Exhibit 5

Cash Flow Projections for RJR Nabisco Under Its Prebid Strategy, 1988-1998 (in millions o
1988

Projected Year
Tobacco sales
Food sales

1989

1990

7,061
9,889

7,650
10,438

8,293
11,383

Total

16,950

18,088

19,676

Operating income
Tobacco
Food
Corporate

1,924
1,079
-350

2,022
1,163
-287

2,360
1,255
-279

2,653

2,898

3,336

551
1,360
730
1,142

582
1,498
807
1,708
80

662
1,730
791
1,462
111

Total

Interest
Net income
Depreciation, amortization, & deferred tax
Capital expenditures
Change in working capital
Capital Cash Flow
Discounted Cash Flow
Terminal Value at 1998
Present Value for projected 10 years
Present Value of Terminal Value
Enterprise Value (EV)
Cash (assumed to be Non Operating Asset)
Firm Value (EV+ Non Operating Assets[Cash])

1,099
1,610
959.4051 1226.972

42785.65
13585.45
10998.7
24584.15
957.5 (Average of cash from Exhibit 3 for
25541.65

988-1998 (in millions of dollars).

1991

1992

1993

1994

1995

1996

1997

1998

10

8,983
12,092

9,731
12,847

10,540
13,651

11,418
14,507

12,368
15,420

13,397
16,393

14,514
17,428

15,723
18,533

21,075

22,578

24,191

25,925

27,788

29,790

31,942

34,256

2,786
1,348
-296

3,071
1,459
-314

3,386
1,581
-333

3,733
1,713
-353

4,115
1,855
-374

4,534
2,011
-396

4,998
2,178
-420

5,508
2,361
-445

3,838

4,216

4,634

5,093

5,596

6,149

6,756

7,424

693
2,023
819
1,345
98

690
2,259
849
930
105

658
2,536
866
738
113

594
2,858
867
735
121

458
3,251
867
735
130

410
3,625
867
735
140

259
4,094
867
735
151

-21
4,625
861
735
162

2,092
2,763
3,209
3,463
3,711
4,027
4,334
4,568
1391.793 1604.716 1627.014 1532.775 1433.908 1358.364 1276.227 1174.274

The Value of RJR Nabisco under the pre-bid operating strategy is $

cash from Exhibit 3 for 1986-87)

beta equity
Asset beta*

1986
1.24
0.694

1987
0.67

*Average of Asset Beta for two years

Asset beta = Equity Beta* Equity to
Value Ratio (taken from Exhibit 2, Mkt
value of Equity and Long term Debt
from Exhibit 3 for value calculation)

Rf
9.00%
MRP
8.00%
Growth rate
3.5%
(assumed based on GDP of the country)
GDP growth rate in the US is 4.5% in 1998
Expected Asset Return
14.6%
(Discounting factor for CCF valuation)

ng strategy is $25541.65mn

Exhibit 6

Cash Flow and Capital Structure Projections for RJR Nabisco Under the Management Grou

Projected Year

1989

1990

1991

7,650
1,917
2,792
388
-965
777
432
41
12,680
14,811

8,293
2,385
1,353
388
293
725
381
45
0
1,945

8,983
2,814
1,286
388
621
726
380
48
0
2,205

4,894
3,292
3,000

4,519
3,075
3,000

3,798
2,877
3,000

11,186

10,594

9,675

1,632
1,035
1,535

1,938
1,229
1,828

2,303
1,460
2,449

4,202

4,995

6,212

Panel A: Operating Information

Sales
Operating income
Interest
Amortizationa
After-tax income
Depreciation, amortization, & deferred tax
Capital expenditures
Change in working capital
Net proceeds from asset sales
Capital Cash Flow
Panel B: Capital Structure

Year-end book values:

Assumed debt
Bank debt
Subordinated debt
Total

Preferred stock
Convertible preferred stock
Common stock
Total

Equity to Value Ratio

Asset Beta (Equity Beta * Equity to value Ratio)
Expected Asset Return

0.27307 0.320418 0.391012

0.182957 0.21468 0.261978
10.5%
10.7%
11.1%

Capital Cash Flow

Discounted Cash flow
Terminal Value at 1998
Present Value for projected 10 years
Present Value of Terminal Value
Enterprise Value (EV)
Cash (assumed to be Non Operating Asset)
Firm Value (EV+ Non Operating Assets[Cash])

14811
1945
2205
13408.03 1586.673 1608.109
34928.87
25264.48
9129.417
34393.9
957.5
The Value of
35351.4

RJR Na

he Management Group Strategy, 1989-1998 (in millions of dollars).

1992

1993

1994

1995

1996

1997

1998

10

9,731
3,266
1,183
388
987
735
389
52
0
2,464

10,540
3,589
1,037
388
1,297
749
396
57
0
2,630

11,418
3,945
850
388
1,655
754
402
61
0
2,796

12,368
4,337
624
388
2,063
758
412
67
0
2,966

13,397
4,768
351
388
2,527
763
422
72
0
3,147

14,514
5,243
0
388
3,073
769
432
78
0
3,332

15,723
5,766
0
388
3,418
774
442
85
0
3,665

2,982
2,411
3,000

2,582
1,217
3,000

1,854
0
3,000

0
0
2,510

0
0
0

0
0
0

0
0
0

8,393

6,799

4,854

2,510

2,736
1,735
3,436

3,250
2,061
4,733

3,861
2,448
6,388

4,587
2,909
8,451

5,162
3,455
10,978

2,801
4,105
14,051

0
4,538
17,469

7,907

10,044

12,697

15,947

19,595

20,957

22,007

0.485092 0.596331 0.723435 0.864008

0.325012 0.399542 0.484701 0.578886
11.6%
12.2%
12.9%
13.6%

1
0.67
14.4%

1
0.67
14.4%

1
0.67
14.4%

2464
2630
2796
2966
3147
3332
3665
1588.483 1479.321 1351.731 1212.526 1075.731 995.9503 957.9272

Value of RJR Nabisco under the Management group's operating strategy is $

Equity Beta for 1987

Rf
MRP

0.67
9.00%
8.00%

Growth rate
3.5%
(assumed based on GDP of the country)
GDP growth rate in the US is 4.5% in 1998

ng strategy is $35351.4mn

Exhibit 7

Cash Flow and Capital Structure Projections for RJR Nabisco Under KKR's Strategy, 19891989

Projected Year

1990

1991

Panel A: Operating Information

Tobacco sales
Food sales

7,650
8,540

8,293
6,930

8,983
7,485

Total

16,190

15,223

16,468

Operating income
Tobacco
Food
Corporate

2,022
1,060
-219

2,360
1,026
-158

2,786
1,191
-167

2,862

3,228

3,811

Total

Interest expense
Amortizationa
After-tax income
Depreciation, amortization & deferred tax
Capital expenditures
Change in working capital
Noncash interest expense
Net proceeds from asset sales
Capital Cash flow

2,754
388
-281
1,159
774
79
206
3,500

2,341
1,997
388
388
233
845
991
899
556
555
84
87
237
312
2,700
0

6,485

5,862

3,411

4,894
8,958
3,500
1,580

4,519
5,812
3,500
1,817

3,798
5,119
3,500
2,129

Panel B: Capital Structure

Year-end book values:

Assumed debt
Bank debt
Subordinated debt
Converting debtc
Total

Preferred stock
Common stock
Total

18,932

15,648

14,546

2,896
1,219

3,331
1,452

3,958
2,297

4,115

4,783

6,255

Equity to Value Ratio

Asset Beta (Equity Beta * Equity to value Ratio)
Expected Asset Return

0.178548 0.234105 0.300707

0.119627 0.15685 0.201473
10.0%
10.3%
10.6%

Capital Cash Flow

Discounted Cash flow
Terminal Value at 1998
Present Value for projected 10 years
Present Value of Terminal Value
Enterprise Value (EV)
Cash (assumed to be Non Operating Asset)
Firm Value (EV+ Non Operating Assets[Cash])

6485
5862
3411
5897.759 4822.262 2520.446
41161.74
24277.69
10758.51
35036.21
957.5
The Value of
35993.71

RJR Na

KKR's Strategy, 1989-1998 (in millions of dollars).

1992

1993

1994

1995

1996

1997

1998

10

9,731
8,084

10,540
8,730

11,418
9,428

12,368
10,183

13,397
10,997

14,514
11,877

15,723
12,827

17,815

19,270

20,846

22,551

24,394

26,391

28,550

3,071
3,386
3,733
4,115
4,534
4,998
5,508
1,245
1,307
1,367
1,430
1,494
1,561
1,630
-176
-185
-194
-203
-213
-224
-235
4,140

4,508

4,906

5,341

5,815

6,335

6,902

1,888
1,321
1,088
806
487
21
0
388
388
388
388
388
388
388
1,134
1,751
2,168
2,641
3,164
3,814
4,203
907
920
924
928
933
939
945
572
586
598
618
638
658
678
94
102
110
119
129
140
151
366
0
0
0
0
0
0
0
0
0
0
0
0
0
3,629

3,304

3,472

2,982
2,582
2,182
4,195
2,612
629
3,500
3,500
3,500
2,495
0
0

3,638

0
0
3,470
0

3,817

3,976

0
0
149
0

4,319

0
0
0
0

149

0
0
0
0

13,172

8,694

6,311

3,470

4,702
3,430

5,586
7,676

6,636
9,844

7,883
12,485

9,365
15,648

7,320
19,463

4,377
23,666

8,132

13,262

16,480

20,368

25,013

26,783

28,043

0.381712 0.604026 0.723092 0.854434 0.994078

0.255747 0.404698 0.484472 0.572471 0.666033
11.0%
12.2%
12.9%
13.6%
14.3%
3629
2386.578

1
0.67
14.4%

1
0.67
14.4%

3304
3472
3638
3817
3976
4319
1855.02 1678.708 1491.956 1307.656 1188.445 1128.864

Value of RJR Nabisco under the Management group's operating strategy is $

Equity Beta for 1987

Rf
MRP

0.67
9.00%
8.00%

Growth rate
3.5%
(assumed based on GDP of the country)
GDP growth rate in the US is 4.5% in 1998

ng strategy is $35993.71mn

N
1.Capital Cash Flows are claculated as follows:

a) net income + Interest + depreciation, amortization, and deferred tax - capital expenditures
b) net income + Interest + depreciation, amortization, and deferred tax - capital expenditures
c) net income + Interst Expense + noncash interest + depreciation, amortization, and deferre

2. Growth Rate has been estimated as 3.5% keeping in view of the country's GDP growth rate w
done in this case analysis; alternatively, different growth rate scenarios can be seen by changin

3. Expected Asset return is used as appropriate cost of capital or simply discount rat
tax deductible interst payments are included in the CCF. Therefore, the pretax rate co

4. In each of the above valuations, The Firm Value is only calculated and not the shar
can deduct the estimated Debt value ( $5156mn = Avg. of 1986 and 87 from Exhibit 3
outstanding (from foot note in Page no.3) We can infer the Share Price of the firm.

NOTES to Question 1

capital expenditures - change in working capital.

capital expenditures - change in working capital + net proceeds from asset sales.
ortization, and deferred tax - capital expenditures - change in working capital + net proceeds from asset sale

y's GDP growth rate which was 4% in year 1998. Sensitivity analysis can be performed for different growth ra
n be seen by changing the Growth rate value "cell" in each of above valuations.

simply discount rate as Capital cash flows measure the cash flow available to both equity and de
e, the pretax rate corresponds to the riskiness of the assets of the firm. Hence Return on Assets

ed and not the share price as the scope of the question is till the value of firm. If the share price
nd 87 from Exhibit 3) from the firm value and Find the Equity value. Then by dividing this equity
Price of the firm.

ceeds from asset sales.

for different growth rate scenarios but has not been

both equity and debt holders. The benifits of

e Return on Assets is employed.

m. If the share price has to be calculated, We

dividing this equity value by no. of shares

The difference in the value of the three operating plans can be seen as

Pre-Bid O
.
.
.

Improved sales in tobacco and food business over the years From Exhibit 6
RJR Nabisco, estimated that its capital expenditure of $10bn over the next 1
estimated revenues through "Premier" brand of smoke less cigarettes which
Continuos operation of the food division and expenditures to modernize bake

Managemen

. The management groups strategy was to sell RJR Nabiscos food businesses
these businesses away from each other, could help the market distinguish and
market realize the companys value more efficiently and maximize shareholde
. Because of the high interest payments owing to the proposed LBO, higher inte

KKR's Op

. Continuous operation of the two primary lines of businesses and intent on disp
. Because of the high interest payments owing to the proposed LBO, higher inte

ans can be seen as follows:

Pre-Bid Operating Strategy

ears From Exhibit 6

10bn over the next 10 years would result in significant improvement in the revenues, not to forget their
ess cigarettes which taste like.... eventually.
es to modernize bakeries.

Management Group's Strategy

cos food businesses as they believed that the business was undervalued by market. They think that keeping
market distinguish and realize the true intrinsic value of each business. They believe that doing this would he
maximize shareholders interests.
posed LBO, higher interest tax shields act as value drivers.

KKR's Operating Strategy

ses and intent on dispensing off of redundant assets.

posed LBO, higher interest tax shields act as value drivers.

not to forget their

hey think that keeping

at doing this would help

The characteristics of the debt used by Management and KKR's Strategies c

Manageme

Assumed Debt: $5.2 billion ( Which is already present, pre existin

Subordinated Debt: $3 billion
In the event of Default, holders of subordinated debt must give pre
will be paid off only after specified creditors have been compensat
Bank Debt: $15 billion
This may include collateral based loan, line of credit, The bank will

KKR

Assumed Debt: $5.2 billion ( Which is already present, pre existin

Subordinated Debt: $3.5 billion
In the event of Default, holders of subordinated debt must give pre
will be paid off only after specified creditors have been compensat
Bank Debt: $12.4 billion
This may include collateral based loan, line of credit, The bank will
Converting Debt : This kind of debt is covertible into equity at a later dat
Payment in Kind (converting Debt): This means that interest is not paid in

and KKR's Strategies can be seen as follows:

Management Group's Strategy

present, pre existing Debt)

ed debt must give preference to to specified creditors. Usually this means that the subordinate lenders
have been compensated.

f credit, The bank will have the primary right over the assets if the company is liquidated
KKR's Strategy

present, pre existing Debt)

ed debt must give preference to to specified creditors. Usually this means that the subordinate lenders
have been compensated.

f credit, The bank will have the primary right over the assets if the company is liquidated
o equity at a later date, there by changing the capital structure of the frim.
interest is not paid in cash but rolled up into existing debt. And converted into equity at a later date.

ordinate lenders

ed

ordinate lenders

ed

at a later date.