Netflix's Income Statement and Balance Sheet for 2010 and 2011 along with select note disclo sures are given below. Use the information to answer the following questions:

1. Netflix's share price on December 31, 2011, was $69.

a. Using this information and the footnote disclosure, compute Netflix's options "overhang" on December 31, 2011, using detailed information of the range of exercise prices. Compute the overhang as a percentage of market capitalization.

b.Is there a more accurate estimate of the December 31, 2011, overhang that is disclosed by the company? What is it called and how much is it?

c. An analyst estimates that Netflix's shares are worth $90 on an undiluted basis. Using the detailed information of the range of exercise prices, compute the overhang and overhang as a percentage of market capitalization for this estimated price. What would be the analyst's estimate of Netflix share price on a diluted basis?

d. What is the economic implication of the "overhang"? Is it a liability?

2. Examine the stock-based compensation expense disclosures provided by Netflix in the notes to the financial statements.
a. The stock-based compensation expense arises on account of both employee stock option (ESO) and the em ployee stock purchase (ESPP) plans. Explain Netflix's conditions for grants under the ESO and ESPP plans.

Briefly explain why Netflix incurs a cost under either type of grant.

b. Using note information, identify Netflix's compensation expense from ESOs (and employee stock purchase plan) during 2010 and 2011. Examine the trend in compensation expense over time and provide explanations for the trend.

c. Explain where and how the compensation expense is reflected in Netflix's income statement. Why is ESO expense reflected in these line items on the income statement?

d. What are the major assumptions used by Netflix when determining compensation expense relating to ESOs?

e. How would the stock-based compensation expense numbers affect your valuation of Netflix's stock?

3. Refer to the information regarding basic and diluted EPS in the income statement.

a. Use the option overhang information in (1) to determine Netflix's diluted EPS for 2011. What are some of the reasons why you are unable to exactly derive the reported diluted EPS number?

b. Can you approximately determine the option "overhang" on December 31, 2011, using the basic and diluted EPS information? Compare it with your answer in (1) above.

4. What adjustments would you make to the financial statements of Netflix? How do employee stock options influence (a) equity analysis and (b) creditanalysis?

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2011 2010 Fulfillment expenses. Marketing Technology and development General and administrative.t.t--. Stock-based compensation expense before income taxes Income tax benefit Total stock-based compensation after income taxes 1,500 6,107 28,922 25,053 61,582 (22,847) $38,735 1,145 3,043 10,189 13,619 27,996 (11,161) $ 16,835