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