Question

Netflix has the following abridged financial statement information for fiscal year 2017 and 2018 ($ in billions): 2018 3.79 0 0 2017 2.82 0 0 Income Statement Sales Cost of Goods Sold Gross Profit SG&A Exp Interest Expense Income Before Tax Income Tax Expense Net Income 2018 15.79 9.97 5.82 4.22 0.42049 1.23 0.01522 1.21 9.69 2017 Balance Sheet 11.69 Cash 7.66 Marketable Securities 4.03 Inventory 3.19 Total Current Assets 0.2382 Fixed Assets 0.48532 Total Assets -0.07361 Accounts Payable 0.56893 Total Current Liabilities Long-Term Debt 2017 Total Liabilities 0.41828 25.97 0.56299 6.49 10.39 20.74 7.67 0.3194 19.01 0.35956 5.47 6.53 15.43 2018 Cash Flow Statement Cash Flows from Operations Cash Flows from Investing Cash Flows from Financing 2.94 1.73 -2.6B -0.33912 -1.79 Retained Earnings 0.03433 Common Equity 5.24 3.58 4.05 3.08 Total Equity 5.24 3.58 On 12/31/2018, Netflix has 436,600,000 shares outstanding, stock price of $267.66, and annual earning growth rate of 49.84%. Netflix does not issue any dividends. Netflix has a beta of 1.56 which suggests a. Netflix stock price will be higher than the 30 year Treasury bond prices. b.Netflix stock is riskier than a portfolio with beta of 1. c. Netflix has higher chance to go bankruptcy than other listed firms. d. Netflix stock will fall by more than 16% if the stock market rises by 1%

Answer 1

beta suggests how much change in stock will be there with respect to change in market

In other words, beta implies riskiness. Higher the beta, higher the risk, higher the return.

Here beta = 1.56, which is higher than portfolio of beta = 1

market portfolio beta = 1

which implies that if portfolio with beta =1 rises by 1%, then stock with beta = 1.56 will rise by 1.56%

and if it declines by 1%, the netflix stock will fall by 1.56%

So netflix stock is riskier than a portfolio with beta = 1

Answer : b   [Thumbs up please]