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Some genius invented the Oreo. Were just living off of the inheritance.
F. Ross Johnson
Discount Rate
As we discussed, the discount rate is the weighted average cost of capital (WACC).
D E WACC E (rd )(1 t ) E (re ) DE DE
where t = tax rate, E(rd) = expected cost of debt D = amount of debt in capitalization E(re) = expected cost of equity E = amount of equity capitalization
Discount Rate
To calculate the WACC using 1989 figures under the three strategies:
5,204 12,790 Prebid : (.09)(1 .34) (.168) .137 5,204 12,790 5,204 12,790
11,186 4,202 Mgmt : (. 098 )(1 .34 ) (.250 ) .115 11,186 4,202 11,186 4,202 18,932 4115 KKR : (. 102 )(1 .34 ) (. 330 ) .114 18,932 4115 18,932 4115
NOTE: since the capital structure changes over time, we need to recompute the WACC each year to reflect the change in capital structure.
Prebid Mgmt 18,088 7,650 14,429 5,544 807 777 2,852 1,329 970 1,882 807 1,708 80 0 901 452 877 777 432 41 12,680 13,861
KKR 16,190 12,596 1,159 2,435 828 1,607 1,159 774 79 3,500 5,413
- Cap.Exp. - Chg WC
+ Asset
Sale Net CF
Terminal Value
To estimate a terminal value, we need to make an assumption about future growth after 1998. If cash flows grow by 2.5% per year (and the WACC remains constant), then for the pre-bid strategy: 4575(1 .025) PV (1998) 38,755 .146 .025 For the Management Group scenario:
3666 (1 .025 ) PV (1998 ) 31,055 .146 .025
Terminal Value
Results will depend on the growth rate assumption. Values in 1998 of cash flows for 1999 and beyond for different assumptions are (Sensitivity Analysis): Growth Rate
Strategy Pre-Bid Management KKR 0% 31,336 25,110 29,582 2.5% 38,755 31,055 36,587 5% 50,039 40,097 47,239
Present Value
The present value of the cash flows for the prebid strategy is (using the 2.5% growth rate assumption after 1998): ($ millions)
901 1385 1856 PV 2 3 1.137 (1 .139) (1 .14)
...
Present Value
To figure out the value per share of RJR Nabisco to the CURRENT shareholders, consider the pre-bid valuation: Total Assets = 22,607 Current Debt = 5,204 Equity = 17,403
Valuation
Estimates of the value per share under the alternatives (again, using the 2.5% growth rate assumption):
Strategy Prebid Management KKR Total 22,607 30,593 29,278 Debt 5204 5204 5204 Equity 17,403 25,389 24,074 Share Price $70.34 $102.62 $97.31
Sources of Value
The company is worth substantially more under either the KKR or the Management Group plan. There are smaller differences between the KKR value and the management value. The buyout plans propose to
increase debt trim excesses decrease capital expenditures sell food assets decrease operating profits
What Happened?
Per share bids:
Case (11/18) $100 94 98-110 11/29/88 $101 106 103-115
MGMT KKR FB