Today I was looking into Netflix’s cost of capital, you know, the WACC thing. It’s kinda like figuring out how much it costs them to borrow money to run the show. So I started digging around.
First, I pulled up Netflix’s latest financial statements. I needed to find their cost of debt and cost of equity. The cost of debt is basically the interest rate they pay on their loans. I found that in their notes to the financial statements, it was pretty straightforward. They had some bonds issued at different rates, so I just took a weighted average of those.
Next up was the cost of equity, which is a bit trickier. This is like the return investors expect for holding Netflix stock. I used the Capital Asset Pricing Model (CAPM) for this one. It’s a common way to estimate this. I needed a few things for this: the risk-free rate, the beta of Netflix’s stock, and the market risk premium.
- Risk-free rate: I used the yield on the 10-year US Treasury bond. You can find that online pretty easily.
- Beta: This measures how volatile Netflix’s stock is compared to the overall market. I grabbed this from a financial website.
- Market risk premium: This is the extra return investors expect for investing in the stock market instead of just a risk-free bond. I used a standard estimate for this.
Once I had all those pieces, I plugged them into the CAPM formula, which is: Cost of Equity = Risk-Free Rate + Beta Market Risk Premium. That gave me an estimate for Netflix’s cost of equity.
Now, I had the cost of debt and the cost of equity. I just needed to figure out the proportion of debt and equity in Netflix’s capital structure. I found that in their balance sheet. They have more equity than debt, which is typical for a tech company.
Finally, I put it all together to calculate the WACC. The formula is pretty simple: WACC = (Cost of Debt Proportion of Debt (1 – Tax Rate)) + (Cost of Equity Proportion of Equity). I used Netflix’s effective tax rate for the tax part.
And boom! I got Netflix’s WACC. It’s a pretty useful number to know, especially if you’re thinking about investing in them or just curious about their finances. This whole process is not super accurate, but it can give me a pretty rough figure.
