Question

Look up the current risk-free rate (the yield on a 10-year US Treasury bond will work). Now make an estimate of the market rate of return (an estimate can be found on Damodaran’s website – look at the homepage – at the bottom you will see his estimate for the current equity risk premium). You could also use another source. Be sure to cite your sources. Also, look up beta for Netflix, Inc. (NFLX). Report all information that you found and its source and date. Use all of this information to estimate the cost of equity for Netflix. Is this a reasonable estimate? Why or why not?

Answer 1

Look up the current risk-free rate (the yield on a 10-year US Treasury bond will work).

the current risk-free rate = the yield on a 10-year US Treasury bond = 0.72%

(Source: https://www.treasury.gov/resource-center/data-chart-center/interest-rates/pages/textview.aspx?data=yield

https://ycharts.com/indicators/10_year_treasury_rate)

Date: 8th Sep 2020

Now make an estimate of the market rate of return (an estimate can be found on Damodaran’s website – look at the homepage – at the bottom you will see his estimate for the current equity risk premium).

Implied Equity Risk Premium = 5.00%

(Source: http://pages.stern.nyu.edu/~adamodar/)

Date: 1st Sep 2020

Also, look up beta for Netflix, Inc. (NFLX).

Beta = 0.97

Source: https://finance.yahoo.com/quote/NFLX/key-statistics?p=NFLX

Date: 8th Sep 2020

Use all of this information to estimate the cost of equity for Netflix.

Cost of equity = Rf + beta x Rmp = 0.72% + 0.97 x 5% = 5.57%

Is this a reasonable estimate? Why or why not?

No, the estimate is very low. The cost of equity should be higher. It's too low a figure to be true for cost of equity.