Financial Access
Autor: Lam Liu • September 6, 2017 • Case Study • 394 Words (2 Pages) • 660 Views
Abstract
To assess whether Netflix should issue $1 or $1.5billion debt to their capital structure, the DCF model have been used to calculate the firm value in different situation, moreover, the EPS, WACC, tax shield, agency cost and financial distress are all consider to draw a conclusion.
As the result, when Netflix issue a new $1.5 billion debt, although it can get highest tax shield, the tax shield cannot fix the financial distress cost occurred by issuing debt. Compare with that, issuing $1 billion can create tax shield which can justify the financial distress cost. Therefore, issue $1 billion new debt is the best recommendation for Netflix.
Introduction
Netflix has engaged SmartAsEver LLC to evaluate whether they should issue an additional $1 or $1.5 billion long-term debts to their capital structure. To assess the Netflix Inc., whether the debt level is appropriate, financial flexibility, debt reverse, D/E ratio, EPS, book and market price, WACC and other objectives are all need to be consider when analyse and discuss the capital structure.
In addition, this report will also discuss how a female CEO and increase of female directors would affect the firm’s objectives and financial decisions.
Recapitalization evaluation
When assess whether Netflix’s debt level is appropriate in different choice of bond issue, trade-off between tax shield and financial distress should be the key point to compare two different debt number. According to the trade-off theory, the optimal capital structure is that the net tax benefit of debt financing balances leverage related costs such as financial distress and bankruptcy, holding company’s assets and investment decisions constant (Ng, N., & Bundala, h., 2012). In other words, when raising debt level, it will create tax benefits and higher debt brings more risk, which means financial distress cost will grow up at the same time. So when estimate the best debt level, trade-offs should be evaluated in three scripts, which are no debt issued, issue $1 b and $1.5 b debt.
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