Philip Morris Valuation Model[1]

Exhibit -1 WACC Analysis for Philip Morris & Philip Morris/Nabisco Calculation of WACC for Philip Morris & Combined Organization % Debt D/(D+E) Cost of Debt a E/(D+E) Risk Free Rate b Tax Rate c Levered Beta d Risk Premium e Cost of Equity WACC Philip Morris 11% 0.110 8.00% 0.890 5.50% 39% 0.85 5.68% 10.33% 9.73% Nabisco 15% 0.150 8.03% 0.850 5.50% 39% 0.80 5.68% 10.04% 9.28% Philip Moris /Nabisco 23% 0.230 7.50% 0.770 5.50% 39% 1.15 5.68% 12.03% 10.33% a Cost of debt for Philip Morris and Nabisco, respectively was calculated by taking a weighted average interest rate ıon all notes payable ı and commercial paper borrowings. Applicable rates for each debt offering were found in each company's 10-Q. b Risk free rate equals Yield on 1-year U.S. Treasury Bond as of June 2000. c According to information found in company reports, the tax rate is 38.5%. d Levered Betas for Philip Morris and Nabisco were based on Beta Estimates provided by Value Line; levered beta for the combined firm is a weighted average of the two company's beta. e Taken as the arithmetic average of the risk premium of S&P500 over the 10-year Treasury Bonds less survivorship bias of 1.75%Exhibit -2 Valuation Assumptions: Philip Morris, Nabisco, Philip Morris /Nabisco Income Statement 2000E 2001E 2002E 2003E 2004 -1 Revenue Growth Philip Morris 5.5% 5.5% 4.0% 4.0% 2.5% Nabisco 7.5% 7.5% 6.5% 6.5% 5.0% Philip Morris /Nabisco 7.0% 7.0% 6.0% 6.0% 3.5% 1 Operating Income Growth Philip Morris 5.8% 5.8% 4.5% 4.5% 2.5% Nabisco 8.0% 8.0% 7.0% 7.0% 5.0% Philip Morris /Nabisco 7.5% 7.5% 6.5% 6.5% 3.5% Tax % 39% Balance Sheet 2000E 2001E 2002E 2003E 2004 -2 Working Capital as a % of Sales Philip Morris 6.3% 6.3% 6.3% 6.3% 6.3% Nabisco 1.0% 1.0% 1.0% 1.0% 1.0% Philip Morris /Nabisco 5.0% 5.0% 5.0% 5.0% 5.0% Valuation Philip Morris Nabisco Philip Morris /Nabisco Discount Rate 9.7% 9.3% 10.3% Ongoing Growth 2.5% 5.0% 3.5% 1 Growth Rates for 2000 -2003 are based on each company's Compound Annual Growth Rate for 1997 -1999; Operating growth rate assumptions for the combined entity reflect deal synergies 2 Working Capital is assumed to be a Fixed % of Sales and is based on 1999 WC figures. While WC forecasts for Nabisco appear low, they are they are consistent with WC figures reported by the company from 1997 -1999.Exhibit -3 DCF Valuation: Philip Morris 1999A 2000E 2001E 2002E 2003E 2004 Revenue 61,649 $ 65,040 $ 68,617 $ 71,362 $ 74,216 $ Operating Profit 15,214 $ 16,355 $ 17,582 $ 18,724 $ 19,942 $ Cash Taxes Paid 5,175 $ 6,297 $ 6,769 $ 7,209 $ 7,678 $ NOPLAT 10,039 $ 10,058 $ 10,813 $ 11,516 $ 12,264 $ Working Capital 3,851 4,098 $ 4,323 $ 4,496 $ 4,676 $ Change in Working Capital 247 $ 225 $ 173 $ 180 $ Free Cash Flow (FCF) 9,812 $ 10,587 $ 11,343 $ 12,084 $ 12,386 $ Terminal Value 171,245 $ Present Value of FCF 8,942 $ 8,793 $ 8,584 $ 8,334 $ 7,785 $ PV of Terminal Value 107,629 $ Total PV 150,066 $ Net Debt $8,381 Existing Shares Outstanding 2,403 Price per Share 59.0 $ Exhibit -4 DCF Valuation: Nabisco 1999A 2000E 2001E 2002E 2003E 2004 Revenue 8,268 $ 8,888 $ 9,555 $ 10,176 $ 10,837 $ Operating Profit 1,095 $ 1,183 $ 1,277 $ 1,367 $ 1,462 $ Cash Taxes Paid 232 455 $ 492 $ 526 $ 563 $ NOPLAT 863 $ 727 $ 785 $ 840 $ 899 $ Working Capital 44 89 $ 96 $ 102 $ 108 $ Change in Working Capital 45 $ 7 $ 6 $ 7 $ Free Cash Flow (FCF) 682 $ 779 $ 834 $ 893 $ 937 $ Terminal Value 21,909 $ Present Value of FCF 624 $ 652 $ 639 $ 626 $ 601 $ PV of Terminal Value 13,770 $ Total PV 16,914 $ Net Debt 3,687 Existing Shares Outstanding 267.0 Price per Share 63.3 $ Exhibit -5 DCF Valuation: Philip Morris /Nabisco 1999A 2000E 2001E 2002E 2003E 2004 Revenue 69,917 $ 74,811 $ 80,048 $ 84,851 $ 89,942 $ Operating Profit 16,309 $ 17,532 $ 18,847 $ 20,072 $ 21,377 $ Cash Taxes Paid 5,175 6,750 $ 7,256 $ 7,728 $ 8,230 $ NOPLAT 10,782 $ 11,591 $ 12,344 $ 13,147 $ Working Capital 3,895 3,741 $ 4,002 $ 4,243 $ 4,497 $ Change in Working Capital (154) $ 262 $ 240 $ 255 $ Free Cash Flow (FCF) 10,937 $ 11,329 $ 12,104 $ 12,892 $ 13,343 $ Terminal Value 195,493 $ Present Value of FCF 9,913 $ 9,308 $ 9,014 $ 8,702 $ 8,164 $ PV of Terminal Value 122,869 $ Total PV 167,970 $ Net Debt 19,297.0 Existing Shares Outstanding 2,267.0 Price per Share 74.1 $