CVS Health Corporation issued $40 billion in bonds on Tuesday, March 6, 2018. This bond issuance was the third largest US corporate bond issuance in history (the others were Verizon Communication Inc.s $49 billion deal in 2013 and Anheuser-Busch InBev SAs $46 billion offering in 2016.)

CVS issued the bonds to raise funds to pay for its planned acquisition of Aetna Inc. for $69 billion. Regulators are not expected to approve the Aetna purchase until the second half of 2018, but CVS wanted to issue the bonds now to avoid the risk that interest rates will continue to rise throughout the year.

In addition to the proceeds of the bond issuance, CVS will also use $4 billion of cash, a $5 billion loan, and stock to pay for the Aetna purchase.

The CVS bonds range from two-year bonds to 30-year bonds. If the Aetna purchase is not approved by regulators, CVS will pay off the bonds, with the redemption price set according to the terms of the bonds.

Questions

1.What is the impact of the bond issuance on the balance sheet of CVS? What accounts would increase or decrease?

2.How would CVSs current ratio be impacted, if at all, by the bond issuance? How would its debt ratio be impacted?

3.What would happen to CVSs times-interest-earned ratio as a direct result of the bond issuance? Does this bond issuance increase risk or decrease risk for CVS? Explain.

4.Why might CVS have decided to issue $40 billion of bonds for the acquisition of Aetna rather than issuing additional common stock?