In February 2014, Netflix took out a $400 million loan. Netflix is using these f

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

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.