Interest Expense
The interest rate is given by $50,000,000 X 0.05, which gives 2,500,000 per year. Every month, the interest rate is 2,500,000/12, which is $208,333.33. For the balance sheet, the loan will be entered as long-term debt and filled annually, increasing the value of the long-term and total liabilities. In the income statement, the loan will increase the value of the interest expense every year by an amount equal to $208,333.
Recommendation for Loan Approval
Having gone through the annual reports provided by Netflix over a period of 7 years (2012-2019), it is possible to decide on whether to approve the loan they are requesting of $50,000,000 over a period of 30% at an interest rate of 8%. It has been established that Netflix has made profits, which continue to grow from one fiscal year to the next. Secondly, the company’s liabilities jumped from $5.6 million in 2012 to about $7.6 million in 2019, as it experienced positive growth of 8% per annum.
However, the most significant percentage of the liabilities are long-term, meaning that the company has other loans it is still servicing. It should be noted that the company does not have different long-term liabilities, which means it can meet its obligations to pay its debts every fiscal year (Gitman et al., 2018). The company’s total assets exceed the total liabilities throughout the seven years, implying that its liquidity is credible and has good financial health. It was found that the company would be paying $208,333 monthly or $2.5 million per year. Judging by the company’s liquidity, it is evident that Netflix is positioned to meet this amount. The company’s profitability also supports its ability to meet the interest rate and loan obligations.
For the bank, the loan is worth it because it will fetch about $2.5 million every year in addition to the amount that the company will be paying back. At the end of the 30 years, the bank will have made a profit of $75 million in interest on the loan. This amount is worth and will improve the bank’s earnings yearly for the next 3 decades.
Advice About the Line of Credit (LOC) Request
The line of credit that Netflix requests imply that the company will have the ability to borrow credit from the bank as long as continuously as the limit is not reached. As it continues to repay the loan, it can borrow again when the bank accepts an open LOC. If the bank decides to consider a closed LOC, the company will borrow once it has repaid the previous interest and amount due, which means it cannot borrow money on top of the previous debt (Gitman et al., 2018). To decide on the amount and type of LOC the bank needs to consider for the case of Netflix, it is essential to look at several factors.
First, the company’s profitability is high, as provided in the balance sheet. It has been making profits for the last 7 years, growing from one trading period to the other. Secondly, the company’s net worth is acceptable, as shown by the income statement. In this case, the value of both short-term and long-term assets exceeds the value of short-term and long-term liabilities. At any trading period, the company can quickly convert its assets into cash that can be used to offset its debts (Gitman et al., 2018). Furthermore, Netflix does not have deferred loans and liabilities, and it meets its obligations using the amount earned from its business.
After considering these factors, the best decision would be to grant Netflix an open LOC with a limit of $1 million per year with an interest rate of 6% per annum. This is based on the view that the company makes more than five times this amount in profits. Thus, the assumption is that the company can easily reach this value and pay it back using its earnings from business rather than using its assets to meet its obligations.
Reference
Gitman, L., McDaniel, C., Shah, A., Reece, M., Koffel, L., Talsma, B., & Hyatt, J. (2018). Introduction to business. OpenStax publishers.