Question 4 [30 marks] GSK is planning to spin off its Consumer Healthcare division. Analysts expect its dividends to start at 0.5 per year per share in the spin-off year and grow at a rate of 4% per year afterwards. Comparable Consumer Healthcare firms have an asset beta of 0.7. Assume a debt-to-capital ratio of 70% for the spin-off and a debt beta of 0. Risk free rate is 3.0%, market risk premium 8.0%. A. Valuation. (i) Estimatethefairinitialsharepriceofthespin-off. (ii) How would your answer change if the new firm cuts its dividend next year to 0.1 per share but recovers it again to the expected level in the year after? [20 marks] B. Risk. GSK has an asset beta of 0.4 and a debt-to-capital ratio of 0.7 now, prior to the spin-off. Analyst estimate the Consumer Healthcare division to account for 50% of its 100 billion enterprise value. (i) WhatisGSKscurrentequitybeta? (ii) What will be GSKs equity beta after the spin-off?

GSK is planning to spin off its Consumer Healthcare division. Analysts expect its dividends to start at 0.5 per year per share in the spin-off year and grow at a rate of 4% per year afterwards. Comparable Consumer Healthcare firms have an asset beta of 0.7. Assume a debt-to-capital ratio of 70% for the spin-off and a debt beta of 0 . Risk free rate is 3.0%, market risk premium 8.0%. A. Valuation. (i) Estimate the fair initial share price of the spin-off. (ii) How would your answer change if the new firm cuts its dividend next year to 0.1 per share but recovers it again to the expected level in the year after? [20 marks] B. Risk. GSK has an asset beta of 0.4 and a debt-to-capital ratio of 0.7 now, prior to the spin-off. Analyst estimate the Consumer Healthcare division to account for 50% of its 100 billion enterprise value. (i) What is GSK's current equity beta? (ii) What will be GSK's equity beta after the spin-off? GSK is planning to spin off its Consumer Healthcare division. Analysts expect its dividends to start at 0.5 per year per share in the spin-off year and grow at a rate of 4% per year afterwards. Comparable Consumer Healthcare firms have an asset beta of 0.7. Assume a debt-to-capital ratio of 70% for the spin-off and a debt beta of 0 . Risk free rate is 3.0%, market risk premium 8.0%. A. Valuation. (i) Estimate the fair initial share price of the spin-off. (ii) How would your answer change if the new firm cuts its dividend next year to 0.1 per share but recovers it again to the expected level in the year after? [20 marks] B. Risk. GSK has an asset beta of 0.4 and a debt-to-capital ratio of 0.7 now, prior to the spin-off. Analyst estimate the Consumer Healthcare division to account for 50% of its 100 billion enterprise value. (i) What is GSK's current equity beta? (ii) What will be GSK's equity beta after the spin-off