much better than DISH given the capital structures of both organizations. The debt and equity metrics for both companies are shown in Table 6 below.
Table 6: Debt and Equity Information for Netflix, Inc. (NFLX) and Dish Network Corporation
(DISH):
NFLX
Market value of debt
Market value of equity
Total value
WACC
Corporate tax rate
DISH
Market value of debt
Market value of equity
2013
$500,000,000
$27,937,908
$527,937,908
3.63%
38.03%
2013
$60,786
$349,854
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Total value
WACC
Corporate tax rate
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$401,640
3.57%
30.51%
Capital Structure Theories
Netflix, Inc. as a non-dividend paying firm retains its earnings and invests them back into the company to fund future projects. Dish Network Corporation issues dividends to its shareholders, but still maintains considerable debt. DISH issued new debt yearly for the past three years, augmenting its debt-equity structure definitively. Two theories of capital structure, pecking-order theory and trade-off theory, explain how companies decide on a capital structure depending on how firms use funds to invest in projects. The pecking-order theory, which is more applicable to Netflix, Inc., suggests that firm’s prefer to fund projects with retained earnings first, then safe debt, and hesitantly with riskier debt securities (Fama & French, 2002). NFLX does not pay dividends to investors and uses its retained earnings for capital investments, so it is understandable that the firm would use the pecking-order theory. By contrast, the trade-off theory offers that every firm has an optimal debt-equity level and should strive to maintain its structure at that level. DISH’s continual use of debt to finance projects suggests that it follows the tradeoff theory.
Summary
Netflix, Inc. is an Internet-based subscription television service with operations in over
40 countries around the world. The company provides streaming services which are available to consumers via smart televisions, wireless streaming devices, gaming systems, and portable
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devices such as tablets and cellular phones. In 2014, Netflix, Inc. reached 50 million subscribers and continued its expansion into international markets. Competitors to Netflix, Inc. are Hulu
Plus, DirectTV, Dish Network Corporation, and a host of other streaming services, video rental kiosks, and broadcast service providers. Recent news of HBO’s planned streaming service offering, HBO Go, caused Netflix, Inc.’s stock price to vary rapidly as investors noticed potential for true competition to the firm’s current model and breadth of operations.
In its annual report, NFLX named increased content license procurement, the creation of original programming, and international expansion as its primary drivers. Risks to the firm include struggling DVD-by-mail subscriptions, the supplier power of directors and producers, and varying television consumption patterns by subscribers in the international markets it is entering. The firm does not pay dividends to shareholders but reinvests its earnings in the firm instead. With an expected return on investment of 9.10%, NFLX is expected to produce significantly higher returns than the market.
As a risk-averse investor, Netflix, Inc.’s impressive rate of return and promising growth potential is not enough to convince me to invest. The entertainment market is flush with service providers and firms in a variety of industries that give pause to an investment in such as potentially risky firm. I would consider investing in NFLX after the firm begins to pay dividends and its dividend history is available for comparison to its competitors. A stock price of $459.80 per share is presents a serious investment that requires much more proof of high dividend payout potential for a risk-averse investor, whereas investors with diverse portfolios that can soften the effects of risk may find Netflix, Inc. to be a worthy long-term investment.
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References
Block, S. (2011). Does the weighted average cost of capital describe the real world approach to the discount rate? The Engineering Economist, 56, 170-180. doi:10.1080/0013791X.
2011.573618
Carter, D.A., Simkins, B.J., & Simpson, W.G. (2003). Corporate governance, board diversity, and firm value. The Financial Review, 38, 33-53. doi:10.1111/1540-6288.00034
Dish Network Corporation. (2014). 2013 annual report of Dish Network Corporation. Retrieved from http://files.shareholder.com/downloads/DISH/
3560933695x0x787586/72A181FA-886D-424C-954B-C6B64E3B9A76/
DISH_Network_Corporation_2014_Annual_Report.pdf
Errunza, V.R., & Senbet, L.W. (1981). The effect of international operations on the market value of the firm: Theory and evidence. The Journal of Finance, 36(2), 401-417. doi:
10.2307/2327024
Fama, E.F., & French, K.R. (2002). Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Services, 15, 1-33. doi:10.2139/ssrn.199431
Fama, E.F, & French, K.R. (2004). The capital asset pricing model: Theory and evidence.
Journal of Economic Perspectives, 18(3), 25-46. doi:10.2139/ssrn.440920
Google Finance. (2014). Netflix, Inc. Retrieved from https://www.google.com/finance? cid=672501 INVESTMENT ANALYSIS
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Morningstar. (2014). Growth, Profitability, and Financial Ratios for DISH Network Corp
(DISH). Retrieved from http://financials.morningstar.com/ratios/r.html? t=DISH®ion=usa&culture=en-US Morningstar. (2014). Growth, Profitability, and Financial Ratios for Netflix Inc. (NFLX).
Retrieved from http://financials.morningstar.com/ratios/r.html? t=NFLX®ion=usa&culture=en-US Morningstar. (2014). NFLX key ratios report. Retrieved from http://financials.morningstar.com/ ratios/r.html?t=NFLX®ion=usa&culture=en-US Netflix. (2014). 2013 annual report of Netflix, Inc. Retrieved from http://files.shareholder.com/ downloads/NFLX/3454835262x0x748407/76a245dc-3314-401c-baba-ed229ca9145a/ NFLX_AR.PDF
Netflix. (2014). 2014 proxy statement for annual meeting of stockholders to be held on June 9,
2014. Retrieved from http://files.shareholder.com/downloads/NFLX/
3454835262x0x748406/131946bc-3760-46aa-a938-cb54cb68ec83/NFLX_Proxy.PDF
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10.1093/rfs/hhs073
Ross, S. R., Westerfield, R. W., & Jaffe, J. (2013). Corporate finance (10th ed.). NY: McGrawHill.
Song, S. (2014). Value and cost of multinationality: International diversification and real options effects. The International Journal of Business and Finance Research, 8(5), 115-125.
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Retrieved from http://www.theibrf.com
United States Department of the Treasury. (2014). Daily treasury yield curve rates. Retrieved from http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/
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Appendix A
Calculations for the weighted average cost of capital (WACC) for Netflix, Inc.
Weighted average cost of capital (WACC) formula:
RWACC = (S/S + B) × RS + (B/S + B) × RB × (1 - tC)
S = market value of firm equity = $27,937,908
B = market value of firm debt = $500,000,000
RS* = cost of equity = 9.07%
RB = borrowing rate of debt = 5.37% tC = corporation’s tax rate = 38.03%
*RS = RF + (RM - RF) × b beta: 1.3
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Appendix B
Calculations for the weighted average cost of capital (WACC) for Dish Network Corp.
Weighted average cost of capital (WACC) formula:
RWACC = (S/S + B) × RS + (B/S + B) × RB × (1 - tC)
S = market value of firm equity = $23,555,730,000
B = market value of firm debt = $12,596,793,000
RS* = cost of equity = 2.86%
RB = borrowing rate of debt = 7% tC = corporation’s tax rate = 30.51%
*RS = RF + (RM - RF) × b beta: 0.40
Investment Analysis Paper on Netflix, Inc. (NFLX)
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Investment Analysis Paper on Netflix, Inc. (NFLX)
Netflix, Inc. (NFLX) is a publicly-traded, retail entertainment company that offers television programs and movies to customers via direct-to-door delivery through its DVD service with over 100,000 titles, and through its Web-based streaming service. The company’s forwardlooking strategy includes efforts to increase access to its streaming service domestically and internationally, and to expand its content offerings through a mix of original program development and title acquisition (Netflix, 2014). The company operates three divisions: domestic streaming, international …show more content…
streaming, and domestic DVD-by-mail. NFLX releases financial information to investors and stakeholders through its investor resource website, as well as through SEC filings, webcasts, press releases phone call recordings, and a variety of other sources. Information is released to the public via the company’s social media channels.
Board of Directors
The proxy statement of Netflix, Inc. contains detailed biographies of prospective and current board members. These one-paragraph biographies outline the educational and professional qualification of each board member, and the relevance of their experience to the current operating model of NFLX (Netflix, 2014).
The proxy statement begins with an explanation of its many corporate governance processes, as well as the rules by which shareholders must abide (Netflix, 2014). The firm’s committees and their leaders/members are outlined in the proxy statement, and all efforts to avoid conflict of interest are detailed. Shareholder proposals are separated and detailed individually, and include information regarding the particular board members involved and
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influenced by the decisions proposed. There is space allowed at the end of each proposal for a
Netflix Opposing Statement that offers the opportunity for the company’s executive management to directly state any rebuttals to the board of directors’ proposals. The Compensation Discussion and Analysis section of the proxy statement spells out the company’s compensation policy and extensively discloses the compensation amounts of its officers.
Monitoring Potential of the Firm 's Board of Directors
The board of directors at Netflix, Inc. has an advanced monitoring capacity as the company is fairly transparent. In its Annual Statement, Netflix, Inc. discusses the many challenges that the business faced over the past year and the company’s responses to these challenges. The Risk Factors section of the report outlines the various risks the company faces and the potential effects of a faulty response to these risks to the overall business in great detail.
The Annual Report also includes financial explanations of the operational decisions made by company management and the rationale behind each major decision.
Strengths and Weaknesses of Board Structure
The NFLX board of directors is comprised of members with tenured and successful careers in both entertainment and technology, a clear strength of the board structure. There are seven members on the NFLX board of directors, and only two of them are women. The board composition shows a clear lack of diversity which is only compounded by the fact that there are zero minority board members, presenting a considerable weakness of the board structure.
Diversity in board composition provides key perspectives often missing from a homogenous board of white men, and can also be inspirational to the company’s diverse workforce (Carter,
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Simkins, & Simpson, 2003).
Ethical Concerns
Many board members serve simultaneously on boards of other companies, though not of direct competitors to Netflix, Inc. However, one can assume that there are potential opportunities for conflict to arise between the responsibilities of board members at NFLX and their responsibilities elsewhere. Another recognizable potential conflict of interest is Reed Hasting’s position as CEO and Chairman of the Board of Directors, which gives him an extreme amount of power and restricts the independent advisory capabilities of the board when attempting to hold executive management accountable.
Competitive Financial Ratio Comparison
Netflix, Inc. is an Internet television network that specializes in providing streaming television service with a great variety features, including no commercial advertising in program broadcasts and the ability to watch via tablet, TV, or computer. NFLX also provides direct-todoor DVD ordering services for subscription customers in the United States. Dish Network
Corporation is a broadcast satellite provider of subscription television services, and a direct competitor to Netflix, Inc. Both companies are publicly traded. Using the DuPont identity technique to take a closer look at return on equity (ROE) reveals consistencies in asset turnover and profit margin trends for both NFLX and Dish Network Corporation. Return on equity is an important financial ratio that measures the gains (or losses) of stock value to shareholders.
DuPont Identity
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The DuPont Identity is a ratio that measures return on equity so that firms can compare their efficiencies to those of their competitors in terms of stockholder value (Ross, Westerfield, &
Jaffe, 2013). The DuPont Identity measures three key components of return on equity (ROE): operating efficiency (profit margin), asset use efficiency (total asset turnover), and financial leverage (equity multiplier). The formula for the DuPont Identity is shown in Equation 1.
ROE = profit margin × total asset turnover × equity multiplier
(1)
Table 1: Raw Data for Netflix, Inc. (in millions)
Netflix
2011
2012
2013
Net income
$226
$17
$112
Revenue
$3,205
$3,609
$4,375
Assets
$1,831
$2,241
$3,059
Equity
$643
$745
$1,334
Table 2: Raw Data for Dish Network Corp. (in millions)
DISH
2011
2012
2013
$1,516
$637
$807
Revenue
$12,641
$14,048
$13,905
Assets
$11,470
$17,380
$20,376
Equity
($420)
$37
$977
Net income
Tables 1 and 2 show the financial data necessary to calculate the Dupont Identity measurements for both NFLX and DISH. Table 3 shows the DuPont Analysis of both companies.
Table 3: DuPont Analysis
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Netflix
DISH
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ROE
Profit Margin
Asset
Turnover
Equity
Multiplier
2011
35.04%
7.05%
1.75
2.84
2012
2.28%
0.47%
1.61
3.01
2013
8.38%
2.56%
1.43
2.29
2011
(360.49%)
11.99%
1.10
(27.31)
2012
1723.58%
4.53%
0.81
469.73
2013
82.27%
5.80%
0.68
20.86
Differences or Trends
Both companies experienced dramatic fluctuations in ROE between 2011 and 2012. The
DuPont Identity analysis shows DISH Network Corporation’s efforts to raise the level of equity in the firm by issuing over $4 billion in debt in 2012 and 2013. This caused a massive increase to its equity multiplier and brought ROE from negative to positive in a big way. Netflix maintained a fairly consistent equity multiplier from 2011 to 2013 but experienced a dramatic drop in profit margins in 2012, which rebounded in 2013 when the firm issued $500 million in debt to fund more projects and increase leverage.
Analysis of other key financial ratios, such as gross margin percentage, provide more information about the financial stability of these companies in relation to the results of the
DuPont Identity analysis. Gross margin analysis for both companies shows that Netflix, Inc. is much better at operational efficiency at the sales and delivery level than DISH Network
Corporation. DISH, on the other hand, maintains a greater cash flow than NFLX, which is most
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likely a reflection of Netflix’s investment in broadening its customer base and the continual purchase and development of new programming, as well as DISH’s multi-company umbrella model. Growth
The dividend growth model, which determines required return on investment, helps to establish an estimated growth rate for a firm. Netflix, Inc. does not pay out dividends; therefore no historical dividend data exists. The lack of dividend amount history makes the dividend growth model difficult, if not impossible, to apply to NFLX.
Dividend Growth Model
The dividend growth model establishes the estimated growth rate of a company using historical dividend information. The dividend growth model is shown in Equation 2, with constant growth assumed.
P0 = Div/(1+R) + Div(1+g)2/(1+R)2 + Div(1+g)3/(1+R)3 + … = Div/R-g
(2)
In Equation 2, P0 equals the present value of the stock investment, Div is the dividend yield at the end of the first period, R is the appropriate discount rate for the stock, and g is estimated rate of growth. With no dividend information available as NFLX does not pay out dividends, the dividend growth model is useless. However, an estimated growth rate is determinable for Netflix,
Inc.
NFLX does not pay out dividends because the company reinvests its earning back into the firm for use in capital investments and projects, therefore the firm growth rate model is
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preferable to the dividend growth model when measuring the growth potential of NFLX. The firm growth rate model uses earnings to calculate expected firm growth, or g, as shown in
Equation 3. g = retention ratio × return on retained earnings (ROE)
(3)
To calculate the estimated growth rate, retention ratio and return on retained earnings must be calculated first. Retention ratio is the amount of retained earnings to the amount of earnings this year (see Equation 4). retention ratio = retained earnings this year/earnings this year
For NFLX, the retention ratio is 1 since the firm retains all of its earnings. Next, the return on retained earnings is estimated based on historical return on equity (ROE).
Table 4: Growth Rate for Netflix, Inc.
Analysis
Formula
2013
ROE
Net income/ Equity
8.40%
Retention ratio
1 – (cash dividends/ net
1
income)
Growth rate in earnings (g)
Retention ratio x ROE
8.40% × 1 = 8.40%
Using the firm growth rate model, Netflix, Inc. shows an expected growth rate of 8.40%.
Issues with Using the Growth Model
Netflix, Inc. does not pay out dividends which makes using the dividend growth model extremely difficult. The dividend growth model uses historical and projected dividend payout
(4)
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amounts to determine estimated growth. However, with no dividend data available for NFLX, the equation is useless.
Reasonableness of Constant Growth
Financial data shows that NFLX posts earnings per share (EPS) and return on equity
(ROE) results that are highly variable (Morningstar, 2014). The unpredictability of both ROE and EPS for NFLX makes the firm’s stock a risky investment. In the last five years, Netflix,
Inc.’s EPS varied between 1.98 at its highest and 0.28 at its lowest. For reasons such as unpredictability of future EPS patterns, the analysts at Morningstar rate the stock as highly uncertain (Morningstar, 2014). It is not reasonable to assume constant growth for Netflix stock because it is a non-dividend paying firm that hedges its bets on attempting to radically increase stock value by investing in new growth opportunities each year.
Annual Report
The annual report of Netflix, Inc. outlines its future growth strategy and its current investments. The growth strategy of the company includes efforts to (a) produce and license inhouse original programming unique to the network; (b) increase content license ownership by purchasing rights to more shows not currently in the company’s catalog; and (c) continue international expansion of its streaming services. NFLX currently boasts more than 50 million subscribers in over 40 countries. The growth strategy of NFLX and its subsequent implications present real options for NFLX to maximize its investment and better build its operational infrastructure. INVESTMENT ANALYSIS
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Potential Real Options
Potential real options for the company exist as it continues to expand its operations internationally and reinvest its earnings back into the company. These real options include (a) the creation of original programming unique to the company; (b) opportunities for license expansion through the purchase of greater quantities of varied content; (c) expansion or abandonment of its
DVD-by-mail operations; and (d) continuance or abandonment of its international market expansion efforts.
Of the four real options identified, Netflix’s international market expansion efforts present the greatest opportunity to effect the firm’s overall health. In the 2013 annual report,
Netflix, Inc. (2014) stated that international operations require the investment of significant resources into foreign markets, many of which pose regulatory, economic, and political risks not similar to those of the United States. However, international operations provide NFLX with a huge competitive advantage over other Internet television networks, such as its closest streaming subscription competitor Hulu, Inc., who does not have any international operations. This makes
NFLX an international pioneer in the streaming television industry with significant competitive advantage over Hulu, Inc. and Dish Network Corporation.
Another serious real option presented to Netflix, Inc. is the possible abandonment of its
DVD-by-mail operations. The company anticipates continual decline in its DVD-by-mail subscriptions, yet anticipates that the division will eventually serve as a source of contribution profit that will help fund losses from its international expansion operations. Netflix, Inc.’s DVDby-mail service depends heavily on the United States Postal Service and the demand of DVDs
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over streaming content by current and potential subscribers; both of these dynamics make this division very risky. Of the six properties owned by the company, three are used to support the
DVD-by-mail operations. With the abandonment of the DVD division, these properties may be sold or repurposed to house more streaming technologies and systems increasing the support for domestic streaming. There are real options for increasing the value of investments through continued multinational operation expansion (Song, 2014), and by possibly abandoning DVDby-mail operations in favor of aggressively expanding international streaming services.
Capital Budgeting Process
Netflix, Inc.
does not pay out dividends, and all earnings are reinvested back into the firm. This means there is always capital on hand for project investment as long as NFLX posts earnings. Equity is available in the firm for it to take on any real option it may choose, and its three divisions are all capable of creating a new project that would affect the other lines of the business, as well as the particular division itself. The company is also adept at issuing debt by way of notes to increase capital and cash flow. However, Netflix, Inc. should be careful about maintaining an optimal debt/equity mix. The company’s past and current capital investment projects have been successful at generating sizable returns. NFLX has a 10-year average of
19.61% return on invested capital (Morningstar, 2014).
Beta
As noted by Ross, Westerfield, and Jaffe (2013), beta is a metric that “measures the responsiveness of a security to movements in the market portfolio” (p. 362). It is of critical importance to investors because it is a “measure of the systemic risk of the stock” (Patton &
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Verardo, 2012, p. 2789). Beta serves as an indicator of how a stock will perform in a volatile …show more content…
market.
If a stock has a beta of 5%, then it will perform 5 percentage points higher than the market when the market is up, and 5 percentage points lower than the market when the market is down. The larger the beta, the riskier the stock is to the investor’s portfolio (Ross et al., 2013).
The appropriate beta coefficient for Netflix, Inc. (NFLX) is 1.3 which means that the firm performs higher (or lower) than the overall market (Yahoo Finance, 2014; Google Finance,
2014). Beta is also an important part of the capital asset pricing model (CAPM) in the determination of expected return on a security.
Expected Return – CAPM
The capital asset pricing model (CAPM) calculates the expected return on a security. The model is widely adopted for asset pricing because “it offers powerful and intuitively pleasing predictions about how to measure risk and the relation between expected return and risk” (Fama
& French, 2004, p. 25). As the formula for expected return, CAPM uses beta as shown in
Equation 5.
RE = RF + b × (RM - RF)
(5)
In the equation, RE is the expected return, RF is the risk-free rate, b is the stock’s beta, and RM is the expected return on the market. The risk-free rate is the interest rate of an investment with no risk, an estimate represented by the current rate of U.S. Treasury bills (Ross et al., 2013). The current interest rate for 3-month U.S. Treasury bills is 0.01% (U.S. Department of the Treasury,
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2014).
The expected return on the market is the addition of the risk-free rate and the market risk premium (RP) as demonstrated by Equation 6.
RM = RF + RP
(6)
The average historical equity premium is 6.9%, so 7% is an estimate for the risk premium (Ross et al., 2013). Therefore, the current expected return on the market is 7.01% = .01% + 7%. With this information, the CAPM for Netflix, Inc. is calculated as .01% + 1.3 x (7% - .01%) = 9.10%.
The expected return on NFLX stock is 9.10%.
Dividend Growth Model versus CAPM
The dividend growth model depends on current and future dividend payout amounts to determine patterns in dividend activity and stock valuation (Ross et al., 2013). Netflix, Inc. currently does not pay dividends and has not done so in its history of operation. Therefore, the dividend growth model is all but useless in determining stock valuation as the amounts necessary are not available.
The capital asset pricing model (CAPM) is appropriate for calculating the expected return on NFLX stock and the risk associated with adding NFLX to a diversified portfolio. All of the necessary components of calculating expected return using CAPM for Netflix, Inc. are available.
The beta for NFLX is 1.3 which signals that the stock follows the movements of the market, but performs higher (or lower in times of downturn) than the market and carries a substantial level of risk. This is understandable considering that the expected return for Netflix, Inc. stock is 9.10%,
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much higher than the market premium of 7.01%, as indicated by the beta coefficient.
Debt and Equity
A company may use a combination of both debt and equity instruments to fund capital projects and investments (Ross et al., 2013. Both a firm’s market value of debt and market value of equity determine the firm’s value. These financial elements are necessary for the calculation of firm value and weighted average cost of capital (WACC).
Debt
For this analysis, the book value of debt represents the market value of debt. Netflix owns
$500 million dollars in long-term debt as a result of a recent issuance of notes, due in 2021, to increase capital (Netflix, 2014). The cost of debt is determined to be 5.37% (Netflix, 2014).
NFLX used the profits from the issuance of new debt to pay off outstanding debt with an 8.50% cost of debt, thus lowering the firm’s interest payment costs. Table 5 shows the current debt structure for NFLX.
Table 5: Debt Structure for Netflix, Inc.
Netflix, Inc.
2013
Long term debt
$500,000,000
Cost of Debt %
5.37%
Equity
The market value of equity is calculated by multiplying the number of outstanding shares by the current stock price (Ross et al., 2013). Equation 7 demonstrates this calculation for NFLX,
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with MVE representing the market value of equity.
MVE = (# of outstanding shares) (current stock price)
(7)
Using this equation, the market value of equity for NFLX is $27,937,908 = (60,761)($459.80).
When combined with the market value of debt for the company, one calculates a total value of
$527,937,908 for Netflix, Inc.
Weighted Cost of Capital
The weighted average cost of capital (WACC) is a metric that “weighs the cost of equity and cost of debt” (Ross et al., 2013). Financial analysts use WACC to determine the optimal debt-equity mix, or rather the appropriate rate of return “the firm must earn on its existing assists to maintain its value” (Block, 2011; Ross et al., 2013, p. 418). The WACC also takes taxes into consideration providing a more realistic and effective number. NFLX pays a current tax rate of
38.03% (Morningstar, 2014), and the return the market as established previously is 7.01%. The required rate of return, or WACC, for Netflix, Inc. is 3.63% (see Appendix A).
Capital Budgeting Assumptions
The WACC of a firm is useful in determining project feasibility and overall firm valuation, as well as net present value (Ross et al., 2013). Using the capital assets pricing model to determine WACC is particularly beneficial in reviewing NFLX as the firm does not produce the dividends necessary to use the dividend growth model. When considering new capital project investments, WACC provides a litmus test of required return to assist in financial decisions.
Difficulties in using WACC when investigating Netflix, Inc. include lack of stability due
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to the company’s penchant for taking on and paying off debt and the application of WACC for foreign divisions. As NFLX continues to pursue international operations and use equity and debt to fund these capital projects, the market value of the firm will vary significantly across countries and international markets (Errunza & Senbet, 1981).
However, the annual report of Netflix provides a detailed look into capital structure, including both debt and equity, and the ratios necessary to calculate WACC.
Competitive Review of Debt and Equity Mix
As both Netflix, Inc. and Dish Network Corporation are firms with leverage, in the form of debt sold in notes, an interested investor should expect returns greater than the market average due to the risk associated with levered equity (Ross, Westerfield, & Jaffe, 2013).
Dish Network Corporation (DISH) is a direct-broadcast satellite television provider located and operating in the United States, and a major Netflix, Inc. competitor.
Competitive Review
Dish Network Corporation maintains a market value of debt equaling $12,596,793,000 and a market value of equity of $23,555,730,000 (Dish Network Corporation, 2014). The firm’s shares currently sell for $58.53 with 460,600,000 shares outstanding. DISH’s corporate tax rate of 30.51% is 7.52 percentage points lower than NFLX’s. While enjoying a lower tax rate than
NFLX, DISH also owns a variety of auxiliary brands such as Blockbuster Video, which is currently languishing and the firm plans to close 300 stores across the country,
and
Dishanywhere, DISH’s subscriber-only streaming service. The required rate of return, or WACC, for Dish Network Corporation is 3.57% (see Appendix B), and the beta for the company is 0.40.
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Both the WACC and beta for DISH underscore the inability of the firm to develop its service offerings to create a significant competitive advantage. Operating in a market with a beta of 1, DISH is a stock that analysts expect to perform closely to the market but with underwhelming progress, as opposed to Netflix, Inc.’s riskier stock that promises greater losses and greater returns with a beta of 1.3. The market is aware of the potential for NFLX to pay out large returns with long-term value creation as a staple of the business, and the company’s stock is trading at $459.80 to DISH’s $58.83. The financial strength and operational advantages of
Netflix, Inc. over Dish Network Corporation are also evident when the WACC of both companies are compared. The required rate of return for Netflix, Inc. is 3.63%, and DISH’s required rate of return is 3.57% despite its incredible earnings versus its debt burden, which signals that NFLX is expected to perform much better than DISH given the capital structures of both organizations. The debt and equity metrics for both companies are shown in Table 6 below.
Table 6: Debt and Equity Information for Netflix, Inc. (NFLX) and Dish Network Corporation
(DISH):
NFLX
Market value of debt
Market value of equity
Total value
WACC
Corporate tax rate
DISH
Market value of debt
Market value of equity
2013
$500,000,000
$27,937,908
$527,937,908
3.63%
38.03%
2013
$60,786
$349,854
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Total value
WACC
Corporate tax rate
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$401,640
3.57%
30.51%
Capital Structure Theories
Netflix, Inc. as a non-dividend paying firm retains its earnings and invests them back into the company to fund future projects. Dish Network Corporation issues dividends to its shareholders, but still maintains considerable debt. DISH issued new debt yearly for the past three years, augmenting its debt-equity structure definitively. Two theories of capital structure, pecking-order theory and trade-off theory, explain how companies decide on a capital structure depending on how firms use funds to invest in projects. The pecking-order theory, which is more applicable to Netflix, Inc., suggests that firm’s prefer to fund projects with retained earnings first, then safe debt, and hesitantly with riskier debt securities (Fama & French, 2002). NFLX does not pay dividends to investors and uses its retained earnings for capital investments, so it is understandable that the firm would use the pecking-order theory. By contrast, the trade-off theory offers that every firm has an optimal debt-equity level and should strive to maintain its structure at that level. DISH’s continual use of debt to finance projects suggests that it follows the tradeoff theory.
Summary
Netflix, Inc. is an Internet-based subscription television service with operations in over
40 countries around the world. The company provides streaming services which are available to consumers via smart televisions, wireless streaming devices, gaming systems, and portable
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devices such as tablets and cellular phones. In 2014, Netflix, Inc. reached 50 million subscribers and continued its expansion into international markets. Competitors to Netflix, Inc. are Hulu
Plus, DirectTV, Dish Network Corporation, and a host of other streaming services, video rental kiosks, and broadcast service providers. Recent news of HBO’s planned streaming service offering, HBO Go, caused Netflix, Inc.’s stock price to vary rapidly as investors noticed potential for true competition to the firm’s current model and breadth of operations.
In its annual report, NFLX named increased content license procurement, the creation of original programming, and international expansion as its primary drivers. Risks to the firm include struggling DVD-by-mail subscriptions, the supplier power of directors and producers, and varying television consumption patterns by subscribers in the international markets it is entering. The firm does not pay dividends to shareholders but reinvests its earnings in the firm instead. With an expected return on investment of 9.10%, NFLX is expected to produce significantly higher returns than the market.
As a risk-averse investor, Netflix, Inc.’s impressive rate of return and promising growth potential is not enough to convince me to invest. The entertainment market is flush with service providers and firms in a variety of industries that give pause to an investment in such as potentially risky firm. I would consider investing in NFLX after the firm begins to pay dividends and its dividend history is available for comparison to its competitors. A stock price of $459.80 per share is presents a serious investment that requires much more proof of high dividend payout potential for a risk-averse investor, whereas investors with diverse portfolios that can soften the effects of risk may find Netflix, Inc. to be a worthy long-term investment.
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References
Block, S. (2011). Does the weighted average cost of capital describe the real world approach to the discount rate? The Engineering Economist, 56, 170-180. doi:10.1080/0013791X.
2011.573618
Carter, D.A., Simkins, B.J., & Simpson, W.G. (2003). Corporate governance, board diversity, and firm value. The Financial Review, 38, 33-53. doi:10.1111/1540-6288.00034
Dish Network Corporation. (2014). 2013 annual report of Dish Network Corporation. Retrieved from http://files.shareholder.com/downloads/DISH/
3560933695x0x787586/72A181FA-886D-424C-954B-C6B64E3B9A76/
DISH_Network_Corporation_2014_Annual_Report.pdf
Errunza, V.R., & Senbet, L.W. (1981). The effect of international operations on the market value of the firm: Theory and evidence. The Journal of Finance, 36(2), 401-417. doi:
10.2307/2327024
Fama, E.F., & French, K.R. (2002). Testing trade-off and pecking order predictions about dividends and debt. Review of Financial Services, 15, 1-33. doi:10.2139/ssrn.199431
Fama, E.F, & French, K.R. (2004). The capital asset pricing model: Theory and evidence.
Journal of Economic Perspectives, 18(3), 25-46. doi:10.2139/ssrn.440920
Google Finance. (2014). Netflix, Inc. Retrieved from https://www.google.com/finance? cid=672501 INVESTMENT ANALYSIS
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Morningstar. (2014). Growth, Profitability, and Financial Ratios for DISH Network Corp
(DISH). Retrieved from http://financials.morningstar.com/ratios/r.html? t=DISH®ion=usa&culture=en-US Morningstar. (2014). Growth, Profitability, and Financial Ratios for Netflix Inc. (NFLX).
Retrieved from http://financials.morningstar.com/ratios/r.html? t=NFLX®ion=usa&culture=en-US Morningstar. (2014). NFLX key ratios report. Retrieved from http://financials.morningstar.com/ ratios/r.html?t=NFLX®ion=usa&culture=en-US Netflix. (2014). 2013 annual report of Netflix, Inc. Retrieved from http://files.shareholder.com/ downloads/NFLX/3454835262x0x748407/76a245dc-3314-401c-baba-ed229ca9145a/ NFLX_AR.PDF
Netflix. (2014). 2014 proxy statement for annual meeting of stockholders to be held on June 9,
2014. Retrieved from http://files.shareholder.com/downloads/NFLX/
3454835262x0x748406/131946bc-3760-46aa-a938-cb54cb68ec83/NFLX_Proxy.PDF
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Song, S. (2014). Value and cost of multinationality: International diversification and real options effects. The International Journal of Business and Finance Research, 8(5), 115-125.
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Retrieved from http://www.theibrf.com
United States Department of the Treasury. (2014). Daily treasury yield curve rates. Retrieved from http://www.treasury.gov/resource-center/data-chart-center/interest-rates/Pages/
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Appendix A
Calculations for the weighted average cost of capital (WACC) for Netflix, Inc.
Weighted average cost of capital (WACC) formula:
RWACC = (S/S + B) × RS + (B/S + B) × RB × (1 - tC)
S = market value of firm equity = $27,937,908
B = market value of firm debt = $500,000,000
RS* = cost of equity = 9.07%
RB = borrowing rate of debt = 5.37% tC = corporation’s tax rate = 38.03%
*RS = RF + (RM - RF) × b beta: 1.3
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Appendix B
Calculations for the weighted average cost of capital (WACC) for Dish Network Corp.
Weighted average cost of capital (WACC) formula:
RWACC = (S/S + B) × RS + (B/S + B) × RB × (1 - tC)
S = market value of firm equity = $23,555,730,000
B = market value of firm debt = $12,596,793,000
RS* = cost of equity = 2.86%
RB = borrowing rate of debt = 7% tC = corporation’s tax rate = 30.51%
*RS = RF + (RM - RF) × b beta: 0.40