Rjr Nabisco Executive Summary
Case Study
RJR Nabisco
Fair Value Per Share
Jacob Dobrovolny
November 18, 2014
Executive Summary
The RJR Nabisco case study was used to implement concepts that I have learned in class during the semester and apply it to the real world. The Nabisco case allowed me to develop my skills by using an Excel Worksheet, understanding how to calculate the fair value price per share, and determining the fair value price per share by changing the tax rate and growth rate. First, I was expected to construct an Excel Worksheet. Using the given data and analyzing the case, I was able to find all of the fixed variables needed in the Excel Worksheet. Using these fixed variables, I was able to use my prior skills in …show more content…
Excel to construct equations to find the dependent variables, such as the fair value price per share. This case also helped me develop my skills in calculating the fair value price per share. Using the different variables given in this case, I was able to use equations to find the best estimate for the fair value price per share of RJR Nabisco. The third benefit I gained from this assignment was how the tax rate and growth rate affected the fair value price per share. Using the previous data and the reusable Excel Sheet, I was able to find the changes in the fair value price per share due to changes in the tax and growth rate. Overall, the RJR Nabisco case helped me develop my skills in using Excel Worksheets. It also let me apply what I have learned in class about calculating the fair value price per share, and allowed me to experience it in a more realistic setting. I was also able to see how changes in the tax rate and growth rate affect the fair value price per share.
Table of Contents
1. Construct a reusable Excel Sheet for fair value price....................................................1
2. In your Excel sheet, change the input cell for tax rate to 15%. What is the new fair value per share?.............................................................................................................1
3. Change the tax rate back to 34% and this time change the perpetual growth rate to 5%. What is the new fair value per share?.....................................................................1
4. Appendix 1- Calculations..............................................................................................2
5. Excel Worksheet............................................................................................................4
1. Construct a "reusable" Excel sheet that computes the fair value per share using the information given in the case. Please make sure that your Excel sheet can closely approximate the value per share given in the case (~$108).
I was able to construct an Excel Worksheet (see page 5) that was able to use the information given in the RJR Nabisco Case Study. I was able to make it using different variables that would allow me to change the tax rate and growth rate to get the next two answers.
2. In your Excel sheet, change the input cell for tax rate to 15%. What is the new fair value per share?
By changing the tax rate to 15%, it causes the price per share to increase to $123.19
3. Change the tax rate back to 34% and this time change the perpetual growth rate to 5%. What is the new fair value per share?
By changing the tax rate back to 34% and moving the growth rate up to 5%, it causes the price per share to increase to $125.14.
Appendix 1- Calculations
Tax on Operating Income
Operating Income * Tax Rate
After Tax Operating Income
Operating Income – After Tax Operating Income
Unlevered Cash Flow (UCF)
After Tax Operating Income + Depreciation – Capital Expenditures – Change in Working Capital + Proceeds from Asset Sale
Interest Tax Shields
Interest Expense * Tax Rate
Present Value of Unlevered Cash Flows (1989-1993)
UCF / (1+ Interest Rate)^ (Year from 1989+1)
Total Present Value of Unlevered Cash Flows (1989-1993)
Add up each Years Present Value from 1989-1993
Value at t=5 of Unlevered Cash Flows After 1993
((UCF At 1993)(1+Growth Rate)) / (Interest Rate-Growth Rate)
Present Value of UCF after 1993
(Value at t=5 of Unlevered Cash Flows After 1993) / (1+Interest Rate)^5
Total Unlevered Value of Firm
Present Value of UCF after 1993 + Present Value of UCF (1989-1993)
Present Value of Interest Tax Shield (1989-1993)
Interest Tax Shield / (1+ Cost of Debt)^ (Year from 1989+1)
Total Present Value of Interest Tax Shield (1989-1993)
Sum of Individual Years Present Value of Interest Rate Tax Shield Between 1989-1993
Return of Equity
Interest Rate + (Target Debt Ratio / Target Equity Ratio)(1-Tax Rate)(Interest Rate-Cost of Debt)
Rwacc
(Target Equity Ratio*Return on Equity) + (Target Debt Ratio*Cost of Debt (1-Tax Rate))
Levered Value
(UCF in 1993(1+Growth Rate)) / (Rwacc-Growth Rate)
Value of Tax Shield (After 1993)
Levered Value – Present Value of UCF at T=5 (after 1993)
Value of Tax Shield (After 1993) as of 1989
Value of Tax Shield (After 1993) / (1+Cost of Debt)^5
Total Value of Interest Tax Shield
Value of Tax Shield (After 1993) as of 1989 + Total Present Value of Tax Shield (1989-1993)
Total Value of RJR Under Buyout
Total Unlevered Value of Firm +Total Value of Interest Tax Shield
Value of Equity
Total Value of RJR Under Buyout – Debt Yields
Price Per Share
Value of Equity / Number of Shares Outstanding
RJR Nabisco
Fair Value Per Share
Jacob Dobrovolny
November 18, 2014
Executive Summary
The RJR Nabisco case study was used to implement concepts that I have learned in class during the semester and apply it to the real world. The Nabisco case allowed me to develop my skills by using an Excel Worksheet, understanding how to calculate the fair value price per share, and determining the fair value price per share by changing the tax rate and growth rate. First, I was expected to construct an Excel Worksheet. Using the given data and analyzing the case, I was able to find all of the fixed variables needed in the Excel Worksheet. Using these fixed variables, I was able to use my prior skills in …show more content…
Excel to construct equations to find the dependent variables, such as the fair value price per share. This case also helped me develop my skills in calculating the fair value price per share. Using the different variables given in this case, I was able to use equations to find the best estimate for the fair value price per share of RJR Nabisco. The third benefit I gained from this assignment was how the tax rate and growth rate affected the fair value price per share. Using the previous data and the reusable Excel Sheet, I was able to find the changes in the fair value price per share due to changes in the tax and growth rate. Overall, the RJR Nabisco case helped me develop my skills in using Excel Worksheets. It also let me apply what I have learned in class about calculating the fair value price per share, and allowed me to experience it in a more realistic setting. I was also able to see how changes in the tax rate and growth rate affect the fair value price per share.
Table of Contents
1. Construct a reusable Excel Sheet for fair value price....................................................1
2. In your Excel sheet, change the input cell for tax rate to 15%. What is the new fair value per share?.............................................................................................................1
3. Change the tax rate back to 34% and this time change the perpetual growth rate to 5%. What is the new fair value per share?.....................................................................1
4. Appendix 1- Calculations..............................................................................................2
5. Excel Worksheet............................................................................................................4
1. Construct a "reusable" Excel sheet that computes the fair value per share using the information given in the case. Please make sure that your Excel sheet can closely approximate the value per share given in the case (~$108).
I was able to construct an Excel Worksheet (see page 5) that was able to use the information given in the RJR Nabisco Case Study. I was able to make it using different variables that would allow me to change the tax rate and growth rate to get the next two answers.
2. In your Excel sheet, change the input cell for tax rate to 15%. What is the new fair value per share?
By changing the tax rate to 15%, it causes the price per share to increase to $123.19
3. Change the tax rate back to 34% and this time change the perpetual growth rate to 5%. What is the new fair value per share?
By changing the tax rate back to 34% and moving the growth rate up to 5%, it causes the price per share to increase to $125.14.
Appendix 1- Calculations
Tax on Operating Income
Operating Income * Tax Rate
After Tax Operating Income
Operating Income – After Tax Operating Income
Unlevered Cash Flow (UCF)
After Tax Operating Income + Depreciation – Capital Expenditures – Change in Working Capital + Proceeds from Asset Sale
Interest Tax Shields
Interest Expense * Tax Rate
Present Value of Unlevered Cash Flows (1989-1993)
UCF / (1+ Interest Rate)^ (Year from 1989+1)
Total Present Value of Unlevered Cash Flows (1989-1993)
Add up each Years Present Value from 1989-1993
Value at t=5 of Unlevered Cash Flows After 1993
((UCF At 1993)(1+Growth Rate)) / (Interest Rate-Growth Rate)
Present Value of UCF after 1993
(Value at t=5 of Unlevered Cash Flows After 1993) / (1+Interest Rate)^5
Total Unlevered Value of Firm
Present Value of UCF after 1993 + Present Value of UCF (1989-1993)
Present Value of Interest Tax Shield (1989-1993)
Interest Tax Shield / (1+ Cost of Debt)^ (Year from 1989+1)
Total Present Value of Interest Tax Shield (1989-1993)
Sum of Individual Years Present Value of Interest Rate Tax Shield Between 1989-1993
Return of Equity
Interest Rate + (Target Debt Ratio / Target Equity Ratio)(1-Tax Rate)(Interest Rate-Cost of Debt)
Rwacc
(Target Equity Ratio*Return on Equity) + (Target Debt Ratio*Cost of Debt (1-Tax Rate))
Levered Value
(UCF in 1993(1+Growth Rate)) / (Rwacc-Growth Rate)
Value of Tax Shield (After 1993)
Levered Value – Present Value of UCF at T=5 (after 1993)
Value of Tax Shield (After 1993) as of 1989
Value of Tax Shield (After 1993) / (1+Cost of Debt)^5
Total Value of Interest Tax Shield
Value of Tax Shield (After 1993) as of 1989 + Total Present Value of Tax Shield (1989-1993)
Total Value of RJR Under Buyout
Total Unlevered Value of Firm +Total Value of Interest Tax Shield
Value of Equity
Total Value of RJR Under Buyout – Debt Yields
Price Per Share
Value of Equity / Number of Shares Outstanding