Finance Capstone Consequences and Solutions

Question: Discuss about the Finance Capstone for Consequences and Solutions. Answer: The current debt level of Netflix is adequate, as debt to equity ratio of 48.45%, which allows the company to operate in turmoil times. The solvency ratio of the company is at high levels, which increase chances of the company to become insolvent if more debt is acquired. Thus, the additional debt through bond might hamper the overall profitability of the company, while it might oscillate future net income. Fargher, Sidhu, Tarca Van (2016) mentioned that companies only opt for debt when capital could not be raised through an IPO. However, Netflix overall rating in has been slashed by Moodys from BB to B and SP cut ratings from BBB to BB, which depict that company is related among junk or non investment category. This is the reason the company is no able to initiate a public offering and is determined to raise debt for its expansion process. Particulars 2012 2013 2014 1.5 Billion Debt 1 Billion Debt Net Income 17,152 112,403 266,799 Short term liabilities 1,675,926 2,154,203 2,663,154 Long term liabilities 3,223,217 4,079,002 5,198,943 1,500,000 1,000,000 Depreciation 204,356 223,591 264,816 Equity 744,673 1,333,561 1,857,708 long term debt 200,000 500,000 900,000 1,500,000 1,000,000 Solvency ratio 4.52% 5.39% 6.76% 5.68% 6.00% Debt to equity 26.86% 37.49% 48.45% 129% 102% Table 1: Depicting the solvency and debt to equity ratio of Netflix (Source: As created by the author) The overall table mainly depicts both solvency ratio and debt to equity ratio of Netflix from 2012 to 2014 and after the debt initiation. From the overlap evaluation it could be detected that accumulation of debt could be catastrophic for Netflix, as its debt to equity ratio could reach an alarming rate of 129% or 102%. However, if the proposal of Jessica is accepted then the company will mainly be financing its activities with higher debt, which could increase volatility in income due to fluctuations in interest payments. The company has been taking more debt each year from 2012, while the decision in 2014 to acquire an additional debt could be disastrous. Fatica, Hemmelgarn Nicodeme (2013) mentioned that high debt accumulation mainly allows the company to take tax advantage, which retains more income in the business. On the other hand, Heikal, Khaddafi Ummah (2014) criticises that higher interest payments might increase cash outflow, which could reduce ability of the company to a ttain higher profits. After evaluation of overall Netflix capability the recapitalisation proposal could be dropped, as the company is in no state to adhere the rising debt. The interest expenses of the company are also raising two fold each fiscal year. This is mainly an indication of higher fluctuation in net profits, if sales remain stagnant (Schippers, 2015). The non-issuance of debt and using the current available cash for supporting its expansion plan could mainly help the company in reducing its financing costs. In addition, non-accumulation of debt could reduce the debt to equity ratio, while maintaining trust of the investors in companys performance and return generation capacity. Thu, it could be advisable that bond issue is not appropriate for Netflix in current business scenario. Reference: Fargher, N., Sidhu, B., Tarca, A., Van Zyl, W. (2016). Accounting for financial instruments with characteristics of debt and equity: Finding a way forward. Fatica, S., Hemmelgarn, T., Nicodeme, G. (2013). The debt-equity tax bias: consequences and solutions.Reflets et perspectives de la vie conomique,52(1), 5-18. Heikal, M., Khaddafi, M., Ummah, A. (2014). Influence analysis of return on assets (ROA), return on equity (ROE), net profit margin (NPM), debt To equity ratio (DER), and current ratio (CR), against corporate profit growth in automotive In Indonesia stock exchange.International Journal of Academic Research in Business and Social Sciences,4(12), 101. Schippers, M. T. (2015). The Debt Versus Equity Debacle: A Proposal for Federal Tax Treatment of Corporate Cash Advances.U. Kan. L. Rev.,64, 527.