1. Disney is contemplating the purchase of a large portion of the assets of Netflix (Disney would be primarily buying Netflix's movie and television production businesses). If Disney undertakes
the transaction, Disney would pay $100 billion of cash to Netflix tomorrow and would raise that
cash tomorrow by taking on new debt of $100 billion.
You are an investment advisor and you know that one of your large clients owns a Disney bond.
Your client asks you to estimate how Disney's purchase of the Netflix assets would likely affect
the value of Disney bonds.
You know that your client owns a Disney bond that has a 4.50% annual coupon rate, has 10
years to maturity, and has a face value of $1,000. This bond's yield to maturity is 4% and its
credit rating is A. If Disney does the transaction (and issues the new debt), the credit rating
agencies estimate that the Disney bond rating will change to BBB and the spread on the Disney
bond will widen by 100 basis points.
Calculate the change in the value of the Disney bond if the transaction is undertaken.