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1. Calculate the value of GEs bonds both before and after the change in bond ratings.

2. Identify the bonds that have the greatest change in value. Explain why those bonds had the greatest change in value.

3. Assume the potential bond rating change has no effect on GEs equity. Explain how the rating change affects GEs cost of capital and why.

4. Is the assumption in (5) accurate? Explain why the bond rating change will have an effect on GEs beta.

On 9 November 2021, GE announced that they plan to split into 3 separate companies. In early 2023, the company will have a tax-free spin-off of its health care operations and in 2024 will spin-off the GE Renewable Energy, GE Digital, and GE power into another company. This will leave GE has an aviation focused company. (See the press release, GE Plans to Form Three Public Companies Focused on Growth Sectors of Aviation, Healthcare, and Energy.

Shortly after the announcement went public, S & P Global Ratings announced that it would place GEs bonds under review for a possible downgrade because spinning off the healthcare operations leaves GE less diversified. (Linnane, C., 9 November 2021, S&P Global Ratings puts GE ratings on review for possible downgrade after plan to split into three companies, MarketWatch)

As provided above, GEs credit rating is currently BBB. Assume that GEs debt is downgraded one grade to BB. Current yields for both BBB and BB rated bonds are:

Case 1: GE Bonds Principal Due (USD) 748.0 Coupon/Bas e Rate Maturity 4.250% 2040 1,277.0 4.350% 2050 1,002.0 5,030% Sep-30-2022 Description Type 4.250% Notes Due Bonds and Notes 2040 4.350% Notes Due Bonds and Notes 2050 Current Portion of Other Borrowings Long-Term Borrowings Senior Unsecured Bonds and Notes Debt - 3.450% Notes Due 2027* Senior Unsecured Bonds and Notes Debt - 3.625% Notes Due 2030 1,000.0 3.450% 2027 1.250.0 3.625% 2030 19 Term 1-year 5-year 6-year 17-year 8-year 9-year 10-year 19-year 29-year BBB 0.99% 2.30% 2.50% 2.68% 2.84% 2.98% 3.10% 3.75% 3.84% BB 2.05% 3.76% 4.05% 4.31% 4.54% 4.74% 4.93% 5.91% 6.08%