Question 5 [ 30 marks] Some analysts argue that the Consumer Healthcare division is able to take on more debt than 70% of its capital. If it took on additional debt accounting for 10% of its capital after the spinoff, it could return the proceeds to GSK. In turn, GSK could invest this capital into growing its struggling drugs business. Investing the additional cash inflow as CAPEX will increase its Free Cash Flows by 1 billion in each of the next 5 years (starting next year). Its risk profile will not change. A. Restructuring. (i) How much new debt would the Consumer Healthcare division issue? (ii) Does it matter for the value of the Consumer Healthcare division how much debt it can issue? Why or why not? [10 marks] B. Investment (i) With a market premium of 8% and a risk-free rate of 3%, what will be GSKs new cost of equity (after the spin-off)? If you have not finished question 4 yet, make an assumption for any numbers you are missing, state it clearly, and proceed. (ii) How much is the cash injection worth to GSK?

Some analysts argue that the Consumer Healthcare division is able to take on more debt than 70% of its capital. If it took on additional debt accounting for 10% of its capital after the spinoff, it could return the proceeds to GSK. In turn, GSK could invest this capital into growing its struggling drugs business. Investing the additional cash inflow as CAPEX will increase its Free Cash Flows by 1 billion in each of the next 5 years (starting next year). Its risk profile will not change. A. Restructuring. (i) How much new debt would the Consumer Healthcare division issue? (ii) Does it matter for the value of the Consumer Healthcare division how much debt it can issue? Why or why not? [10 marks] B. Investment (i) With a market premium of 8% and a risk-free rate of 3%, what will be GSK's new cost of equity (after the spin-off)? If you have not finished question 4 yet, make an assumption for any numbers you are missing, state it clearly, and proceed. (ii) How much is the cash injection worth to GSK? Some analysts argue that the Consumer Healthcare division is able to take on more debt than 70% of its capital. If it took on additional debt accounting for 10% of its capital after the spinoff, it could return the proceeds to GSK. In turn, GSK could invest this capital into growing its struggling drugs business. Investing the additional cash inflow as CAPEX will increase its Free Cash Flows by 1 billion in each of the next 5 years (starting next year). Its risk profile will not change. A. Restructuring. (i) How much new debt would the Consumer Healthcare division issue? (ii) Does it matter for the value of the Consumer Healthcare division how much debt it can issue? Why or why not? [10 marks] B. Investment (i) With a market premium of 8% and a risk-free rate of 3%, what will be GSK's new cost of equity (after the spin-off)? If you have not finished question 4 yet, make an assumption for any numbers you are missing, state it clearly, and proceed. (ii) How much is the cash injection worth to GSK