FI-561 - MERGERS & ACQUISITIONSWEEK 6 HOMEWORK ANSWER KEYProblem 16-1 (Chapter 16, pp. 434-435)P16.1.1 Based on the value drivers in Table P16.1.1 we obtain an intrinsic value per share for Coleman of $10.87 as shown in Table PA16.1.1.

P16.1.2 After the turnaround by a new management group or by the previous management group energized by new compensation arrangements in which they achieve a substantial ownership position, the value drivers improve as shown in Table PA16.1.2. The new intrinsic value per share has become $31.18. So the management buyout group could offer a substantial premium over the pre-buyout intrinsic value and yet earn substantial returns over a 3 to 7 year holding period.

Table PA16.1.1 - Capital Cash Flow Model - Coleman Textiles

Table PA16.1.2 - Capital Cash Flow Model - Coleman Textiles LBO

P16.1.3

The value of Coleman textiles had greatly increased. This represents the nature of an LBO. Capable management accomplishes a turnaround. Sometimes new management is installed with a substantial ownership stake. But sometimes old management given the opportunity to obtain a large ownership position and support (financial as well as for policy changes) can achieve a turnaround. The improved performance increases share value.

Note that we use a cost of capital of 11% in the pre-buyout situation and 13% for the post-buyout firm. An argument can be made for a higher cost of capital in the pre-buyout situation since the firm was not performing well and therefore carried risk of financial distress. Also in the postbuyout situation we use 13% to reflect the high initial debt situation. However, since the debt is paid down rapidly from internal cash flows, a lower discount factor might be employed. In the capital cash flow method we are using, in theory the discount factor should be the required asset return, independent of leverage. The required asset return therefore might be lower than 13%. Some might argue that the cash tax rate would be lower during the time that debt levels and tax deductions are high. However if all aspects of taxes to the corporation and to holders of the debt are taken into account some studies show that taxes are not reduced by leveraged buyouts (citation).

This illustrates that there are rich opportunities for discussing alternative characteristics of both the pre-buyout and post-buyout term characteristics and value drivers.

Questions 19.1 & 19.2 (Chapter 19, p. 549)19.1: What are three types of antitakeover amendments, and how do they work to defend a target from an unwelcome takeover?

Types of Antitakeover AmendmentsAntitakeover amendments generally impose new conditions on the transfer of managerial control of the firm through a merger, tender offer, or by replacement of the board of directors. There are four major types of antitakeover amendments.

a. Supermajority Amendments. These amendments require shareholder approval by at least two-thirds and sometimes as much as 90% of the voting power of the outstanding capital stock for all transactions involving change of control. In most existing cases, however, the supermajority provisions have a "board-out" clause which provides the board with the power to determine when and if the supermajority provisions will be in effect.

b. Fair Price Amendments. These are supermajority provisions with a "board-out" clause and an additional clause waiving the supermajority requirement if a fair price is paid for all purchased shares. The fair price is commonly defined as the highest price paid by the bidder during a specified period and is sometimes required to exceed an amount determined relative to accounting earnings or book value of the target. Fair price amendments are a defense in particular against two-tier tender offers that are not approved by the target's board.

c. Classified Boards. Another major type of antitakeover amendment provides for staggered, or classified, boards of directors to delay the effective transfer of control in a takeover. Management's purported rationale in proposing a staggered board is to assure continuity of policy and experience.

d. Authorization of Preferred Stock. The board of directors is authorized to create a new class of securities with special voting rights. This security, typically preferred stock, may be issued to friendly parties in a control contest.

19.2 : What is the effect of the passage of antitakeover amendments on stock price?Effects of Antitakeover AmendmentsIn general, a problem of confounding effects in that antitakeover amendments may be associated with information that the firm has become a takeover target which has positive effects on returns to shareholders. DeAngelo and Rice found an insignificant negative effect. Linn and McConnell found significant positive effects. Jarrell and Poulsen found very small negative effects. McWilliams found a small positive effect and indicated that the market did not view the amendments as effective defense.

16.1Table 16.1Value of LBO Transactions($ Billions)YearTotal Value OfferedAll M&ALeveraged Buyouts% of Total Mergers198253.83.56.5%198373.14.56.2%1984122.218.715.3%1985179.819.711.0%1986173.145.226.1%1987163.736.222.1%1988246.947.019.0%1989221.165.729.7%1990108.215.214.1%199171.27.09.8%199296.79.69.9%1993176.411.06.2%1994226.713.05.7%1995356.020.05.6%1996495.029.05.9%1997657.128.74.4%19981,191.941.03.4%19991,425.962.04.3%20001,325.751.53.9%2001699.418.62.7%Yearly Averages1982-1985107.211.69.7%1986-1989201.248.524.2%1990-199292.010.611.3%1993-1995253.014.75.9%1996-20001,019.142.44.4%2001699.418.62.7%Source: Mergers & Acquisitions Almanac issues, Mergerstat Review (2002).

16.2Table 16.2Relative Premium OfferedAll AcquisitionsGoing PrivatePeriodMean PremiumMedian PremiumMean PremiumMedian Premium1986-198939.9%30.2%33.9%26.5%1990-199239.4%32.0%27.6%19.9%1993-200041.4%32.2%35.1%27.1%200157.2%40.5%67.6%52.2%Source: Mergerstat Review (2002).

16.3Table 16.3Relative P/E RatiosPeriodS&P 500Mean P/EGoing PrivateMean P/EGoing PrivateMedian P/E1986-198915.320.517.81990-199219.314.612.31993-200023.322.717.8200148.322.712.1Source: Mergerstat Review (2002).

16.7Table 16.7Capital Cash Flow ModelYear 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues5,0005,4005,8326,2996,8027,3477,5672.Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%3.NOI = EBIT5005405836306807356054.Cash tax rate (T)40.0%40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes2002162332522722942426.NOPAT3003243503784084413637.+ Depreciation2502702923153403672658. Change in working capital505458636873389. Capital expenditures1001081171261361477610. Change in other assets net5054586368737611.Free cash flows35037840844147651443912.Interest expense40038030020015010013.Interest tax shield16015212080604014.Capital cash flow (CCF) (11+13)53856056155657447915.10.70%10.70%10.70%10.70%10.70%10.70%16.Discount factor0.903340.816030.737150.665900.6015417.Present values486457413370345Panel B Operating Relationships (As a % of Revenues)NOI10.0%10.0%10.0%10.0%10.0%10.0%8.0%NOPAT6.0%6.0%6.0%6.0%6.0%6.0%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures2.0%2.0%2.0%2.0%2.0%2.0%1.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow7.0%7.0%7.0%7.0%7.0%7.0%5.8%Panel C Valuation CalculationsPart I - Expected Asset Return InputsPart III - Terminal Value (TV)(a)6.00%TV =(b)0.723=479 / (0.107-0.03) = 479 / 0.077 =6,219(c)Risk premium (RP)6.50%(d)Tax rate (T)40.00%Part IV - Valuation Calculation(e)12.50%(1)PV of cash flows2,072(f)8.00%(2)PV of terminal value3,741(g)Target Equity (S) to Value (V)60.0%(3)Operating Value (V)5,814(h)Target Debt (B) to Value (V)40.0%(4)Add: Marketable securities0.0(5)Total value5,814Part II - Expected Asset Return Calculation(6)Less: Initial book debt (D)2,000Using CAPM(7)Value of equity3,814(8)Shares outstanding100.0= 6.0% + 6.5%(0.723) =10.70%(9)Intrinsic share price$38.14Using Weighted AveragePart V - Ratios1.16= 12.50%(0.600) + 8.00%(0.400) =10.70%11.637.75

Q16.2.1Table A16.2.1RJR Nabisco Projections19881989199019911992199319941995199619971998Year n+1Panel A Inputs for Present Value Calculations1.Net revenues15,17316,19017,27418,43219,64820,94522,30623,75625,18226,69328,29429,1432.Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%3.NOI = EBIT2,7522,9373,1333,3403,5613,7924,0394,2814,5384,8104,3714.Cash tax rate (T)34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%5.Income taxes9369981,0651,1361,2111,2891,3731,4551,5431,6351,4866.NOPAT1,8161,9382,0682,2052,3502,5032,6652,8252,9953,1752,8857.+ Depreciation1,1331,0361,1061,0811,1521,2271,1881,2591,0688495838. Change in working capital818692981051121191261331411469. Capital expenditures77769155358941944623825213314114610. Change in other assets net(3,497)(2,695)0.00.00.00.00.00.00.00.00.011.Free cash flows5,5894,8922,5292,5972,9783,1723,4973,7073,7963,7403,17712.Interest expense2,7542,3411,9971,8881,3211,088806487210.059013.Interest tax shield93679667964244937027416670.020114.6,5255,6883,2083,2393,4283,5423,7713,8723,8033,7403,37715.14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%16.Discount factor0.871460.759440.661820.576750.502620.438010.381710.332640.289890.2526217.Present values5,6864,3202,1231,8681,7231,5511,4391,2881,102945Panel B Operating Relationships (As a % of Revenues)NOI17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%15.0%NOPAT11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-21.6%-15.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow34.5%28.3%13.7%13.2%14.2%14.2%14.7%14.7%14.2%13.2%10.9%Panel C Valuation CalculationsPart I - Expected Asset Return InputsPart III - Terminal Value (TV)Part IV - Valuation Calculation(a)8.00%TV =(1)PV of capital cash flows22,046(b)0.900=3377 / (0.1475-0.03) = 3377 / 0.1175 =28,742(2)PV of terminal value7,261(c)Risk premium (RP)7.50%(3)Operating Value (V)29,307(d)Tax rate (T)34.00%PVTV =(4)Add: Marketable securities0.0=28742 x 0.25262 =7,261(5)Total value29,307Part II - Expected Asset Return Calculation(6)Less: Initial book debt (D)5,204(7)Value of equity24,103= 8.0% + 7.5%(0.900) =14.75%(8)Shares outstanding229.0(9)Intrinsic share price$105.25Table P16.2.1Operating Relationships and Financial Information - RJR Nabisco Projections(in millions)Initial revenues (1988)15,1738.0%Marketable securities00.9Intial book debt5,204Risk premium (RP)7.5%Shares outstanding229.0Tax rate (T)34.0%1989199019911992199319941995199619971998Year n+1Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%Interest expense (millions)$2,754$2,341$1,997$1,888$1,321$1,088$806$487$21$0$590Operating relationships (as a % of revenues)NOI17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%15.0%NOPAT11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-21.6%-15.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow34.5%28.3%13.7%13.2%14.2%14.2%14.7%14.7%14.2%13.2%10.9%Using Weighted Average= 0.00%(0.000) + 0.00%(0.000) =0.00%

Q16.2.2Table A16.2.2RJR Nabisco Projections19881989199019911992199319941995199619971998Year n+1Panel A Inputs for Present Value Calculations1.Net revenues15,17316,19017,27418,43219,64820,94522,30623,75625,18226,69328,29429,1432.Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%3.NOI = EBIT2,7523,1093,5023,9304,1894,4614,7515,0365,3395,6594,3714.Cash tax rate (T)34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%5.Income taxes9361,0571,1911,3361,4241,5171,6151,7121,8151,9241,4866.NOPAT1,8162,0522,3112,5942,7652,9443,1363,3243,5233,7352,8857.+ Depreciation1,1331,0361,1061,0811,1521,2271,1881,2591,0688495838. Change in working capital818692981051121191261331411469. Capital expenditures77769155358941944623825213314114610. Change in other assets net(3,497)(2,695)0.00.00.00.00.00.00.00.00.011.Free cash flows5,5895,0062,7722,9873,3933,6143,9674,2054,3244,3013,17712.Interest expense2,7542,3411,9971,8881,3211,088806487210.059013.Interest tax shield93679667964244937027416670.020114.6,5255,8023,4513,6283,8423,9844,2414,3714,3314,3013,37715.14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%16.Discount factor0.871460.759440.661820.576750.502620.438010.381710.332640.289890.2526217.Present values5,6864,4062,2842,0931,9311,7451,6191,4541,2561,086Panel B Operating Relationships (As a % of Revenues)NOI17.0%18.0%19.0%20.0%20.0%20.0%20.0%20.0%20.0%20.0%15.0%NOPAT11.2%11.9%12.5%13.2%13.2%13.2%13.2%13.2%13.2%13.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-21.6%-15.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow34.5%29.0%15.0%15.2%16.2%16.2%16.7%16.7%16.2%15.2%10.9%Panel C Valuation CalculationsPart I - Expected Asset Return InputsPart III - Terminal Value (TV)Part IV - Valuation Calculation(a)8.00%TV =(1)PV of capital cash flows23,560(b)0.900=3377 / (0.1475-0.03) = 3377 / 0.1175 =28,742(2)PV of terminal value7,261(c)Risk premium (RP)7.50%(3)Operating Value (V)30,821(d)Tax rate (T)34.00%PVTV =(4)Add: Marketable securities0.0=28742 x 0.25262 =7,261(5)Total value30,821Part II - Expected Asset Return Calculation(6)Less: Initial book debt (D)5,204(7)Value of equity25,617= 8.0% + 7.5%(0.900) =14.75%(8)Shares outstanding229.0(9)Intrinsic share price$111.87Table P16.2.2Operating Relationships and Financial Information - RJR Nabisco Projections(in millions)Initial revenues (1988)15,1738.0%Marketable securities00.9Intial book debt5,204Risk premium (RP)7.5%Shares outstanding229.0Tax rate (T)34.0%1989199019911992199319941995199619971998Year n+1Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%Interest expense (millions)$2,754$2,341$1,997$1,888$1,321$1,088$806$487$21$0$590Operating relationships (as a % of revenues)NOI17.0%18.0%19.0%20.0%20.0%20.0%20.0%20.0%20.0%20.0%15.0%NOPAT11.2%11.9%12.5%13.2%13.2%13.2%13.2%13.2%13.2%13.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-21.6%-15.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow34.5%29.0%15.0%15.2%16.2%16.2%16.7%16.7%16.2%15.2%10.9%Using Weighted Average= 22900.00%(0.000) + 0.00%(0.000) =0.00%

Q16.2.3Table A16.2.3RJR Nabisco Projections19881989199019911992199319941995199619971998Year n+1Panel A Inputs for Present Value Calculations1.Net revenues15,17316,19017,27418,43219,64820,94522,30623,75625,18226,69328,29429,1432.Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%3.NOI = EBIT2,7523,1093,5023,9304,1894,4614,7515,0365,3395,6594,3714.Cash tax rate (T)34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%5.Income taxes9361,0571,1911,3361,4241,5171,6151,7121,8151,9241,4866.NOPAT1,8162,0522,3112,5942,7652,9443,1363,3243,5233,7352,8857.+ Depreciation1,1331,0361,1061,0811,1521,2271,1881,2591,0688495838. Change in working capital818692981051121191261331411469. Capital expenditures77769155358941944623825213314114610. Change in other assets net(1,000)(1,000)0.00.00.00.00.00.00.00.00.011.Free cash flows3,0923,3112,7722,9873,3933,6143,9674,2054,3244,3013,17712.Interest expense2,7542,3411,9971,8881,3211,088806487210.059013.Interest tax shield93679667964244937027416670.020114.4,0284,1073,4513,6283,8423,9844,2414,3714,3314,3013,37715.14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%16.Discount factor0.871460.759440.661820.576750.502620.438010.381710.332640.289890.2526217.Present values3,5103,1192,2842,0931,9311,7451,6191,4541,2561,086Panel B Operating Relationships (As a % of Revenues)NOI17.0%18.0%19.0%20.0%20.0%20.0%20.0%20.0%20.0%20.0%15.0%NOPAT11.2%11.9%12.5%13.2%13.2%13.2%13.2%13.2%13.2%13.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-6.177%-5.789%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow19.1%19.2%15.0%15.2%16.2%16.2%16.7%16.7%16.2%15.2%10.9%Panel C Valuation CalculationsPart I - Expected Asset Return InputsPart III - Terminal Value (TV)Part IV - Valuation Calculation(a)8.00%TV =(1)PV of capital cash flows20,097(b)0.900=3377 / (0.1475-0.03) = 3377 / 0.1175 =28,742(2)PV of terminal value7,261(c)Risk premium (RP)7.50%(3)Operating Value (V)27,358(d)Tax rate (T)34.00%PVTV =(4)Add: Marketable securities0.0=28742 x 0.25262 =7,261(5)Total value27,358Part II - Expected Asset Return Calculation(6)Less: Initial book debt (D)5,204(7)Value of equity22,154= 8.0% + 7.5%(0.900) =14.75%(8)Shares outstanding229.0(9)Intrinsic share price$96.74Table Q16.2.2RJR Nabisco Projections(in millions)Initial revenues (1988)15,1738.0%Marketable securities00.9Intial book debt5,204Risk premium (RP)7.5%Shares outstanding229.0Tax rate (T)34.0%1989199019911992199319941995199619971998Year n+1Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%Interest expense (millions)$2,754$2,341$1,997$1,888$1,321$1,088$806$487$21$0$590Operating relationships (as a % of revenues)NOI17.0%18.0%19.0%20.0%20.0%20.0%20.0%20.0%20.0%20.0%15.0%NOPAT11.2%11.9%12.5%13.2%13.2%13.2%13.2%13.2%13.2%13.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-6.2%-5.8%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow19.1%19.2%15.0%15.2%16.2%16.2%16.7%16.7%16.2%15.2%10.9%Using Weighted Average= 22900.00%(0.000) + 0.00%(0.000) =0.00%

A16.1.1Table A16.1.1Capital Cash Flow Model - Coleman TextilesYear 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues10,00010,60011,23611,91012,62513,38213,7842.Revenue growth rate6.0%6.0%6.0%6.0%6.0%3.0%3.NOI = EBIT8488999531,0101,0718274.Cash tax rate (T)40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes3393603814044283316.NOPAT5095395726066424967.+ Depreciation5305625966316695518. Change in working capital2122252382522684149. Capital expenditures42444947650553534510. Change in other assets net10611211912613413811.Free cash flows29731533335337515212.Interest expense40038030020015010013.Interest tax shield16015212080604014.Capital cash flow (CCF) (11+13)45746745343343519215.11.00%11.00%11.00%11.00%11.00%11.00%16.Discount factor0.900900.811620.731190.658730.5934517.Present values412379332286258Panel B Operating Relationships (As a % of Revenues)NOI8.0%8.0%8.0%8.0%8.0%6.0%NOPAT4.8%4.8%4.8%4.8%4.8%3.6%Depreciation5.0%5.0%5.0%5.0%5.0%4.0%Change in working capital2.0%2.0%2.0%2.0%2.0%3.0%Capital expenditures4.0%4.0%4.0%4.0%4.0%2.5%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow2.8%2.8%2.8%2.8%2.8%1.1%Panel C Valuation CalculationsPart I - Expected Asset ReturnPart III - Terminal Value (TV)Expected asset return11.00%TV =Tax rate (T)40.00%=192 / (0.11-0.03) = 192 / 0.08 =2,395Part IV - Valuation Calculation(1)PV of cash flows1,665(2)PV of terminal value1,421(3)Operating Value (V)3,087(4)Add: Marketable securities0.0(5)Total value3,087(6)Less: Initial book debt (D)2,000(7)Value of equity1,087(8)Shares outstanding100.0(9)Intrinsic share price$10.87Part V - Ratios0.310.000.00(a)6.00%(b)0.723(c)Risk premium (RP)6.50%(d)(e)12.50%(f)8.00%(g)Target Equity (S) to Value (V)60.0%(h)Target Debt (B) to Value (V)40.0%Part II - Expected Asset Return CalculationUsing CAPM= 6.0% + 6.5%(0.723) =Using Weighted Average= 12.50%(0.600) + 8.00%(0.400) =10.70%Initial revenues (million)$10,000Marketable securities$0Expected asset return11.00%Initial book debt$2,000Tax rate40.00%Shares outstanding (million)100Year 1Year 2Year 3Year 4Year 5Year n+1Revenue growth rate6.0%6.0%6.0%6.0%6.0%3.0%Interest expense (million)$400$380$300$200$150$100(as a % of revenues)NOI8.0%8.0%8.0%8.0%8.0%6.0%NOPAT4.8%4.8%4.8%4.8%4.8%3.6%Depreciation5.0%5.0%5.0%5.0%5.0%4.0%Change in working capital2.0%2.0%2.0%2.0%2.0%3.0%Capital expenditures4.0%4.0%4.0%4.0%4.0%2.5%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow2.8%2.8%2.8%2.8%2.8%1.1%

A16.1.2Table A16.1.2Capital Cash Flow Model - Coleman Textiles LBOYear 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues10,00010,80011,66412,59713,60514,69315,1342.Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%3.NOI = EBIT1,2961,4001,5121,6331,7631,2114.Cash tax rate (T)40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes5185606056537054846.NOPAT7788409079801,0587267.+ Depreciation5405836306807355308. Change in working capital108117126136147769. Capital expenditures43246750454458845410. Change in other assets net10811712613614715111.Free cash flows67072378184491157512.Interest expense80076060040030020013.Interest tax shield3203042401601208014.Capital cash flow (CCF) (11+13)9901,0271,0211,0041,03165515.13.00%13.00%13.00%13.00%13.00%13.00%16.Discount factor0.884960.783150.693050.613320.5427617.Present values876804708615560Panel B Operating Relationships (As a % of Revenues)NOI12.0%12.0%12.0%12.0%12.0%8.0%NOPAT7.2%7.2%7.2%7.2%7.2%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures4.0%4.0%4.0%4.0%4.0%3.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow6.2%6.2%6.2%6.2%6.2%3.8%Panel C Valuation CalculationsPart I - Expected Asset ReturnPart III - Terminal Value (TV)Expected asset return13.00%TV =Tax rate (T)40.00%=655 / (0.13-0.03) = 655 / 0.1 =6,551Part IV - Valuation Calculation(1)PV of cash flows3,563(2)PV of terminal value3,556(3)Operating Value (V)7,118(4)Add: Marketable securities0.0(5)Total value7,118(6)Less: Initial book debt (D)4,000(7)Value of equity3,118(8)Shares outstanding100.0(9)Intrinsic share price$31.18Part V - Ratios0.710.000.00(a)6.00%(b)0.723(c)Risk premium (RP)6.50%(d)(e)12.50%(f)8.00%(g)Target Equity (S) to Value (V)60.0%(h)Target Debt (B) to Value (V)40.0%Part II - Expected Asset Return CalculationUsing CAPM= 6.0% + 6.5%(0.723) =Using Weighted Average= 12.50%(0.600) + 8.00%(0.400) =10.70%Initial revenues (million)$10,000Marketable securities$0Expected asset return13.00%Initial book debt$4,000Tax rate40.00%Shares outstanding (million)100Year 1Year 2Year 3Year 4Year 5Year n+1Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%Interest expense (million)$800$760$600$400$300$200(as a % of revenues)NOI12.0%12.0%12.0%12.0%12.0%8.0%NOPAT7.2%7.2%7.2%7.2%7.2%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures4.0%4.0%4.0%4.0%4.0%3.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow6.2%6.2%6.2%6.2%6.2%3.8%

B16.1Table B16.1Year 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues5,0005,4005,8326,2996,8027,3477,5672.Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%3.NOI = EBIT5005405836306807356054.Cash tax rate40.0%40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes2002162332522722942426.NOPAT3003243503784084413637.+ Depreciation2502702923153403672658. Change in working capital505458636873389. Capital expenditures1001081171261361477610. Change in other assets net5054586368737611.Free cash flows (FCF)35037840844147651443912.10.70%10.70%10.70%10.70%10.70%10.70%13.Discount factor0.903340.816030.737150.665900.6015414.Present values of FCF34133332531730915.Interest expense40038030020015010016.Interest tax shield (TS)16015212080604017.8.00%8.00%8.00%8.00%8.00%8.00%18.Discount factor0.925930.857340.793830.735030.6805819.Present value of tax shield148130955941Panel B Operating Relationships (As a % of Revenues)NOI10.0%10.0%10.0%10.0%10.0%10.0%8.0%NOPAT6.0%6.0%6.0%6.0%6.0%6.0%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures2.0%2.0%2.0%2.0%2.0%2.0%1.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow7.0%7.0%7.0%7.0%7.0%7.0%5.8%Panel C Valuation CalculationsInputs(a)6.00%=439 / (0.107-0.03) = 439 / 0.077 =5,700(b)0.723(c)Risk premium (RP)6.50%(d)Tax rate (T)40.00%=40 / (0.08-0.03) = 40 / 0.05 =800(e)8.00%(f)Target Equity (S) to Value (V)60.0%(1)PV of free cash flows1,626(g)Target Debt (B) to Value (V)40.0%(2)PV of interest tax shield473(3)PV of terminal free cash flows3,429Calculations(4)PV of terminal interest tax shield544(5)Operating Value (V)6,073(6)Add: Marketable securities0.0= 6.0% + 6.5%(0.723) =10.70%(7)Total value6,073(8)Less: Book debt (D)2,000(9)Value of equity4,073(10)Shares outstanding100.0(11)Intrinsic share price$40.73Ratios:1.2112.158.10

B16.2Table B16.2Year 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues5,0005,4005,8326,2996,8027,3477,5672.Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%3.NOI = EBIT5005405836306807356054.Cash tax rate40.0%40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes2002162332522722942426.NOPAT3003243503784084413637.+ Depreciation2502702923153403672658. Change in working capital505458636873389. Capital expenditures1001081171261361477610. Change in other assets net5054586368737611.Free cash flows (FCF)35037840844147651443912.10.70%10.70%10.70%10.70%10.70%10.70%13.Discount factor0.903340.816030.737150.665900.6015414.Present values of FCF34133332531730915.Interest expense40038030020015010016.Interest tax shield (TS)16015212080604017.10.70%10.70%10.70%10.70%10.70%10.70%18.Discount factor0.903340.816030.737150.665900.6015419.Present value of tax shield145124885336Panel B Operating Relationships (As a % of Revenues)NOI10.0%10.0%10.0%10.0%10.0%10.0%8.0%NOPAT6.0%6.0%6.0%6.0%6.0%6.0%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures2.0%2.0%2.0%2.0%2.0%2.0%1.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow7.0%7.0%7.0%7.0%7.0%7.0%5.8%Panel C Valuation CalculationsInputs(a)6.00%=439 / (0.107-0.03) = 439 / 0.077 =5,700(b)0.723(c)Risk premium (RP)6.50%(d)Tax rate (T)40.00%=40 / (0.107-0.03) = 40 / 0.077 =519(e)8.00%(f)Target Equity (S) to Value (V)60.0%(1)PV of free cash flows1,626(g)Target Debt (B) to Value (V)40.0%(2)PV of interest tax shield446(3)PV of terminal free cash flows3,429Calculations(4)PV of terminal interest tax shield312(5)Operating Value (V)5,814(6)Add: Marketable securities0.0= 6.0% + 6.5%(0.723) =10.70%(7)Total value5,814(8)Less: Book debt (D)2,000(9)Value of equity3,814(10)Shares outstanding100.0(11)Intrinsic share price$38.14Ratios:1.1611.637.75

Sheet1Purchase Price ($ in Millions) 1981-2000Table 1 - 4Transaction ValueTotal DollarNetAverageMedian$100$1,000Value OfferedBaseAnnouncementsPricePriceor Moreor More1981$82,617.61,1262,395$73.4$9.011312$82.621982$53,754.59302,346$57.8$10.51166$53.751983$73,080.51,0772,533$67.9$16.513811$73.081984$122,223.71,0842,543$112.8$20.12018$122.221985$179,767.51,3203,011$136.2$21.127036$179.771986$173,136.91,4683,336$117.9$24.934627$173.141987$163,686.39722,032$168.4$51.330136$163.691988$246,875.11,1492,258$215.1$56.936945$246.881989$221,085.11,0922,366$202.5$36.632835$221.091990$108,151.78562,074$126.4$21.018121$108.151991$71,163.87221,877$98.6$22.715013$71.161992$96,688.39502,574$101.8$22.520018$96.691993$176,399.61,0812,663$163.2$26.024227$176.401994$226,670.81,3482,997$168.2$33.038351$226.671995$356,016.41,7353,510$205.2$30.546274$356.021996$494,962.12,6585,848$186.7$25.364094$494.961997$657,062.63,0137,800$218.1$30.0873120$657.061998$1,191,861.13,0917,809$385.6$33.5906158$1,191.861999$1,425,884.83,3849,278$421.4$39.61,097195$1,425.882000$1,325,734.43,7579,566$352.9$36.01,150206$1,325.73Copyright 2001 Mergerstat

Sheet2Average P/E* Offered Relative To S&P 500 1990-1999Table 1 - 14Average P/E OfferedS&P 500AverageRelative toP/E**P/E OfferedS&P 500 P/E199118.620.07.50%199224.222.7-6.20%199323.424.44.30%199419.924.523.10%199516.623.843.40%199619.226.236.50%199722.427.422.30%199826.925.1-6.70%199932.624.3-25.50%200025.423.8-6.30%* Excludes negative P/E multiples and P/E multiples larger than 100.** Based upon an average of weekly prices and quarterly earnings.Copyright 2001 Mergerstat

Sheet3S&P 500 P/E Ratio vs. Premium Offered, 1991-2000Table 1 - 17S&P 500AverageP/E*Premium Offered**199118.635.1%199224.241.0%199323.438.7%199419.941.9%199516.644.7%199619.236.6%199722.435.7%199826.940.7%199932.643.3%200025.449.2%* Based upon an average of weekly prices and quarterly earnings.** Excludes negative premiums.Copyright 2001 Mergerstat

Sheet4Going Private: Valuation of Transactions, 1991-2000Table 1 - 41Price to Earnings Ratio Offered*Premium Offered**AverageMedianAverageMedian199113.210.723.8%20.0%199215.212.724.8%8.1%199314.814.934.7%20.0%199424.520.241.9%35.0%199530.817.229.8%19.2%199628.923.134.8%26.2%199723.619.930.4%24.5%199820.217.729.1%20.4%199922.316.938.0%32.7%200016.212.541.9%38.7%* Excludes negative P/E multiples and P/E multiples larger than 100.** Excludes negative premiums.Copyright 2001 Mergerstat

16.1Table 16.1Value of LBO Transactions($ Billions)YearTotal Value OfferedAll M&ALeveraged Buyouts% of Total Mergers198253.83.56.5%198373.14.56.2%1984122.218.715.3%1985179.819.711.0%1986173.145.226.1%1987163.736.222.1%1988246.947.019.0%1989221.165.729.7%1990108.215.214.1%199171.27.09.8%199296.79.69.9%1993176.411.06.2%1994226.713.05.7%1995356.020.05.6%1996495.029.05.9%1997657.128.74.4%19981,191.941.03.4%19991,425.962.04.3%20001,325.751.53.9%2001699.418.62.7%Yearly Averages1982-1985107.211.69.7%1986-1989201.248.524.2%1990-199292.010.611.3%1993-1995253.014.75.9%1996-20001,019.142.44.4%2001699.418.62.7%Source: Mergers & Acquisitions Almanac issues, Mergerstat Review (2002).

16.2Table 16.2Relative Premium OfferedAll AcquisitionsGoing PrivatePeriodMean PremiumMedian PremiumMean PremiumMedian Premium1986-198939.9%30.2%33.9%26.5%1990-199239.4%32.0%27.6%19.9%1993-200041.4%32.2%35.1%27.1%200157.2%40.5%67.6%52.2%Source: Mergerstat Review (2002).

16.3Table 16.3Relative P/E RatiosPeriodS&P 500Mean P/EGoing PrivateMean P/EGoing PrivateMedian P/E1986-198915.320.517.81990-199219.314.612.31993-200023.322.717.8200148.322.712.1Source: Mergerstat Review (2002).

16.7Table 16.7Capital Cash Flow ModelYear 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues5,0005,4005,8326,2996,8027,3477,5672.Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%3.NOI = EBIT5005405836306807356054.Cash tax rate (T)40.0%40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes2002162332522722942426.NOPAT3003243503784084413637.+ Depreciation2502702923153403672658. Change in working capital505458636873389. Capital expenditures1001081171261361477610. Change in other assets net5054586368737611.Free cash flows35037840844147651443912.Interest expense40038030020015010013.Interest tax shield16015212080604014.Capital cash flow (CCF) (11+13)53856056155657447915.10.70%10.70%10.70%10.70%10.70%10.70%16.Discount factor0.903340.816030.737150.665900.6015417.Present values486457413370345Panel B Operating Relationships (As a % of Revenues)NOI10.0%10.0%10.0%10.0%10.0%10.0%8.0%NOPAT6.0%6.0%6.0%6.0%6.0%6.0%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures2.0%2.0%2.0%2.0%2.0%2.0%1.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow7.0%7.0%7.0%7.0%7.0%7.0%5.8%Panel C Valuation CalculationsPart I - Expected Asset Return InputsPart III - Terminal Value (TV)(a)6.00%TV =(b)0.723=479 / (0.107-0.03) = 479 / 0.077 =6,219(c)Risk premium (RP)6.50%(d)Tax rate (T)40.00%Part IV - Valuation Calculation(e)12.50%(1)PV of cash flows2,072(f)8.00%(2)PV of terminal value3,741(g)Target Equity (S) to Value (V)60.0%(3)Operating Value (V)5,814(h)Target Debt (B) to Value (V)40.0%(4)Add: Marketable securities0.0(5)Total value5,814Part II - Expected Asset Return Calculation(6)Less: Initial book debt (D)2,000Using CAPM(7)Value of equity3,814(8)Shares outstanding100.0= 6.0% + 6.5%(0.723) =10.70%(9)Intrinsic share price$38.14Using Weighted AveragePart V - Ratios1.16= 12.50%(0.600) + 8.00%(0.400) =10.70%11.637.75

Q16.2.1Table A16.2.1RJR Nabisco Projections19881989199019911992199319941995199619971998Year n+1Panel A Inputs for Present Value Calculations1.Net revenues15,17316,19017,27418,43219,64820,94522,30623,75625,18226,69328,29429,1432.Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%3.NOI = EBIT2,7522,9373,1333,3403,5613,7924,0394,2814,5384,8104,3714.Cash tax rate (T)34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%5.Income taxes9369981,0651,1361,2111,2891,3731,4551,5431,6351,4866.NOPAT1,8161,9382,0682,2052,3502,5032,6652,8252,9953,1752,8857.+ Depreciation1,1331,0361,1061,0811,1521,2271,1881,2591,0688495838. Change in working capital818692981051121191261331411469. Capital expenditures77769155358941944623825213314114610. Change in other assets net(3,497)(2,695)0.00.00.00.00.00.00.00.00.011.Free cash flows5,5894,8922,5292,5972,9783,1723,4973,7073,7963,7403,17712.Interest expense2,7542,3411,9971,8881,3211,088806487210.059013.Interest tax shield93679667964244937027416670.020114.6,5255,6883,2083,2393,4283,5423,7713,8723,8033,7403,37715.14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%16.Discount factor0.871460.759440.661820.576750.502620.438010.381710.332640.289890.2526217.Present values5,6864,3202,1231,8681,7231,5511,4391,2881,102945Panel B Operating Relationships (As a % of Revenues)NOI17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%15.0%NOPAT11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-21.6%-15.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow34.5%28.3%13.7%13.2%14.2%14.2%14.7%14.7%14.2%13.2%10.9%Panel C Valuation CalculationsPart I - Expected Asset Return InputsPart III - Terminal Value (TV)Part IV - Valuation Calculation(a)8.00%TV =(1)PV of capital cash flows22,046(b)0.900=3377 / (0.1475-0.03) = 3377 / 0.1175 =28,742(2)PV of terminal value7,261(c)Risk premium (RP)7.50%(3)Operating Value (V)29,307(d)Tax rate (T)34.00%PVTV =(4)Add: Marketable securities0.0=28742 x 0.25262 =7,261(5)Total value29,307Part II - Expected Asset Return Calculation(6)Less: Initial book debt (D)5,204(7)Value of equity24,103= 8.0% + 7.5%(0.900) =14.75%(8)Shares outstanding229.0(9)Intrinsic share price$105.25Table P16.2.1Operating Relationships and Financial Information - RJR Nabisco Projections(in millions)Initial revenues (1988)15,1738.0%Marketable securities00.9Intial book debt5,204Risk premium (RP)7.5%Shares outstanding229.0Tax rate (T)34.0%1989199019911992199319941995199619971998Year n+1Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%Interest expense (millions)$2,754$2,341$1,997$1,888$1,321$1,088$806$487$21$0$590Operating relationships (as a % of revenues)NOI17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%17.0%15.0%NOPAT11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%11.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-21.6%-15.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow34.5%28.3%13.7%13.2%14.2%14.2%14.7%14.7%14.2%13.2%10.9%Using Weighted Average= 0.00%(0.000) + 0.00%(0.000) =0.00%

Q16.2.2Table A16.2.2RJR Nabisco Projections19881989199019911992199319941995199619971998Year n+1Panel A Inputs for Present Value Calculations1.Net revenues15,17316,19017,27418,43219,64820,94522,30623,75625,18226,69328,29429,1432.Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%3.NOI = EBIT2,7523,1093,5023,9304,1894,4614,7515,0365,3395,6594,3714.Cash tax rate (T)34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%5.Income taxes9361,0571,1911,3361,4241,5171,6151,7121,8151,9241,4866.NOPAT1,8162,0522,3112,5942,7652,9443,1363,3243,5233,7352,8857.+ Depreciation1,1331,0361,1061,0811,1521,2271,1881,2591,0688495838. Change in working capital818692981051121191261331411469. Capital expenditures77769155358941944623825213314114610. Change in other assets net(3,497)(2,695)0.00.00.00.00.00.00.00.00.011.Free cash flows5,5895,0062,7722,9873,3933,6143,9674,2054,3244,3013,17712.Interest expense2,7542,3411,9971,8881,3211,088806487210.059013.Interest tax shield93679667964244937027416670.020114.6,5255,8023,4513,6283,8423,9844,2414,3714,3314,3013,37715.14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%16.Discount factor0.871460.759440.661820.576750.502620.438010.381710.332640.289890.2526217.Present values5,6864,4062,2842,0931,9311,7451,6191,4541,2561,086Panel B Operating Relationships (As a % of Revenues)NOI17.0%18.0%19.0%20.0%20.0%20.0%20.0%20.0%20.0%20.0%15.0%NOPAT11.2%11.9%12.5%13.2%13.2%13.2%13.2%13.2%13.2%13.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-21.6%-15.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow34.5%29.0%15.0%15.2%16.2%16.2%16.7%16.7%16.2%15.2%10.9%Panel C Valuation CalculationsPart I - Expected Asset Return InputsPart III - Terminal Value (TV)Part IV - Valuation Calculation(a)8.00%TV =(1)PV of capital cash flows23,560(b)0.900=3377 / (0.1475-0.03) = 3377 / 0.1175 =28,742(2)PV of terminal value7,261(c)Risk premium (RP)7.50%(3)Operating Value (V)30,821(d)Tax rate (T)34.00%PVTV =(4)Add: Marketable securities0.0=28742 x 0.25262 =7,261(5)Total value30,821Part II - Expected Asset Return Calculation(6)Less: Initial book debt (D)5,204(7)Value of equity25,617= 8.0% + 7.5%(0.900) =14.75%(8)Shares outstanding229.0(9)Intrinsic share price$111.87Table P16.2.2Operating Relationships and Financial Information - RJR Nabisco Projections(in millions)Initial revenues (1988)15,1738.0%Marketable securities00.9Intial book debt5,204Risk premium (RP)7.5%Shares outstanding229.0Tax rate (T)34.0%1989199019911992199319941995199619971998Year n+1Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%Interest expense (millions)$2,754$2,341$1,997$1,888$1,321$1,088$806$487$21$0$590Operating relationships (as a % of revenues)NOI17.0%18.0%19.0%20.0%20.0%20.0%20.0%20.0%20.0%20.0%15.0%NOPAT11.2%11.9%12.5%13.2%13.2%13.2%13.2%13.2%13.2%13.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-21.6%-15.6%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow34.5%29.0%15.0%15.2%16.2%16.2%16.7%16.7%16.2%15.2%10.9%Using Weighted Average= 22900.00%(0.000) + 0.00%(0.000) =0.00%

Q16.2.3Table A16.2.3RJR Nabisco Projections19881989199019911992199319941995199619971998Year n+1Panel A Inputs for Present Value Calculations1.Net revenues15,17316,19017,27418,43219,64820,94522,30623,75625,18226,69328,29429,1432.Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%3.NOI = EBIT2,7523,1093,5023,9304,1894,4614,7515,0365,3395,6594,3714.Cash tax rate (T)34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%34.0%5.Income taxes9361,0571,1911,3361,4241,5171,6151,7121,8151,9241,4866.NOPAT1,8162,0522,3112,5942,7652,9443,1363,3243,5233,7352,8857.+ Depreciation1,1331,0361,1061,0811,1521,2271,1881,2591,0688495838. Change in working capital818692981051121191261331411469. Capital expenditures77769155358941944623825213314114610. Change in other assets net(1,000)(1,000)0.00.00.00.00.00.00.00.00.011.Free cash flows3,0923,3112,7722,9873,3933,6143,9674,2054,3244,3013,17712.Interest expense2,7542,3411,9971,8881,3211,088806487210.059013.Interest tax shield93679667964244937027416670.020114.4,0284,1073,4513,6283,8423,9844,2414,3714,3314,3013,37715.14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%14.75%16.Discount factor0.871460.759440.661820.576750.502620.438010.381710.332640.289890.2526217.Present values3,5103,1192,2842,0931,9311,7451,6191,4541,2561,086Panel B Operating Relationships (As a % of Revenues)NOI17.0%18.0%19.0%20.0%20.0%20.0%20.0%20.0%20.0%20.0%15.0%NOPAT11.2%11.9%12.5%13.2%13.2%13.2%13.2%13.2%13.2%13.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-6.177%-5.789%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow19.1%19.2%15.0%15.2%16.2%16.2%16.7%16.7%16.2%15.2%10.9%Panel C Valuation CalculationsPart I - Expected Asset Return InputsPart III - Terminal Value (TV)Part IV - Valuation Calculation(a)8.00%TV =(1)PV of capital cash flows20,097(b)0.900=3377 / (0.1475-0.03) = 3377 / 0.1175 =28,742(2)PV of terminal value7,261(c)Risk premium (RP)7.50%(3)Operating Value (V)27,358(d)Tax rate (T)34.00%PVTV =(4)Add: Marketable securities0.0=28742 x 0.25262 =7,261(5)Total value27,358Part II - Expected Asset Return Calculation(6)Less: Initial book debt (D)5,204(7)Value of equity22,154= 8.0% + 7.5%(0.900) =14.75%(8)Shares outstanding229.0(9)Intrinsic share price$96.74Table Q16.2.2RJR Nabisco Projections(in millions)Initial revenues (1988)15,1738.0%Marketable securities00.9Intial book debt5,204Risk premium (RP)7.5%Shares outstanding229.0Tax rate (T)34.0%1989199019911992199319941995199619971998Year n+1Revenue growth rate6.7%6.7%6.7%6.6%6.6%6.5%6.5%6.0%6.0%6.0%3.0%Interest expense (millions)$2,754$2,341$1,997$1,888$1,321$1,088$806$487$21$0$590Operating relationships (as a % of revenues)NOI17.0%18.0%19.0%20.0%20.0%20.0%20.0%20.0%20.0%20.0%15.0%NOPAT11.2%11.9%12.5%13.2%13.2%13.2%13.2%13.2%13.2%13.2%9.9%Depreciation7.0%6.0%6.0%5.5%5.5%5.5%5.0%5.0%4.0%3.0%2.0%Change in working capital0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%0.5%Capital expenditures4.8%4.0%3.0%3.0%2.0%2.0%1.0%1.0%0.5%0.5%0.5%Change in other assets net-6.2%-5.8%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%0.0%Free cash flow19.1%19.2%15.0%15.2%16.2%16.2%16.7%16.7%16.2%15.2%10.9%Using Weighted Average= 22900.00%(0.000) + 0.00%(0.000) =0.00%

A16.1.1Table A16.1.1Capital Cash Flow Model - Coleman TextilesYear 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues10,00010,60011,23611,91012,62513,38213,7842.Revenue growth rate6.0%6.0%6.0%6.0%6.0%3.0%3.NOI = EBIT8488999531,0101,0718274.Cash tax rate (T)40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes3393603814044283316.NOPAT5095395726066424967.+ Depreciation5305625966316695518. Change in working capital2122252382522684149. Capital expenditures42444947650553534510. Change in other assets net10611211912613413811.Free cash flows29731533335337515212.Interest expense40038030020015010013.Interest tax shield16015212080604014.Capital cash flow (CCF) (11+13)45746745343343519215.11.00%11.00%11.00%11.00%11.00%11.00%16.Discount factor0.900900.811620.731190.658730.5934517.Present values412379332286258Panel B Operating Relationships (As a % of Revenues)NOI8.0%8.0%8.0%8.0%8.0%6.0%NOPAT4.8%4.8%4.8%4.8%4.8%3.6%Depreciation5.0%5.0%5.0%5.0%5.0%4.0%Change in working capital2.0%2.0%2.0%2.0%2.0%3.0%Capital expenditures4.0%4.0%4.0%4.0%4.0%2.5%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow2.8%2.8%2.8%2.8%2.8%1.1%Panel C Valuation CalculationsPart I - Expected Asset ReturnPart III - Terminal Value (TV)Expected asset return11.00%TV =Tax rate (T)40.00%=192 / (0.11-0.03) = 192 / 0.08 =2,395Part IV - Valuation Calculation(1)PV of cash flows1,665(2)PV of terminal value1,421(3)Operating Value (V)3,087(4)Add: Marketable securities0.0(5)Total value3,087(6)Less: Initial book debt (D)2,000(7)Value of equity1,087(8)Shares outstanding100.0(9)Intrinsic share price$10.87Part V - Ratios0.310.000.00(a)6.00%(b)0.723(c)Risk premium (RP)6.50%(d)(e)12.50%(f)8.00%(g)Target Equity (S) to Value (V)60.0%(h)Target Debt (B) to Value (V)40.0%Part II - Expected Asset Return CalculationUsing CAPM= 6.0% + 6.5%(0.723) =Using Weighted Average= 12.50%(0.600) + 8.00%(0.400) =10.70%Initial revenues (million)$10,000Marketable securities$0Expected asset return11.00%Initial book debt$2,000Tax rate40.00%Shares outstanding (million)100Year 1Year 2Year 3Year 4Year 5Year n+1Revenue growth rate6.0%6.0%6.0%6.0%6.0%3.0%Interest expense (million)$400$380$300$200$150$100(as a % of revenues)NOI8.0%8.0%8.0%8.0%8.0%6.0%NOPAT4.8%4.8%4.8%4.8%4.8%3.6%Depreciation5.0%5.0%5.0%5.0%5.0%4.0%Change in working capital2.0%2.0%2.0%2.0%2.0%3.0%Capital expenditures4.0%4.0%4.0%4.0%4.0%2.5%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow2.8%2.8%2.8%2.8%2.8%1.1%

A16.1.2Table A16.1.2Capital Cash Flow Model - Coleman Textiles LBOYear 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues10,00010,80011,66412,59713,60514,69315,1342.Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%3.NOI = EBIT1,2961,4001,5121,6331,7631,2114.Cash tax rate (T)40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes5185606056537054846.NOPAT7788409079801,0587267.+ Depreciation5405836306807355308. Change in working capital108117126136147769. Capital expenditures43246750454458845410. Change in other assets net10811712613614715111.Free cash flows67072378184491157512.Interest expense80076060040030020013.Interest tax shield3203042401601208014.Capital cash flow (CCF) (11+13)9901,0271,0211,0041,03165515.13.00%13.00%13.00%13.00%13.00%13.00%16.Discount factor0.884960.783150.693050.613320.5427617.Present values876804708615560Panel B Operating Relationships (As a % of Revenues)NOI12.0%12.0%12.0%12.0%12.0%8.0%NOPAT7.2%7.2%7.2%7.2%7.2%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures4.0%4.0%4.0%4.0%4.0%3.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow6.2%6.2%6.2%6.2%6.2%3.8%Panel C Valuation CalculationsPart I - Expected Asset ReturnPart III - Terminal Value (TV)Expected asset return13.00%TV =Tax rate (T)40.00%=655 / (0.13-0.03) = 655 / 0.1 =6,551Part IV - Valuation Calculation(1)PV of cash flows3,563(2)PV of terminal value3,556(3)Operating Value (V)7,118(4)Add: Marketable securities0.0(5)Total value7,118(6)Less: Initial book debt (D)4,000(7)Value of equity3,118(8)Shares outstanding100.0(9)Intrinsic share price$31.18Part V - Ratios0.710.000.00(a)6.00%(b)0.723(c)Risk premium (RP)6.50%(d)(e)12.50%(f)8.00%(g)Target Equity (S) to Value (V)60.0%(h)Target Debt (B) to Value (V)40.0%Part II - Expected Asset Return CalculationUsing CAPM= 6.0% + 6.5%(0.723) =Using Weighted Average= 12.50%(0.600) + 8.00%(0.400) =10.70%Initial revenues (million)$10,000Marketable securities$0Expected asset return13.00%Initial book debt$4,000Tax rate40.00%Shares outstanding (million)100Year 1Year 2Year 3Year 4Year 5Year n+1Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%Interest expense (million)$800$760$600$400$300$200(as a % of revenues)NOI12.0%12.0%12.0%12.0%12.0%8.0%NOPAT7.2%7.2%7.2%7.2%7.2%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures4.0%4.0%4.0%4.0%4.0%3.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow6.2%6.2%6.2%6.2%6.2%3.8%

B16.1Table B16.1Year 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues5,0005,4005,8326,2996,8027,3477,5672.Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%3.NOI = EBIT5005405836306807356054.Cash tax rate40.0%40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes2002162332522722942426.NOPAT3003243503784084413637.+ Depreciation2502702923153403672658. Change in working capital505458636873389. Capital expenditures1001081171261361477610. Change in other assets net5054586368737611.Free cash flows (FCF)35037840844147651443912.10.70%10.70%10.70%10.70%10.70%10.70%13.Discount factor0.903340.816030.737150.665900.6015414.Present values of FCF34133332531730915.Interest expense40038030020015010016.Interest tax shield (TS)16015212080604017.8.00%8.00%8.00%8.00%8.00%8.00%18.Discount factor0.925930.857340.793830.735030.6805819.Present value of tax shield148130955941Panel B Operating Relationships (As a % of Revenues)NOI10.0%10.0%10.0%10.0%10.0%10.0%8.0%NOPAT6.0%6.0%6.0%6.0%6.0%6.0%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures2.0%2.0%2.0%2.0%2.0%2.0%1.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow7.0%7.0%7.0%7.0%7.0%7.0%5.8%Panel C Valuation CalculationsInputs(a)6.00%=439 / (0.107-0.03) = 439 / 0.077 =5,700(b)0.723(c)Risk premium (RP)6.50%(d)Tax rate (T)40.00%=40 / (0.08-0.03) = 40 / 0.05 =800(e)8.00%(f)Target Equity (S) to Value (V)60.0%(1)PV of free cash flows1,626(g)Target Debt (B) to Value (V)40.0%(2)PV of interest tax shield473(3)PV of terminal free cash flows3,429Calculations(4)PV of terminal interest tax shield544(5)Operating Value (V)6,073(6)Add: Marketable securities0.0= 6.0% + 6.5%(0.723) =10.70%(7)Total value6,073(8)Less: Book debt (D)2,000(9)Value of equity4,073(10)Shares outstanding100.0(11)Intrinsic share price$40.73Ratios:1.2112.158.10

B16.2Table B16.2Year 0Year 1Year 2Year 3Year 4Year 5 = nYear n+1Panel A Inputs for Present Value Calculations1.Net revenues5,0005,4005,8326,2996,8027,3477,5672.Revenue growth rate8.0%8.0%8.0%8.0%8.0%3.0%3.NOI = EBIT5005405836306807356054.Cash tax rate40.0%40.0%40.0%40.0%40.0%40.0%40.0%5.Income taxes2002162332522722942426.NOPAT3003243503784084413637.+ Depreciation2502702923153403672658. Change in working capital505458636873389. Capital expenditures1001081171261361477610. Change in other assets net5054586368737611.Free cash flows (FCF)35037840844147651443912.10.70%10.70%10.70%10.70%10.70%10.70%13.Discount factor0.903340.816030.737150.665900.6015414.Present values of FCF34133332531730915.Interest expense40038030020015010016.Interest tax shield (TS)16015212080604017.10.70%10.70%10.70%10.70%10.70%10.70%18.Discount factor0.903340.816030.737150.665900.6015419.Present value of tax shield145124885336Panel B Operating Relationships (As a % of Revenues)NOI10.0%10.0%10.0%10.0%10.0%10.0%8.0%NOPAT6.0%6.0%6.0%6.0%6.0%6.0%4.8%Depreciation5.0%5.0%5.0%5.0%5.0%5.0%3.5%Change in working capital1.0%1.0%1.0%1.0%1.0%1.0%0.5%Capital expenditures2.0%2.0%2.0%2.0%2.0%2.0%1.0%Change in other assets net1.0%1.0%1.0%1.0%1.0%1.0%1.0%Free cash flow7.0%7.0%7.0%7.0%7.0%7.0%5.8%Panel C Valuation CalculationsInputs(a)6.00%=439 / (0.107-0.03) = 439 / 0.077 =5,700(b)0.723(c)Risk premium (RP)6.50%(d)Tax rate (T)40.00%=40 / (0.107-0.03) = 40 / 0.077 =519(e)8.00%(f)Target Equity (S) to Value (V)60.0%(1)PV of free cash flows1,626(g)Target Debt (B) to Value (V)40.0%(2)PV of interest tax shield446(3)PV of terminal free cash flows3,429Calculations(4)PV of terminal interest tax shield312(5)Operating Value (V)5,814(6)Add: Marketable securities0.0= 6.0% + 6.5%(0.723) =10.70%(7)Total value5,814(8)Less: Book debt (D)2,000(9)Value of equity3,814(10)Shares outstanding100.0(11)Intrinsic share price$38.14Ratios:1.1611.637.75

Sheet1Purchase Price ($ in Millions) 1981-2000Table 1 - 4Transaction ValueTotal DollarNetAverageMedian$100$1,000Value OfferedBaseAnnouncementsPricePriceor Moreor More1981$82,617.61,1262,395$73.4$9.011312$82.621982$53,754.59302,346$57.8$10.51166$53.751983$73,080.51,0772,533$67.9$16.513811$73.081984$122,223.71,0842,543$112.8$20.12018$122.221985$179,767.51,3203,011$136.2$21.127036$179.771986$173,136.91,4683,336$117.9$24.934627$173.141987$163,686.39722,032$168.4$51.330136$163.691988$246,875.11,1492,258$215.1$56.936945$246.881989$221,085.11,0922,366$202.5$36.632835$221.091990$108,151.78562,074$126.4$21.018121$108.151991$71,163.87221,877$98.6$22.715013$71.161992$96,688.39502,574$101.8$22.520018$96.691993$176,399.61,0812,663$163.2$26.024227$176.401994$226,670.81,3482,997$168.2$33.038351$226.671995$356,016.41,7353,510$205.2$30.546274$356.021996$494,962.12,6585,848$186.7$25.364094$494.961997$657,062.63,0137,800$218.1$30.0873120$657.061998$1,191,861.13,0917,809$385.6$33.5906158$1,191.861999$1,425,884.83,3849,278$421.4$39.61,097195$1,425.882000$1,325,734.43,7579,566$352.9$36.01,150206$1,325.73Copyright 2001 Mergerstat

Sheet2Average P/E* Offered Relative To S&P 500 1990-1999Table 1 - 14Average P/E OfferedS&P 500AverageRelative toP/E**P/E OfferedS&P 500 P/E199118.620.07.50%199224.222.7-6.20%199323.424.44.30%199419.924.523.10%199516.623.843.40%199619.226.236.50%199722.427.422.30%199826.925.1-6.70%199932.624.3-25.50%200025.423.8-6.30%* Excludes negative P/E multiples and P/E multiples larger than 100.** Based upon an average of weekly prices and quarterly earnings.Copyright 2001 Mergerstat

Sheet3S&P 500 P/E Ratio vs. Premium Offered, 1991-2000Table 1 - 17S&P 500AverageP/E*Premium Offered**199118.635.1%199224.241.0%199323.438.7%199419.941.9%199516.644.7%199619.236.6%199722.435.7%199826.940.7%199932.643.3%200025.449.2%* Based upon an average of weekly prices and quarterly earnings.** Excludes negative premiums.Copyright 2001 Mergerstat

Sheet4Going Private: Valuation of Transactions, 1991-2000Table 1 - 41Price to Earnings Ratio Offered*Premium Offered**AverageMedianAverageMedian199113.210.723.8%20.0%199215.212.724.8%8.1%199314.814.934.7%20.0%199424.520.241.9%35.0%199530.817.229.8%19.2%199628.923.134.8%26.2%199723.619.930.4%24.5%199820.217.729.1%20.4%199922.316.938.0%32.7%200016.212.541.9%38.7%* Excludes negative P/E multiples and P/E multiples larger than 100.** Excludes negative premiums.Copyright 2001 Mergerstat