KKR is contemplating a leveraged buyout of the Hershey Co (HSY). HSYs 220 million shares currently trade at $43/share, and the company has $2 billion in long-term debt, $1 billion in short-term liabilities that are due immediately, and $500 million of excess cash. KKR is offering $7/share premium to existing shareholders and plans to finance the buyout using $7.5 billion of debt with an interest cost of 11%, $3 billion of equity financing, and $500 million of HSYs own cash. If the buyout succeeds, the total interest expenses and FCFs (in billions) for HSY over the next three years will be those given below. KKR plans to sell HSY after 3 years (t=3), and anticipates the new owners will maintain a target D/V ratio of 0.5, that HSYs cost of debt will drop to 9%, and that FCFs will be $2 billion a year for the new owners. In your below analysis of this LBO, you should assume that HSYs unlevered cost of equity, ra, equals 12% and use the Miles-Ezzell WACC. You should also assume that HSY generates enough pre-tax cash flows such that the full interest expenses can be used to generate tax shields, and the corporate tax rate is 35%. Use this information to answer the below questions, and please express all values in billions of dollars.

Year 1 2 3 Interest expense (without LBO) 0.4 0.4 0.4 Interest expense (with LBO) 1.3 1.3 1.3 FCF (with LBO) 1.5 1.7 1.9

1: What is the base-case NPV of HSY under the deal? i.e. what is the unlevered value of the firm?

2: What is the PV(interest tax shields) for years 1-3?

3: What will be the firms WACC_ME in years > 3?

4: What is the PV of the interest tax shields for years > 3?

5: What is the total firm value of HSY under the LBO?

6: How much value is created because of the LBO?

7: How much of this value being created is coming from additional tax shields in years 1-3?

8: How much of the value being created by the LBO is being captured by the existing shareholders?