PRE BID

Assumptions:
Unlevered Equity Beta =
Risk Free Rate =
Risk Premium =

0.76 approx
9%
8%

1989
Beginning of year values
Assumed debt
5204
Mkt Value of equity
12795
Value of RJR Nabisco
17999

Tax Rate
Debt Beta

34%
0

1990

1991

1992

1993

1994

1995

1996

1997

1998

4894
14929
19823

4519
17372
21891

3798
20168
23966

2982
23355
26337

2582
26990
29572

1854
31156
33010

0
35920
35920

0
41327
41327

0
47548
47548

0.96

0.92

0.89

0.85

0.82

0.80

0.79

0.76

0.76

0.76

Cost of equity

16.7%

16.4%

16.1%

15.8%

15.6%

15.4%

15.3%

15.1%

15.1%

15.1%

WACC

13.6%

13.8%

14.0%

14.2%

14.5%

14.6%

14.8%

15.1%

15.1%

15.1%

Equity beta

Equity Beta
Asset Beta
Debt
Equity

1986
1.24
0.97
5124
12332.2

1987 Average
0.67
0.54
0.76
4057
11133

1989
1
517
582
384

1990
2
948
662
437

1991
3
1399
693
457

1992
4
2073
690
455

1993
5
2551
658
434

1994
6
2869
594
392

1995
7
3253
458
302

1996
8
3617
410
271

1997
9
4075
259
171

1998
10
4589
-21
-14

901

1385

1856

2528

2985

3261

3555

3888

4246

4575

13.6%

13.8%

14.0%

14.2%

14.5%

14.6%

14.8%

15.1%

15.1%

15.1%

PVIF

0.88

0.77

0.68

0.59

0.51

0.44

0.38

0.33

0.28

0.25

Present Value

793

1070

1253

1484

1519

1439

1356

1266

1202

1126

Valuation
Growth in CF after 98 (%)
PV of CF 1989-98
PV of CV

0
12508
7478

2
12508
8797

4
12508
10592

Less: Assumed debt

19986
5204

21305
5204

23100
5204

Net value

14782

16101

17896

Per share

65

70

78

Period
Cash flow available
Interest
After tax interest
Cash flow
WACC

assuming 229 mi shares outstanding

MANAGEMENT
GROUP

Assumptions:
Unlevered Equity Beta =
Risk Free Rate =
Risk Premium =

Bank debt
After tax
Ass. Debt
After tax

0.76
9%
8%

0.0594
0.0594

Sub. Debt
beta
after tax
P Stock

0.25
0.0726
0.0726

1989
Beginning of year values
Assumed debt
5204
Bank debt
15000
Subordinated debt
3000

1990

1991

1992

1993

1994

1995

1996

1997

1998

4894
3292
3000

4519
3075
3000

3798
2877
3000

2982
2411
3000

2582
1217
3000

1854
0
3000

0
0
2510

0
0
0

0
0
0

Preferred stock
Convertible preferred

1374
916

1632
1035

1938
1229

2303
1460

2376
1735

3250
2061

3861
2448

4587
2909

5162
3455

2801
4105

MV of Equity

2500

3895

5034

6342

7834

9512

11428

13594

16040

18799

27994

17748

18795

19780

20338

21622

22591

23600

24657

25705

5.85

2.53

2.12

1.81

1.55

1.39

1.24

1.12

1.02

0.94

Cost of equity

55.8%

29.3%

26.0%

23.5%

21.4%

20.1%

19.0%

18.0%

17.2%

16.5%

WACC

10.6%

11.5%

11.7%

12.0%

12.4%

12.7%

13.1%

13.4%

13.7%

14.0%

Value of RJR Nabisco

Equity beta

Period
Cash flow available
Interest
After tax interest

1989
1
12018
2792
1843

1990
2
593
1353
893

1991
3
919
1286
849

1992
4
1282
1183
781

1993
5
1594
1037
684

1994
6
1946
850
561

1995
7
2344
624
412

1996
8
2797
351
232

1997
9
3332
0
0

1998
10
3666
0
0

Cash flow

13861

1486

1768

2063

2278

2507

2756

3029

3332

3666

WACC

10.6%

11.5%

11.7%

12.0%

12.4%

12.7%

13.1%

13.4%

13.7%

14.0%

0.90

0.80

0.72

0.63

0.56

0.49

0.42

0.36

0.31

0.27

12528

1196

1267

1310

1272

1224

1166

1104

1047

986

Valuation
Growth in CF after 98 (%)
PV of CF 1989-98
PV of CV

0
23100
7027

2
23038
8359

4
23038
10222

Less: Assumed debt

30127
5204

31397
5204

33259
5204

Net value

24923

26193

28055

Per share

109

114

123

PVIF
Present Value

KKR

Assumptions:
Unlevered Equity Beta =
Risk Free Rate =
Risk Premium =
1989
Beginning of year values
Assumed debt
5204
Bank debt
12380
Sr. Subordinated debt
3500

1990

1991

1992

1993

Sub. Debt
beta
after tax
P Stock
Conv. Debt
1994
1995

4894
8958
3500

4519
5812
3500

3798
5119
3500

2982
4195
3500

2582
2612
3500

2182
629
3500

0
0
3479

0
0
149

0
0
0

Converting debt
Preferred stock

1374
2519

1580
2896

1817
3331

2129
3958

0
4792

0
5586

0
6636

0
7883

0
9365

0
7320

MV of Equity

1500

2724

4006

5367

6914

8573

10433

12521

14860

17477

26477

24552

22985

23871

22383

22853

23380

23883

24374

24797

9.07

4.76

3.12

2.48

1.87

1.59

1.38

1.21

1.08

0.97

Cost of equity

81.6%

47.1%

34.0%

28.8%

24.0%

21.7%

20.0%

18.7%

17.6%

16.7%

WACC

10.6%

10.9%

11.3%

11.6%

12.0%

12.4%

12.8%

13.2%

13.6%

13.9%

Value of RJR Nabisco

Equity beta

Bank debt
After tax
Ass. Debt
After tax

0.76
9%
8%

0.0594
0.0594

0.25
0.0726
0.0726
0.0726
1996

1997

1998

Period
Cash flow available
Interest
Non Cash Interest
Effective interest
After tax interest

1989
1
3732
2754
206
2548
1682

1990
2
3521
2341
237
2104
1389

1991
3
1414
1997
312
1685
1112

1992
4
1740
1888
366
1522
1005

1993
5
1983
1321
0
1321
872

1994
6
2383
1088
0
1088
718

1995
7
2832
806
0
806
532

1996
8
3330
487
0
487
321

1997
9
3956
21
0
21
14

1998
10
4319
0
0
0
0

Cash flow

5414

4910

2526

2745

2855

3101

3364

3651

3970

4319

10.6%

10.9%

11.3%

11.6%

12.0%

12.4%

12.8%

13.2%

13.6%

13.9%

PVIF

0.90

0.81

0.72

0.64

0.57

0.50

0.43

0.37

0.32

0.27

Present Value

4895

3990

1831

1768

1620

1540

1449

1350

1263

1172

Valuation
Growth in CF after 98 (%)
PV of CF 1989-98
PV of CV

0
20877
8413

2
20594
10019

4
20594
12273

Less: Assumed debt

29289
5204

30613
5204

32867
5204

Net value

24085

25409

27663

Per share

105

111

121

WACC

VALUE
GAINS

1989
Period
1
Interest Tax Shields
(interest * tax rate)
Pre-bid
197.88
Management Group
949.28
KKR Strategy 936.36

1990
2

1991
3

1992
4

1993
5

1994
6

1995
7

1996
8

1997
9

1998 Terminal Value PV

10

225.08
460.02
795.94

235.62
437.24
678.98

234.6
402.22
641.92

223.72
352.58
449.14

201.96
289
369.92

155.72
212.16
274.04

139.4
119.34
165.58

88.06
0
7.14

-7.14
0
0

0
0
0

$951
$2,100
$2,758

Planned Capex
Pre-bid
1142
Management Group
432
KKR Strategy
774

1708
381
556

1462
380
555

1345
389
572

930
396
586

738
402
598

735
412
618

735
422
638

735
432
658

735
442
678

4836
2908
4461

$6,841
$2,722
$4,191

Net proceeds from asset sales

Pre-bid
0
0
Management Group
12680
0
KKR Strategy 3500
2700

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

0
0
0

$0
$11,007
$5,073

After Tax operating cash flows

Pre-bid
2720
2993
Management Group
2042
2299
KKR Strategy 3048
3121

3352
2583
3414

3632
2891
3639

3924
3118
3895

4228
3358
4162

4560
3620
4453

4925
3910
4771

5326
4229
5120

5761
4580
5500

37900
30129
36186

$27,992
$22,030
$27,750

Interet tax shields

Planned capex
Asset sales
AT Optg Cash flows
Total

KKR-Pre
1807
-2650
5073
-243
9287

MG-Pre
1149
-4119
11007
-5963
10312

1989
Period
1
Operating Profits
Pre-bid
2898
Management Group
1917
KKR Strategy 2862
Depreciation
Pre-bid
807
Management Group
777
KKR Strategy 1159

1990
2

1991
3

1992
4

1993
5

1994
6

1995
7

1996
8

1997
9

1998
10

3336
2385
3228

3838
2814
3811

4216
3266
4140

4634
3589
4508

5093
3945
4906

5596
4337
5341

6149
4768
5815

6756
5243
6335

7424
5766
6902

791
725
991

819
726
899

849
735
907

866
749
920

867
754
924

867
758
928

867
763
933

867
769
939

861
774
945