You are a financial manager of Netflix Inc. (symbol: NFLX). You are considering the purchase of a promising new software company in California. Your objective is to determine the present value of the future cash flows that this company is expected to generate, thus giving you an approximate idea of the maximum price you would be willing to pay for this company. NFLX has determined that the hypothetical cash flows generated by this company would be of similar riskiness to its own asset cash flows. Therefore, NFLX will use its expected return on assets to discount the future net cash flows from the software company. a) Calculate NFLX's equity beta as follows. First, download monthly price data for NFLX and SPY from the Supplementary Data folder on the Blackboard course site. SPY is an exchange-traded fund that tracks the S&P 500, and thus provides a good representation of the market portfolio. The Supplementary Data folder is found on the Problem Sets page. Second, calculate monthly returns for NFLX and SPY using the following equation: r = (Pt Pt-1)/Pt-1, where rt is the return in month t, and Pt is the adjusted closing price in month t. Convert all of your returns into excess returns (rt - rf) by subtracting the monthly risk-free rate, which we will assume is 0.0369/12. You will not have a return observation for the first month of your time series. Third, run a linear regression of NFLX excess returns (your Y variable) on SPY excess returns (your X variable). You can find "Regression" in Microsoft Excel in "Data Analysis" under the "Data" tab. Report the X-variable coefficient and t-statistic (each to three decimal places). The X-variable coefficient is the equity beta for NFLX. A t-statistic above 1.96 indicates that we are 95% confident that NFLX monthly returns are positively correlated with S&P 500 monthly returns. b) Calculate the asset beta for NFLX. Assume that the market value of NFLX equity is $162 billion, the market value of NFLX debt is $28 billion, and the beta of NFLX debt is 0.15. c) Using the CAPM, calculate and report the expected return on assets for NFLX. Assume a market risk premium of 5.0% and a risk-free rate of 3.69% (the approximate yield on 30-year U.S. treasury securities). d) The software company is expected to generate asset cash flows for the next thirty years. Next year, the software company is expected to generate $250 million in asset cash flow, and this cash flow is expected to grow by 2% per year for the life of the software company. What is the present value of the asset cash flows generated by this software company? Jx Date C A B D E F G Date INFLX Adj. Closing Price SPY Adj. Closing Price NFLX Monthly Return SPY Monthly Return NFLX Monthly Excess Return SPY Monthly Excess Return 1/1/18 270.30 258.82 2/1/18 291.38 249.41 3/1/18 295.35 241.61 4/1/18 312.46 243.83 5/1/18 351.60 249.76 6/1/18 391.43 250.07 7/1/18 337.45 260.50 8/1/18 367.68 268.81 9/1/18 374.13 269.19 10/1/18 301.78 251.72 2 11/1/18 286.13 256.39 3 12/1/18 267.66 232.46 1/1/19 339.50 252.54 5 2/1/19 358.10 260.73 5 3/1/19 356.56 264.28 7 4/1/19 370.54 276.29 3 5/1/19 343.28 258.67 9 6/1/19 367.32 275.33 7/1/19 322.99 280.85 8/1/19 293.75 276.15 2 9/1/19 267.62 280.23 B 10/1/19 287.41 287.75 7 11/1/19 314.66 298.16 5 12/1/19 323.57 305.32 5 1/1/20 345.09 306.70 7 2/1/20 369.03 282.42 B 3/1/20 375.50 245.71 9 4/1/20 419.85 278.54 , 5/1/20 419.73 291.81 1 6/1/20 455.04 295.68 2 7/1/20 488.88 314.48 B 8/1/20 529.56 336.43 9/1/20 500.03 322.54 5 10/1/20 475.74 315.75 5 11/1/20 490.70 350.10 7 12/1/20 540.73 361.53 3 1/1/21 532.39 359.37 9 2/1/21 538.85 369.36 3/1/21 521.66 384.87 4/1/21 513.47 406.56 2 5/1/21 502.81 409.23 3 6/1/21 528.21 417.05 7 7/1/21 517.57 428.63 5 8/1/21 569.19 441.38 5 9/1/21 610.34 419.47 7 10/1/21 690.31 450.34 B 11/1/21 641.90 446.72 9 12/1/21 602.44 465.74 ) 1/1/22 427.14 442.73 2/1/22 394.52 429.66 2 3/1/22 374.59 444.43 B 4/1/22 190.36 406.68 5/1/22 197.44 407.60 5 6/1/22 174.87 372.38 5 7/1/22 224.90 408.43 , 8/1/22 223.56 391.76 3 9/1/22 235.44 354.09 9 10/1/22 291.88 384.44 D 11/1/22 305.53 405.82 1 12/1/22 294.88 380.68 2 1/1/23 363.83 400.20 B H