Aetna is contemplating a leveraged buyout of Health Solutions (HS). HS's 100 million shares currently trade at $125/share, and the company has $3 billion in debt and $1 billion of excess cash. Aetna is offering $30/share premium to existing shareholders and plans to finance the buyout using $14 billion of debt with an interest cost of 8% and $500 million of equity financing.  FCFs are projected to be $2.5 billion a year going forward, and if the buyout occurs, the total annual interest expenses (in billions) for HS over the next three years will be $1.25 billion. Aetna plans to sell HS after 3 years (t=3) and anticipates the new owners will maintain a target D/V ratio of 0.25, that HS's cost of debt will drop to 6%, and that FCFs will remain $2.5 billion a year for the new owners.  In your below analysis of this LBO, you should assume that HS's unlevered cost of equity, r_a, equals 10% and that the corporate tax rate is 21%. Using this information please answer the below questions. 1) What is the unlevered value of HS after the LBO? With the LBO, what is the PV(interest tax shields) for years 1-3? What will be HS's WACC_ME after the sale in year 3? With the LBO, what is the PV(interest tax shields) for year > 3? What is the APV of HS's assets under the LBO? What is the NPV of this investment for Aetna if they provide 100% of the $500 million equity needed to complete the deal?  

Answer rating: 100% (QA)

To answer the questions regarding the leveraged buyout LBO of Health Solutions HS we need to perform several calculations based on the given informati... View the full answer