RJR Nabisco
RJR Nabisco
• Some genius invented the Oreo. We’re just living off of the inheritance.
F. Ross Johnson
Fair Market Value
• Fair Market Value: “…the price at which the asset would trade between two rational individuals, each in command of all of the information necessary to value the asset, and neither under any pressure to trade.”
Rocky Higgins
Analysis for Financial
Management (p. 318)
Capital Budgeting 101
• Step 1: Estimate Discount Rate
• Step 2: Project Cash Flows
– Cash flows for 1989-98 in tables
– Terminal value
• Step 3: Compute Net Present Value (NPV)
– Accept positive NPV projects
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
•
18capital
,932 structure changes over time, we
4115
NOTE: since the need to recompute
KKR :
(.102)(1 .34)
(.330) the
.114
WACC each year to reflect the change in capital structure.
18,932 4115
18,932 4115
Projected Cash Flows
• Projected cash flows for 1989 are calculated as follows:
Rev.
- Exp.
- Depr.
TI
- Tax
Net Inc.
Prebid Mgmt
18,088
7,650
14,429
5,544
807
777
2,852
1,329
KKR
16,190
12,596
1,159
2,435
970
1,882
452
877
828
1,607
807
777
1,159
- Cap.Exp.
1,708
432
774
- Chg WC
80
41
79
0
901
12,680
13,861
3,500
5,413
+ Depr.
+ Asset
Sale
Net CF
Projected Cash Flow
• The following cash flow represent the cash flow computed from the tables:
Year
1989
1990
1991
1992
Prebid Management KKR
901
13,861 5413
1385
1486 4909
1856
1768 2526
2528
2062 2745
1993
1994
1995
2985
3261
3555
2278
• Some genius invented the Oreo. We’re just living off of the inheritance.
F. Ross Johnson
Fair Market Value
• Fair Market Value: “…the price at which the asset would trade between two rational individuals, each in command of all of the information necessary to value the asset, and neither under any pressure to trade.”
Rocky Higgins
Analysis for Financial
Management (p. 318)
Capital Budgeting 101
• Step 1: Estimate Discount Rate
• Step 2: Project Cash Flows
– Cash flows for 1989-98 in tables
– Terminal value
• Step 3: Compute Net Present Value (NPV)
– Accept positive NPV projects
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
•
18capital
,932 structure changes over time, we
4115
NOTE: since the need to recompute
KKR :
(.102)(1 .34)
(.330) the
.114
WACC each year to reflect the change in capital structure.
18,932 4115
18,932 4115
Projected Cash Flows
• Projected cash flows for 1989 are calculated as follows:
Rev.
- Exp.
- Depr.
TI
- Tax
Net Inc.
Prebid Mgmt
18,088
7,650
14,429
5,544
807
777
2,852
1,329
KKR
16,190
12,596
1,159
2,435
970
1,882
452
877
828
1,607
807
777
1,159
- Cap.Exp.
1,708
432
774
- Chg WC
80
41
79
0
901
12,680
13,861
3,500
5,413
+ Depr.
+ Asset
Sale
Net CF
Projected Cash Flow
• The following cash flow represent the cash flow computed from the tables:
Year
1989
1990
1991
1992
Prebid Management KKR
901
13,861 5413
1385
1486 4909
1856
1768 2526
2528
2062 2745
1993
1994
1995
2985
3261
3555
2278