Unformatted text preview: FIN 6350 –Project Instructions
For your project, you will work individually or in groups of up to five students performing
financial analysis of Netflix, Inc. The analysis will focus on five topics listed below. The topics
correspond to the topics covered in class; please use your lecture notes and the corresponding
textbook chapters as resources for your work. Tentative deadlines for preparing the analysis on
each of the topics are posted below. They may be adjusted as the class progresses, so please
check with eLearning for the latest updates. Timely completion of the work is essential for
successful participation in in-class discussions.
The final report on the project is due Wednesday, May 8th. Your final report may be
submitted as a single file or two files, one containing spreadsheets with tables and calculations
and another one with the text description and analysis. Due Dates For Each Topic
5. Financial Forecasting - February 6th
Valuation – February 13th
Options – March 13th
Firm Financing and Capital structure – April 10st
Leasing/ Working Capital/Risk Management – April 24th (whatever you can do by that
point) 1. Financial Forecasting
Prepare Pro Forma Income Statements and Balance Sheets for the following several years
(standard is three to five; but you can do more or less if you believe it is more appropriate in
o List of your drivers
Explain which items do and do not vary with sales in your analysis
Justify your sales growth assumptions
Make terminal year forecasts Calculate External Financing Needed
Compare assumed growth to Sustainable and Internal Growth Rates
Evaluate and discuss several financial ratios o
o 2. Valuation
Start with Free Cash Flow Forecasts
Estimate firm value either by discounting free cash flows with WACC or by discounting them with
the unlevered cost of capital and adding side effects of financing separately (APV method)
Note: you can estimate the unlevered cost of capital as follows (we will elaborate on this later in
a. Find the actual cost of equity RE b. Calculate unlevered cost of capital R E=RU + where
cap); from the historical stock price data for your firm RU using the following formula B
( 1−T ) (RU −r B )
S B is the book value of Total Liabilities; S is the market value of equity (market
T is the average corporate tax rate applicable to your firm; and rB is the interest rate on the firm’s bonds. 3. Options
Use the BSM option valuation model to assess the probability of bankruptcy for your
firm. When applying the corresponding formula from the slides, you can use T =1 to find default probability within the next year. However, this is probably not very relevant for a firm
whose debt will not mature for many years. In that case, you can alternatively do the calculation
by setting T to the average or the maximum maturity date for the firm’s debt. Does your firm have significant real options to consider? If yes, provide one or two
examples; discuss what should be thought of as the underlying asset for option valuation
purposes. 4. Firm Financing and Capital Structure
Estimate cost of equity using Fama French Model. How does the outcome compare to
the one you obtain using CAPM? Which one do you find more reliable?
There is a range of things you may be able to discuss depending on your firm’s policies. Here
are a few examples.
o Examine the firm’s current practices concerning dividends, cash balance and share o repurchases.
How do they compare to the industry or nearest competitor? Would you recommend o any changes?
Discuss Flotation Costs – how likely are they to be significant? What can the company do o to minimize them?
What was the last debt issue made by the firm? Specifically, what were the bond terms o
o (maturity, coupon, callable, convertible, both) and the size of the issue?
Why did the firm issue the debt?
What are the pros and cons of issuing additional debt?
What is role of taxes, bankruptcy threat, investor clientele, and operating leverage for o your firm?
Are there any important conflicts of interest between different investor groups, or o between investors and management?
Based on your analysis, would you recommend any changes to the firm’s current capital
structure? How would it affect your valuation estimates? 5. Leasing , Working Capital, and Risk Management
Examine the firm’s current use of leases, if any.
o What are the main types of leases that are used?
Discuss the costs and benefits of the firm’s practices
Compare to industry standards (or consider one or two peers) Alternatively, examine the firm’s inventory, payables and use of revolving credit.
o How do they differ from their nearest competitor or the industry?
What are the strengths and weaknesses? Alternatively, list the main risk factors and discuss how the company addresses them o Can you identify any risk management tools that the company is using? Should be using? ...
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