Tax Rate 40% Assumed

Company Asset Beta D/V 75.00% (Given)

Nike 0.903 Rf 5.20%
Jones Apparel Group 0.943 LIBOR 4.30%
Tommy Hilfiger 1.021 Rp 5.00% Assumed
Liz Claiborne 1.074 E/V 25.00%
Beta Asset 0.985 D/E 3
Beta Equity 2.758
Ke 18.99%

Using MM-II Approach

With tax Ka 11.72%
Without tax Ka 16.75%

Ke = Ka + ((Ka - Kd) * D/E * (1-t))

 Fully Drawn Cost WA WACC (PRE TAX)
Revolvera 7.30% 1.22% WACC (POST TAX)
Term Loan B 8.05% 2.80%
Senior subordinated notes10.88% 5.29% growth rate (Assumed)

Kd 9.30%
Beta Debt 0.820
11.72%
8.93%

3%
 0 1
2001E 2002P

Net Sales 537,300.00 618,800.00

EBITDA 75,100.00 88,700.00
EBIT 55,100.00 67,600.00
Interest 33,473.75
EBT 55,100.00 34,126.25
Tax @ 40% 22,040.00 13,650.50
Net Income(EAT) 33,060.00 20,475.75

Capex 20,500.00 19,500.00

Working Capital 116,347.59 133,995.70

Change in Working Capital 17,648.11

Free Cash Flow

NOPAT 33,060.00 40,560.00
Depreciation and Amortization 20,000.00 21,100.00
Capex 20,500.00 19,500.00
Change in Working Capital 17,648.11
FCFF 32,560.00 24,511.89
Discounted FCFF 32,560.00 22,501.95
PV of FCFF 213,397.34

CCF = FCFF + ( Int * t )

FCFF 32,560.00 24,511.89
Interest 33,473.75
CCF 32,560.00 37,901.39
Discounted CCF 32,560.00 33,924.80
PV of CFF 243,304.75

Cash Flow available for debt Repayment

Net Income(EAT) 33,060.00 20,475.75
Depreciation and Amortization 20,000.00 21,100.00
Capex 20,500.00 19,500.00
Change in Working Capital 17,648.11
Cash flow available (ECF) 32,560.00 4,427.64

CCF = ECF + Int

ECF 32,560.00 4,427.64
Interest 33,473.75
CCF 32,560.00 37,901.39
Discounted CCF 32,560.00 33,924.80
PV of CFF 243,304.75

Debt Schedule
Revolvera 7.30% ### ###
Term Loan B 8.05% ### ###
Senior subordinated notes 10.88% ### ###
Total Debt ### ###
 Year 6 EBIT 144,380.25
EBIT(1-t) 86,628.15
Depreciation and Amortization 35,625.94
Capex 32,154.95
Net Change in working capital 28,033.54
FCFF 62,065.61
WACC 8.93%
Enterprise Value 1,046,231.43
Ending value of debt 239,638.79
Ending value of equity 806,592.65

Backward Induction Method

Ending value of equity 467,944.23 523,970.19
Ending value of debt 327,440.00
Ending value of enterprise 851,410.19
Debt/Capital 0.38
Equity/Capital 0.62
Asset Beta 0.99
Levered (equity) Beta 1.35
Cost of equity 11.97%

APV
FCFF 32,560.00 24,511.89
Discounted FCFF 32,560.00 21,940.12
Interest tax shield 13,389.50
Discounted Interest tax shield 12,250.42
PV of APV 246,053.27

Required equity bid 130,000.00

According to FCFF, CCF, Backward Induction Method and APV, Berkshire should go for leveraged buyout of the William
 2 3 4 5
2003P 2004P 2005P 2006P 2007P

711,600.00 817,300.00 938,800.00 985,740.00 1,115,201

109,100.00 134,200.00 161,600.00 169,680.00
87,300.00 109,800.00 133,500.00 140,175.00
31,096.87 30,773.65 29,784.88 27,576.98
56,203.13 79,026.35 103,715.12 112,598.02
22,481.25 31,610.54 41,486.05 45,039.21
33,721.88 47,415.81 62,229.07 67,558.81

21,000.00 21,500.00 22,500.00 22,500.00

154,090.72 176,979.13 203,288.88 213,453.33 241,486.86

20,095.02 22,888.41 26,309.76 10,164.44 28,033.54

52,380.00 65,880.00 80,100.00 84,105.00

21,800.00 24,400.00 28,100.00 29,505.00
21,000.00 21,500.00 22,500.00 22,500.00
20,095.02 22,888.41 26,309.76 10,164.44
33,084.98 45,891.59 59,390.24 80,945.56
27,881.59 35,502.84 42,178.23 52,772.73

33,084.98 45,891.59 59,390.24 80,945.56

31,096.87 30,773.65 29,784.88 27,576.98
45,523.72 58,201.06 71,304.20 91,976.35
36,472.21 41,736.62 45,768.18 52,842.93

33,721.88 47,415.81 62,229.07 67,558.81

21,800.00 24,400.00 28,100.00 29,505.00
21,000.00 21,500.00 22,500.00 22,500.00
20,095.02 22,888.41 26,309.76 10,164.44
14,426.85 27,427.40 41,519.31 64,399.37

14,426.85 27,427.40 41,519.31 64,399.37

31,096.87 30,773.65 29,784.88 27,576.98
45,523.72 58,201.06 71,304.20 91,976.35
36,472.21 41,736.62 45,768.18 52,842.93

### 0.00 0.00 0.00

### ### ### 0.00
### ### ### ###
### ### ### ###
 Growth rate 3.00%
Tax rate 40.00%
Risk-free rate 5.20%
Asset beta 0.99 From Exhibit 8

EMRP 5.00%

585,568.92 653,040.60 726,634.43 806,592.65

323,012.36 308,585.50 281,158.10 239,638.79
908,581.28 961,626.10 1,007,792.53 1,046,231.43
0.36 0.32 0.28 0.23
0.64 0.68 0.72 0.77
0.99 0.99 0.99 0.99
1.31 1.26 1.21 1.16
11.76% 11.52% 11.27% 11.00%

33,084.98 45,891.59 59,390.24 80,945.56

26,506.67 32,909.37 38,120.95 46,505.44
12,438.75 12,309.46 11,913.95 11,030.79
10,412.38 9,427.56 8,348.39 7,071.97

go for leveraged buyout of the William Carter Co.

EBIT for 6th years is calculated to find FCFF for 6th year. Formula used for Terminal value:
Terminal Value = (FCFF for 6th year) / (WACC with tax - Growth rate)

From Exhibit 7a

Refer to Exhibit 4 for calculation of Working capital % of sales.

Working capital is forecasted wrt to % of sales.
Working capital % of sales = 21.65%.

Using WACC with tax

Discounted FCFF = FCFFn / ((WACC with tax) ^ n)

Using Ka with tax

Discounted CCF = (FCFFn / (ka ^ n)) + ( ( Int * t) / (ka ^ n))

Using Ka with tax

Discounted CCF = (FCFFn / (ka ^ n)) + ( ( Int * t) / (ka ^ n))
Equal to ECF as no dividents paid
Using Ka with tax

Using Kd with tax

Discounted CCF = (FCFFn / (ka ^ n)) + ( ( Int * t) / (kd ^ n))
Exhibit 4 Carter’s Historical Financial Data (in thousands of dollars)

Six Months Six Months

Ended June Ended June
1996 1997 1998 1999 2000 30, 2000 30, 2001

Wholesale sales 188,991 219,535 236,486 231,284 256,094 105,300 123,655

Retail sales 129,244 143,419 171,696 183,312 215,280 88,374 97,370
Total net sales 318,235 362,954 408,182 414,596 471,374 193,674 221,025
Cost of goods sold 200,798 227,332 256,482 271,844 293,340 121,521 140,996
Gross profit 117,437 135,622 151,700 142,752 178,034 72,153 80,029

Selling, general and administrative 96,905 112,531 124,278 120,773 137,513 62,729 68,827
EBITDA 29,558 36,926 43,021 38,834 58,041 17,526 20,627
Depreciation and
amortization 9,026 13,835 15,599 16,855 17,520 8,102 9,425
Nonrecurring charges 8,834 0 0 7,124 0 0 4,272
Operating income 11,698 23,091 27,422 14,855 40,521 9,424 6,930

Interest income 0 0 0 0 -303 0 -68

Interest expense 9,706 17,571 18,525 17,748 16,294 7,919 7,907
Earnings before income taxes 1,992 5,520 8,897 -2,893 24,530 1,505 -909
Provision for income taxes 2,097 2,429 3,616 -869 9,731 607 -364
Extraordinary items, net of tax 2,351 0 0 0 354 354 0
Net Income -2,456 3,091 5,281 -2,024 14,445 544 -545

Other Data:

Capital expenditures 7,756 14,013 17,991 12,726 17,179 4,250 6,128

Working capitala 70,792 87,482 99,480 81,508 84,336 93,550 81,470
Property, plant and equipment, net 48,221 53,011 59,674 51,776 54,441 49,483 48,565
Total debt 145,000 157,100 167,600 142,300 141,400 156,250 156,700
Redeemable preferred stock 18,234 18,462 18,682 18,902 19,116 19,016 19,236
Common stockholders equity 57,488 56,721 58,739 53,615 65,397 52,832 63,525
Source: Adapted from company materials.
a
Working capital is defined as current assets minus current liabilities. Current assets include cash and cash equivalents, accounts receivable, inventories, prepaid expenses,
assets held for sale, and deferred income taxes. Current liabilities include current maturities of long-term debt, accounts payable, and other current liabilities.

Carter’s had no excess cash or marketable securities included in current assets and less than $2 million in debt included in current liabilities.

1996 1997 1998 1999 2000

Working capital a
70,792 87,482 99,480 81,508 84,336
Total net sales 318,235 362,954 408,182 414,596 471,374
Working capital % of sales 22.25% 24.10% 24.37% 19.66% 17.89% 21.65%

Assumptions
Working capital % of sales = 21.65% (average of last 5 years) is used to forecast working capital of next 5 years
Working capital % of sales is assumed to be constant.
Exhibit 6 Goldman Sachs Proposed Capital Structure (in millions of dollars)

Tranche Amount Maturity Fully Drawn Cost Fully Drawn Cost

Revolvera 60.0 5 years LIBOR + 3.00% 7.300%

Term Loan B 125.0 7 years LIBOR + 3.75% 8.0500%
Total Credit Facility 185.0

Senior subordinated notes 175.0 10 years 10.875% 10.875%

Source: Adapted from company materials.

a
Projected $17.5 million funded at close, of which $12.5 million is related to seasonal working capital.

LIBOR 4%
 WA

0.012167
0.027951

0.052865
 2001E 2002P 2003P 2004P 2005P 2006P

Net Sales 537,300 618,800 711,600 817,300 938,800 985,740

% growth 13.8% 15.2% 15.0% 14.9% 14.9% 5.0%

Gross Profit 221,900 260,900 302,400 348,300 400,400 420,420

Margin 41.3% 42.2% 42.5% 42.6% 42.7% 42.7%

SG&A 146,800 172,200 193,300 214,100 238,800 250,740

% of sales 27.3% 27.8% 27.2% 26.2% 25.4% 25.4%

EBITDA 75,100 88,700 109,100 134,200 161,600 169,680

% of sales 14.0% 14.3% 15.3% 16.4% 17.2% 17.2%

EBIT 55,100 67,600 87,300 109,800 133,500 140,175

% of sales 10.3% 10.9% 12.3% 13.4% 14.2% 14.2%

Capex 20,500 19,500 21,000 21,500 22,500 22,500

% of sales 3.8% 3.2% 3.0% 2.6% 2.4% 2.3%

Source: Adapted from company materials.

Depreciation & amortization 20,000 21,100 21,800 24,400 28,100 29,505

% sales 3.7% 3.4% 3.1% 3.0% 3.0% 3.0%
 2007P

1,115,201
13.1%

42.3%

26.6%

15.7%

12.6%

32,155
2.9%

35,626
3.2%
Net sales for 2007 is predicted based on averages % growth in last 5 years.

Capex for 2007 is predicted based on averages % of sales in last 5 years.

Depreciation & amortization for 2007 is predicted based on averages % of sales in last 5 years.
Exhibit 7b Revenue Projections by Channel (in millions of dollars)

% of
2005E–2000A Projected Projected 96–00
2000A 2005E Change Growth CAGR CAGR

Kohl's 35.0 137.0 102.0 21.9% 31.4% 56.1%

Kids R/Babies R Us 36.8 61.8 25.0 5.4% 10.9% 16.5%
Other Wholesalea 181.2 255.2 74.0 15.9% 7.1% 2.7%
Targetb 4.0 100.0 96.0 20.6% 90.4% -
Outlet Stores 215.3 329.0 113.7 24.4% 8.9% 13.6%
Full-Price Retail Stores 0.0 56.0 56.0 12.0% - -

Total 472.3 939.0 466.7 100.0% 14.7% 10.4%

Source: Adapted from company materials.

a
Includes JC Penney, Mervyn's, Federated, May, Sears, and others. Also includes off-price and some licensing.
b
Full target rollout to all 972 stores completed in January 2001. Management projected $25 million in revenue for 2001.
Exhibit 7c Revenue Projections by Product (in millions of dollars)

% of
2005E–2000A Projected Projected 96–00
2000A 2005E Change Growth CAGR CAGR

Wholesale Baby 120.0 177.0 57.0 12.2% 8.1% 9.4%

Wholesale Sleepwear 91.9 130.0 38.1 8.2% 7.2% 11.5%
Wholesale Playwear 24.1 125.0 100.9 21.6% 39.0% -1.3%
Off-Price 17.0 22.0 5.0 1.1% 5.3% 4.2%
Outlet Baby 40.7 61.5 20.8 4.5% 8.6% 18.0%
Outlet Sleepwear 34.3 48.7 14.4 3.1% 7.3% 11.7%
Outlet Playwear 83.9 148.3 64.4 13.8% 12.1% 11.1%
Outlet Other 56.4 70.8 14.4 3.1% 4.7% 14.2%
Target (Baby) 4.0 100.0 96.0 20.6% 90.4% -
FullPrice Retail 0.0 56.0 56.0 12.0% - -

Total 472.3 939.3 467.0 100.0% 14.7% 10.4%

Source: Adapted from company materials.

Exhibit 8 Comparable Company Data, June 2001 (in millions of dollars except where noted)

Earnings Interest- Market 5-Year

Stock Price P/E P/E Growth IPO Equity Bearing Capitaliz Average Net
6/13/01 2001E 2002E Rate Date Beta Revenue EBIT EBITDA Debt ation Leverage Income

Nike $41.35 19.2x 15.8x 15% 1980 1.0 9,488.8 1,014.2 1,211.6 1,296.6 7,224.3 8.4% 589.7

Jones Apparel Group $40.90 13.7x 12.0x 17% 1991 1.1 4,115.3 645.9 757.3 1,482.1 5,343.6 17.1% 327.6

Tommy Hilfiger $13.65 9.0x 7.9x 10% 1992 1.3 1,836.7 194.6 302.1 567.0 1,245.7 18.1% 130.2

Liz Claiborne $24.92 12.3x 10.9x 12% 1981 1.2 3,186.7 333.4 417.9 519.6 2,650.2 4.4% 184.6

Source: Adapted from company materials.

Tax Rate 40% Assumed

 Asset
Beta

0.902782

0.94306

1.02113

1.073694