Appendix - 1 Cost of Equity Analysis for Chemical Banking Corporation and Chase Manhattan Corporation
Risk Free Rate
a
Equity Beta b 1.24281 1.29692
Risk Premium c 5.68% 5.68%
Cost of Equity d 12.29% 12.60%
Chemical Banking Corporation Chase Manhattan Corporation
5.23% 5.23%
a b c d
Risk free rate equals Yield on 1-year U.S. Treasury Bond as of July 1995. Equity beta was derived by regressing each company's monthly stock returns from January 1994 to July 1995 against monthly market returns. Taken as the arithmetic average of the risk premium of S&P500 over the 10-year Treasury Bonds less survivorship bias of 1.75% The cost of equity was calculated by multiplying the equity beta by the risk premium and adding the risk-free rate.
Beta Estimation for Chemical Banking Corporation and Chase Manhattan Corporation
Market Returns - RF -2.56 -4.74 0.64 0.46 -3.23 2.69 3.99 -2.35 1.30 -4.11 0.79 1.69 3.48 2.13 2.09 2.98 2.62 3.66 Beta Chemical Returns -5.70 -2.34 -4.48 10.45 0.31 -0.31 0.96 -9.68 8.57 -4.26 -1.37 8.70 2.90 -5.93 10.60 10.49 2.43 9.27 1.24281 Chase Returns -9.69 -1.16 5.43 11.03 1.32 -3.58 2.36 -8.26 3.96 -1.03 -3.51 -3.64 8.30 -0.70 22.79 5.71 1.62 14.11 1.29692 Chemical Stock Price 39.50 37.25 36.38 34.75 38.38 38.50 38.38 38.75 35.00 38.00 36.38 35.88 39.00 40.13 37.75 41.75 46.13 47.25 51.63 Chase Stock Price 36.13 32.63 32.25 34.00 37.75 38.25 36.88 37.75 34.63 36.00 35.63 34.38 33.13 35.88 35.63 43.75 46.25 47.00 53.63 Market Returns -2.27 -4.41 0.99 0.87 -2.81 3.12 4.42 -1.91 1.78 -3.62 1.33 2.25 4.02 2.64 2.59 3.46 3.07 4.10
Date 199401 199402 199403 199404 199405 199406 199407 199408 199409 199410 199411 199412 199501 199502 199503 199504 199505 199506 199507
RF 3.49 3.95 4.21 4.96 5.04 5.18 5.12 5.26 5.71 5.90 6.45 6.74 6.43 6.07 5.99 5.79 5.38 5.23
Appendix - 2 Valuation Assumptions: Chemical Banking Corporation, Chase Manhattan Corporation, and the Combined Organization
Income Statement 1996
1
1997 8.3% 9.5% 161.4%
1998 7.5% 10.2% 18.8%
1999 7.6% 10.2% 6.1%
2000 7.8% 10.3% 6.3%
Perpetuity 7.0% 8.0% 6.0%
Net Income Growth Chemical Chase Manhattan Combined Tax %
8.3% 90.6% -28.0% 39%
Balance Sheet 1996
1
1997 5.3% 5.5% 5.4%
1998 5.0% 5.6% 5.2%
1999 5.0% 5.6% 5.2%
2000 5.0% 5.6% 5.3%
Perpetuity 4.5% 5.1% 4.8%
Assets Growth Chemical Chase Manhattan Combined Liabilities Growth Chemical Chase Manhattan Combined
5.6% 6.3% 5.9%
1
5.2% 6.0% 5.5%
4.9% 5.2% 5.0%
4.6% 5.2% 4.8%
4.6% 5.2% 4.8%
4.6% 5.2% 4.8%
4.0% 4.6% 4.5%
Valuation Equity Discount Rate Chemical Chase Manhattan 2 Combined
12.29% 12.60% 12.44%
1 2
Forecasted growth in Net Income, Assets, and Liabilities for the explicit forecast period is based on information provided in Exhibits 11 - 13 in the case. Weighted average of two standalone companies equity discount rates.
Appendix - 3 DCF Valuation: Chemical Banking Corporation
Base Year 1995 Perpetuity 2000
1996
1997
1998
1999
2000
Net Income Applicable to Common Assets Increase in Assets Liabilities Increase in Liabilities
1
$
1,705 178,655
$
1,846 188,655 10,000 $176,725 8,800 646 575
$
1,999 198,655 10,000 $185,426 8,701 700 555
$
2,148 208,588 9,933 $193,962 8,536 751 530
$
2,312 219,017 10,429 $202,889 8,927 810 509
$
2,492 229,968 10,951 $212,220 9,331 872 488
$
47,115
$ $167,925 $ $ $ $ 13,353 260.9 $ 51.18
$
$
$
$
$
140,593
$ $ $
$ $ $
$ $ $
$ $ $
$ $ $
112,569 19,091 10,694
Equity Cash Flow (ECF)
PV of ECF Total Present Value of Equity Shares Outstanding Price per Share
1
Equity Cash Flow is calculated as follows: Net Income Applicable to Common - Increase in Assets + Increase in Liabilities.
Appendix - 4 DCF Valuation: Chase Manhattan Corporation
Base Year 1995 Perpetuity 2000
1996
1997
1998
1999
2000
Net Income Applicable to Common Assets Increase in Assets Liabilities Increase in Liabilities
1
$
680 127,007
$
1,296 134,992 7,985 126,501 7,143 454 403
$
1,419 142,462 7,470 133,049 6,548 497 392
$
1,564 150,385 7,923 139,955 6,906 547 383
$
1,724 158,777 8,392 147,227 7,272 604 376
$
1,902 167,674 8,897 154,887 7,660 665 367
$
41,379
118,682
119,358
95,792 18,489 10,216
Equity Cash Flow (ECF)
PV of ECF Total Present Value of Equity Shares Outstanding Price per Share $ $ 12,138 189.9 63.92
1
Equity Cash Flow is calculated as follows: Net Income Applicable to Common - Increase in Assets + Increase in Liabilities.
Appendix - 5 DCF Valuation: Chemical-Chase Combined
Base Year 1995 Perpetuity 2000
1996
1997
1998
1999
2000
Combined Net Income of Standalone Companies Adjustments Additional Revenue Due to Merger Loss of Revenue Due to Overlapping Ops. Restructuring Charges Cost Savings Focus Initiative Adjusted Net Income Assets Increase in Assets Liabilities Increase in Liabilities
1
$
2,385
$
3,142
$
3,418 20
$
3,712 120
$
4,036 120
$
4,394 120
2,385 297,300
-125 -1,500 600 -400 1,717 314,793 17,493 294,372 15,451 -325 -289
1,050 -400 4,488 331,785 16,992 309,143 14,771 2,267 1,793
1,500 -400 5,332 349,153 17,368 324,097 14,954 2,918 2,053
1,500 -400 5,656 367,459 18,306 339,781 15,684 3,034 1,898
1,500 -400 6,014 $ 93,450 386,764 19,305 356,229 16,448 3,157 1,757
252,832
278,921
207,271 47,889 26,651
Equity Cash Flow (ECF)
PV of ECF
Total Present Value of Equity (a) Market Value Chemical Before Merger (b) Calculated Equity Value of Chase (c) Exchange Ratio (b/c) Number of Chemical Shares Outstanding (d) Number of Chase Shares Outstanding (e) Number of Chemical Shares per Chase Share (f) Shares Outstanding (d + e*f) Price per Share
$ $ $
33,864 13,470 12,138 1.10978 260.9 189.9 1.10978 471.6 71.80
$
Market Value of Chase Shares Before Merger (g) Total Market Value of Chemical and Chase Before Merger (b + g) Dollar Impact of Merger on Common Shareholders (a -(b+g))
1
$ $ $
10,184 23,655 10,209
Equity Cash Flow is calculated as follows: Net Income Applicable to Common - Increase in Assets + Increase in Liabilities.
Exhibit 11: Stand-Alone Financial Projections: Chemical (millions of dollars, except per share amounts) 1994 Total Revenues Expenses excluding ORE Income Before Provision Provision ORE NEBT Taxes Operating Income Extraordinary Reported Income Preferred dividends Net income Applicable to Common Common equity (a) Period-end assets Period-end loans Average shares 8,272 5,159 3,113 550 41 2,522 1,046 1,476 (180) 1,296 138 $1,158 $9,262 171,423 78,767 249.3 1995 8,404 4,959 3,445 500 (12) 2,957 1,141 1,816 (11) 1,805 100 $1,705 $10,730 178,655 88,000 260.9 1996 8,800 4,943 3,858 650 17 3,191 1,244 1,946 0 1,946 100 $1,846 $11,930 188,655 9,400 260.9 1997 9,394 5,185 4,209 750 17 3,442 1,343 2,099 0 2,099 100 $1,999 $13,229 198,655 102,000 260.9 1998 9,936 5,433 4,503 800 17 3,686 1,438 2,248 0 2,248 100 $2,148 $14,626 208,588 106,774 260.9
(a) Assumes constant fully diluted shares of 261 million and no dividend reinvestment plan.
Exhibit 11 (continued): Stand-Alone Financial Projections: Chase (millions of dollars, except per share amounts) 1994 Total Revenues Expenses excluding Savings and ORE Focus savings Net expenses Income Before Provision Provision ORE NEBT Taxes Operating Income Extraordinary Reported Income Preferred dividends Net income Applicable to Common Common equity (a) Period-end assets 6,659 4,308 0 4,308 2,351 500 7 1,844 589 1,255 (50) 1,205 127 $1,078 $6,959 114,038 1995 6,525 4,457 0 4,457 2,068 360 (30) 1,738 695 1,043 (240) 803 123 $680 $7,649 127,007 1996 7,014 4,600 (400) 4,200 2,814 450 0 2,364 945 1,419 0 1,419 123 $1,296 $8,491 134,992 1997 7,434 4,768 (400) 4,368 3,067 500 0 2,567 1,026 1,542 0 1,541 123 $1,419 $9,413 142,462 1998 7,880 4,943 (400) 4,543 3,336 525 0 2,811 1,124 1,687 0 1,687 123 $1,564 $10,430 150,385
Period-end loans Average shares
63,038 183.6
66,639 189.9
70,446 189.9
74,471 189.9
78,725 189.9
(a) Assumes constant fully diluted shares of 261 million and no dividend reinvestment plan.
1.057124 1.057129 1.057136 1.057123 1.057123
1999 10,510 5,689 4,821 850 17 3,954 1,542 2,412 0 2,412 100 $2,312 $16,128 219,017 111,780 260.9
2000 11,119 5,953 5,166 900 17 4,249 1,657 2,592 0 2,592 100 $2,492 $17,748 229,968 117,016 260.9
pt per share amounts) 1999 8,351 5,124 (400) 4,724 3,627 546 0 3,081 1,234 1,847 0 1,847 123 $1,724 $11,550 158,777 2000 8,856 5,313 (400) 4,913 3,943 567 0 3,376 1,351 2,025 0 2,025 123 $1,902 $12,787 167,674
83,222 189.9
87,977 189.9
1.057136
0