Aswath Damodaran 342
Ratings Constraints for Disney
! At its optimal debt ratio of 30 %, Disney has an estimated rating of BB+.
! Assume that Disney imposes a rating constraint of A or greater.
! The optimal debt ratio for Disney is then 20 % (see next page)
! The cost of imposing this rating constraint can then be calculated as follows:
Value at 30 % Debt = $ 71 , 239 million
- Value at 20 % Debt = $ 69 , 837 million
Cost of Rating Constraint = $ 1 , 376 million
This is a little unfair, since it is based upon the assumption that operating
income is unaffected by the change in ratings. To the degree that Disney’s
operating income will drop if its rating drops below BBB, this will overstate the
cost of the constraint.
