In-class project 2: due 4/13/2019

Your Name: Cham Nguyen

Valuation of the Leveraged Buyout (LBO) of RJR Nabisco

1. Cash flow estimates

RJR's projected CFs ($ million)
1989 1990 1991 1992
EBIT 2620 3410 3645 3950
Depreciation 449 475 475 475
Capital expenditures 522 512 525 538
Change in working capital -203 -275 200 225
After-tax Proceeds from asset sales 3,545 1,805

Annual grwoth rate of FCFF after 1993 3%

Tax rate 0.34

Estimate RJR's final overall cash flow each year

Year 1989 1990 1991 1992
Relative year 1 2 3 4
Final Cash flow ($ million) 5,404.20 4,293.60 2,155.70 2,319.00

2. Debt/Interest expense estimates

Projected Interest Expense and Tax Shields ($ millions)
1989 1990 1991 1992
Interest expense ($ million) 3,384.00 3,004.00 3,111.00 3,294.00
Tax shield cash flow ($ million) 1,150.56 1,182.86 1,219.24 1,281.46

Debt level from 1993 ($ million) 9,000

Annual grwoth rate of TS CF after 1993 0%

3. Other information
Cost of asset (ra) 14%
Cost of debt (rd) 13.50%
Current debt level ($ million) 5,000
Number of shares outstanding (million) 229

I. Estimate VU
Relative year 1 2 3 4
Discount Final Cash flow ($ million) 4,740.53 3,303.79 1,455.04 1,373.03
VU ($ million) 24,428.87
II. Estimate PV(TS)
Relative year 1 2 3 4
Discounted tax shield cash flow ($ million) 1,013.71 918.21 833.88 772.19
PV(TS) ($ million) 6,341.19

III.
Value of the firm [V] ($ million) 30,770.05
Equity value [E] ($ million) 25,770.05 E
Price per share [P] ($) 112.53
12

Sensitivity analysis
10
Report the price per share if growth rate of FCFF after 1993 is estimated to be:
Growth rate of FCFF after 1993 Price Estimate
112.532988106
8
0%
1%
2%

Price
6
3%
4%
5%
4
6%
7%
8%
2

Draw the graph of estimated price per share vs growth rate below:
0
0% 1%
 1993
4310
475
551
250

1993 1994
5 6
2,518.60 2,594.16

1993 1994
3,483.00 1,215.00
1,345.72 413.10

5 Terminal value
1,308.08 12,248.40
 5 Terminal value
714.46 2,088.75

Estimated price per share vs growth rate

12

10

8
Price

0
0% 1% 2% 3% 4% 5% 6% 7% 8%

Grow Rate
 Texas Instrument's Projected CFs ($ million)
Year 1 2 3 4
Revenues 6 6 6 6
Cost 2 2 2 2
EBIT (Revenue - Cost) 4 4 4 4
Depreciation 3 3 3 3
Change in working capital 1 1 2 0

Tax rate 0.35

FCFF = EBIT*(1-.35)+Depreciation-Change in working capital

Year 1 2 3 4
Final Cash flow ($ million) 4.60 4.10 3.60 5.10