Netflix: Analyzing Debt Recapitalization and Financial Distress Costs

This report provides an in-depth analysis of Netflix's debt recapitalization strategy, focusing on the associated financial implications. It examines the potential for financial distress, the impact of agency costs arising from conflicts between shareholders and management, and the risks of bankruptcy. The report delves into the process of estimating financial distress costs, including calculating the weighted average cost of debt and assessing the impact of bond issuance. It also discusses the importance of maintaining an appropriate mix of debt and equity to mitigate financial risks. The report highlights the need for careful debt management to avoid adverse financial outcomes, providing a comprehensive overview of the challenges and considerations related to Netflix's debt recapitalization plan.

Critical and Creative Thinking

Table of Contents
• INTRODUCTION
• Debt recapitalisation
• Estimating financial distress costs
• CONCLUSION
• REFERENCES

INTRODUCTION
• Recapitalisation financial leverage is one of the
crucial approach by the company.
• The present report deals with Netflix Organisation
which is engaged in business of online streaming of
various shows and is planning for debt
recapitalisation.
• The results could be such that it may lend
organisation to bankruptcy if debt is not timely paid.
• Moreover, report discusses about agency costs and
estimation of cost of financial distress is made as
well.

Debt recapitalisation
• The financial distress may be caused due to change in the
capital structure of the company.
• Netflix Organisation which is engaged in providing live
streaming of shows to customers.
• The debt recapitalisation decision will inject financial distress
in quite adverse manner.
• The term financial distress means that firm may face difficulty
in paying off obligations which becomes due.
• Inability of business to pay liabilities will raise various issues
in which bankruptcy is major problem for the company.

Cont.
• Netflix debt recapitalisation will evolve negatives to it.
• Recapitalisation means that firm will raise funds from debt only
and equity will be reduced up to high extent.
• This will raise burden of paying liabilities along with the interest
on it.
• Firm will be fully dependent on debt to carry on operational
activities and as such, chances of bankruptcy may be evolved
which is the negative sign for the company.
• It will be unable to pay timely payments to various parties
involved in the process and moreover, creditors will call for
making outstanding payments.

Cont.
• Debt recapitalisation will also have negative effect on
agency costs.
• This will eventually increase financial distress of the
company in adverse way.
• Agency cost arises from the conflicting agreement of
shareholders and management in the company.
• In simple words, principal and agent do not meet at
the same point for the betterment of the company.

Cont.
• This disagreement of between these two parties will
have adverse effect on the investors of the company.
• Netflix Organisation has investment in optimum
quantum and as such, conflicting situation of
management and shareholders will have serious
repercussions on investors.
• The investment will become low and value of
Netflix's stock will also decline causing into
reduction in earning price of shares quite adversely.

Cont.
• The major example of agency cost is that if management do
not agree to take on project as if it fails, business may be
doomed in loss.
• On the other hand, shareholders will take risk because if
project succeeds nicely, there earnings will be maximised.
• Thus, conflict arises between them which affects firm in the
bad manner.
• The above example of shareholder maximisation value is of
monitoring costs which fall under type of agency costs.
• Bonding cost also rises when agent commits that he will stay
with the company even if it is acquired by another company.

Cont.
• Thus, agency costs rises because of debt recapitalisation and
Netflix Company will incur agency costs up to high extent.
• Moreover, company will also have financial distress quite
adversely.

Estimating financial distress costs
• Financial distress costs have negative effect on the
company as more of the debt is utilised and equity is
reduced up to high extent.
• Financial distress may have serious repercussions as
firm gradually increases debt structure in the financial
leverage.
• This results into paying more liabilities and also
payment obligations are hiked and to be paid within
stipulated time frame.

Cont.
• This may even lead to bankruptcy which is the serious issue
for the company.
• Thus, organisation should always adequate mix of debt and
equity so that advantages of both the capital can be utilised
up too maximum possible extent.

Cont.
• In this relation, it is required to estimate costs of
financial distress so that risk may be minimised quite
effectively.
• The financial distress also rises from the issue of
bond and as such, risks gets doubled.
• Cost of financial distress can be easily calculated
when bond is issued by the company.
• Netflix Company is changing capital structure and as
such, major funds will be raised from issuing of bond.