Netflix is a media and entertainment company that is in three businesses - cable with an estimated value of $ 10 billion, television networks with an estimated value of $ 7 billion and satellite television with an estimated value of $ 6 billion.

You have estimated a regression beta of 1.025 for the firm, using data over the last 5 years, during which period Netflix had a debt to capital ratio of 20%.

The three businesses have very different risk characteristics and you have been able to find bottom-up betas for two of three businesses unlevered betas of 0.8 for cable and 1.3 for television networks but have been unable to get a beta for the satellite television business. (You can assume a 40% corporate tax rate)

Now assume that the firm currently has a debt to capital ratio of 40% and you can assume that the market has priced the firm correctly and it plans to sell its satellite television business and use the proceeds to pay down debt.

What was Netflix debt to equity ratio before selling the satellite television business?

Given the regression beta, what is Netflix unlevered beta?

Given the regression beta, what is the unlevered beta of just the satellite television business?

Estimate the unlevered beta for Netflix after selling the satellite television business.

Estimate the levered beta after the selling transaction.

With the method of solution