Question

1. Go to Yahoo! Finance or another source and pick a stock to track for the last year. Discuss the performance of the stock over the last year and offer your thoughts being specific about why the stock has done well or not.

2. What are some reasons that a company might choose common stock as means of financing their business rather than using debt? Also comment on why a company might choose debt over common stock.

Answer 1

1. Stock taken here is Netflix Inc., listed on NASDAQ, currently trading at 316.35.

Over the last year, the stock price of Netflix went touched a high of 193.95 on 29th dec'17 from a low of 124.31 on 3rd Jan'17. The stock was bullish because of good tailwinds in the year and good future prospects. With growing popularity of Netflix among people, better internet connectivity, improving standard of living of people and better income, people are moving towards such modes of entertainment and thus making room for such companies to boom. The revenue of Netflix increased by 32.4% with approx 5 fold increase in net profit which stands as the reason for the stocks' strong growth and stability.

2. Company opt for common stock as means of financing because

• It helps the company to raise money with much less cost as no fixed payments have to be made - Cost Effective
• It gives shareholder rights to vote.
• It is low-risk means of financing

Sometimes, a company might choose debt as a means of financing over common stock because:

• It helps to leverage on a small amount to earn big in future.
• In long run, debt is cheaper.
• Debt provides tax benefits as it reduces taxable income.