Disney Inc. and Whitewhale Inc. are identical companies, except for capital structure. They operate in a perfect capital market with no taxes, transactions costs, or bankruptcy costs. The two companies have identical assets and identical business risk. Each company is expected to produce net free cash flows of $90 billion per year from their projects in perpetuity. Each company distributes all of its free cash flows each year. Disney has permanent debt yielding 5.0% per annum, with a market value of $150 billion. Shares of Disney currently sell for $27 per share, with 11 billion shares outstanding at this time. Whitewhale has 21 billion outstanding shares that trade at a price of $23 each. Whitewhale has no debt. Diane is a Los Angeles-based blogger struggling to make rent who thinks she has spotted an arbitrage opportunity in the current values of Whitewhale and Disney, which she wishes to exploit so that she can afford to quit her job and move to Chicago with her not-boyfriend Guy to write her book One Last Thing and Then I Swear to God I’ll Shut Up About This Forever: Dispatches from the Frontlines of the War on Women: Arguments, Opinions, Reflections, Recollections, The Razor Tax. Diane has a friend, Bojack, who is willing to lend her either his 63,000 thousand shares of Whitewhale or his 63,000 thousand shares of Disney for as long as she wants. Bojack’s only condition is that Diane pay him the dividends that he would have received each year had he not lent her the shares. Outside of her friendship with Bojack, Diane has no other opportunities to borrow shares of these two firms.
