COMPANY ABC BUSINESS ENTERPRISE VALUATION OF COMPANY ABC AS OF DECEMBER 31, 2001 WEIGHTED AVERAGE COST OF CAPITAL (WACC) SUMMARY
WACC Methodology Capital Asset Pricing Model PwC Size-Return Study
WACC #DIV/0! #DIV/0!
Concluded WACC
#DIV/0!
COMPANY ABC BUSINESS ENTERPRISE VALUATION OF COMPANY ABC AS OF DECEMBER 31, 2001 WEIGHTED AVERAGE COST OF CAPITAL (WACC) ($ IN THOUSANDS, EXCEPT SHARE PRICE) CAPITAL ASSET PRICING MODEL
Assumptions Valuation Date Stock Price Date Risk-free Rate Pretax Required Rate on Debt Capital Equity Risk Premium Small Stock Premium Alpha
Source: 31-Dec-02 31-Dec-02 Rf = i = Rp = Ssp = A =
0.0% 0.0% 5.0% 0.0% 0.0%
Federal Statistical Release (20-Year Treasury) Yield on Notes Due 2008 Composite Ibbotson Company Characteristics
Tax Rate Calculation Federal Corporate Income Tax Rate State Income Tax Rate Effective Income Tax Rate (t) (Rounded)
35.0% 0.0% 35.0%
Industry Capital Structure Analysis Total Gross Debt (D) (1) Common Share Price Common Shares Outstanding Market Value of Equity (E) Total Capital (D+E) (2) -
Ticker Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Company 7 Company 8 Company 9 Company 10 Company 11 Company 12 Company 13 Company 14 Company 15
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0 = exclude 1 = include Company 1 Company 2 Company 3 Company 4 Company 5 Company 6 Company 7 Company 8 Company 9 Company 10 Company 11 Company 12 Company 13 Company 14 Company 15 Industry Average Included in Averages Relevered Beta Analysis Unlevered Beta Industry Debt-to-Equity Ratio (Debt/Capital over Equity/Capital) Effective Income Tax Rate Relevered Beta (B) (3) 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
Beta (Projected) #DIV/0!
D/E 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
D/Total Capital 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% #DIV/0! 0
Effective Income Tax Rate (t) 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0% 35.0%
Unlevered Beta (3) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 #DIV/0!
#DIV/0! #DIV/0! 35.00% #DIV/0!
WACC Calculation Required Return on Debt Capital [ i * (1 - t) ] = Required Return on Equity Capital [ Rf + B (Rp) + Ssp +A ] = Required Return 0.00% #DIV/0! x x Weighting #DIV/0! #DIV/0! = = WACC #DIV/0! #DIV/0! #DIV/0! Rounded Definitions & Footnotes (1) Total Gross Debt excludes minority interest liabilities and includes preferred stock; gross debt indicates cash has not been subtracted. (2) Total Capital excludes minority interest liabilities. (3) Levering Calculations: Unlevered Beta = Beta (Observed) / [1 + D/E ( 1 - t )] Relevered Beta = Unlevered Beta * [ 1 + D/E ( 1 - t )] #DIV/0!
COMPANY ABC BUSINESS ENTERPRISE VALUATION OF COMPANY ABC AS OF DECEMBER 31, 2001 WEIGHTED AVERAGE COST OF CAPITAL (WACC) PwC SIZE-RETURN STUDY
Size-Return Study Factor Market Value of Equity Book Value of Equity 5-Year Average Net Income Market Value of Invested Capital Total Assets 5-Year Average EBITDA Sales Number of Employees Average
Total Equity Risk Premium Indicated by Factor 12.9% 12.2% 12.8% 12.8% 12.4% 12.5% 11.7% 11.5% 12.4%
Required Return on Debt Capital Pretax Required Return on Debt Capital Effective Income Tax Rate Required Rate on Debt Capital Required Return on Equity Capital Average Total Equity Risk Premium Indicated by Factors Plus: Alpha Adjusted Total Equity Risk Premium Plus: Risk-Free Rate Required Return on Equity Capital
Required Returns 0.0% 35.0% 0.0%
12.4% 0.0% 12.4% 0.0% 12.4%
WACC Calculation Required Return Required Rate on Debt Capital Required Return on Equity Capital 0.0% 12.4% x x Weighting #DIV/0! #DIV/0! = = WACC #DIV/0! #DIV/0! #DIV/0! Rounded: #DIV/0!
Definitions & Footnotes EBITDA = Earnings Before Interest, Taxes, and Depreciation & Amortization
COMPANY ABC BUSINESS ENTERPRISE VALUATION OF COMPANY ABC AS OF DECEMBER 31, 2001 WEIGHTED AVERAGE COST OF CAPITAL (WACC) (USD in Millions) DATA
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SUPPORT
Historical Equity Risk Premiums: Averages Since 1963 Data for Year Ending December 31, 1998
Market Value of Equity Arithmetic Average Premium 15.3% 12.1% 11.8% 10.3% 10.6% 8.8% 9.6% 9.8% 8.3% 9.1% 8.8% 8.6% 7.4% 8.8% 8.0% 7.6% 6.4% 7.3% 6.7% 6.3% 5.0% 6.5% 4.1% 4.9% 6.6% Smoothed Average Premium 12.9% 11.5% 11.0% 10.7% 10.3% 10.0% 9.8% 9.6% 9.4% 9.1% 8.9% 8.7% 8.5% 8.2% 8.0% 7.7% 7.5% 7.3% 7.0% 6.7% 6.4% 6.0% 5.6% 4.9% 3.0% 0.1806 -0.0312 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Book Value of Equity Arithmetic Average Premium 13.6% 11.1% 10.4% 11.1% 10.1% 10.6% 9.1% 8.1% 8.4% 10.0% 9.0% 8.9% 7.7% 9.4% 9.7% 6.7% 6.5% 6.5% 7.0% 7.5% 6.8% 5.6% 6.7% 5.5% 6.6% Smoothed Average Premium 12.2% 11.1% 10.6% 10.3% 10.1% 9.8% 9.7% 9.5% 9.3% 9.2% 8.9% 8.8% 8.6% 8.4% 8.2% 8.1% 7.9% 7.7% 7.4% 7.1% 6.9% 6.6% 6.2% 5.6% 4.5% 0.1630 -0.0289 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 5-Year Average Net Income Arithmetic Average Premium 13.3% 11.1% 11.5% 12.1% 11.2% 10.8% 9.3% 9.8% 11.5% 8.5% 9.1% 8.0% 9.1% 8.3% 9.7% 6.6% 7.7% 7.3% 6.7% 8.9% 6.1% 5.8% 6.0% 6.3% 6.8% Smoothed Average Premium 12.8% 11.6% 11.1% 10.7% 10.5% 10.3% 10.1% 9.9% 9.7% 9.5% 9.3% 9.1% 8.9% 8.8% 8.5% 8.3% 8.1% 7.9% 7.7% 7.6% 7.2% 6.9% 6.4% 5.9% 4.5% 0.1318 -0.0260 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Market Value of Invested Capital Arithmetic Average Premium 15.1% 11.7% 10.1% 11.5% 10.0% 10.1% 9.3% 8.5% 9.0% 8.7% 10.0% 9.0% 8.9% 8.6% 5.9% 6.6% 7.3% 6.1% 7.5% 7.9% 5.6% 5.2% 5.4% 4.8% 6.0% Smoothed Average Premium 12.8% 11.5% 10.9% 10.6% 10.2% 10.0% 9.8% 9.5% 9.3% 9.1% 8.9% 8.7% 8.5% 8.2% 8.0% 7.8% 7.7% 7.3% 7.1% 6.7% 6.4% 6.1% 5.6% 5.0% 3.3% 0.1832 -0.0307 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Total Assets Arithmetic Average Premium 13.5% 12.3% 11.7% 9.9% 8.3% 10.5% 10.1% 9.8% 9.2% 10.0% 9.6% 10.9% 8.3% 6.6% 8.2% 7.0% 7.4% 6.4% 7.2% 8.1% 7.6% 6.4% 7.1% 5.4% 6.0% Smoothed Average Premium 12.4% 11.3% 10.9% 10.5% 10.3% 10.2% 10.0% 9.7% 9.6% 9.4% 9.2% 9.0% 8.8% 8.7% 8.5% 8.3% 8.1% 7.9% 7.6% 7.3% 7.0% 6.7% 6.3% 5.8% 4.5% 0.1707 -0.0269 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 5-Year Average EBITDA Arithmetic Average Premium 12.7% 12.3% 12.3% 11.2% 10.5% 8.5% 11.0% 10.0% 10.9% 10.0% 8.4% 8.0% 10.6% 9.5% 8.5% 7.6% 6.2% 7.0% 7.7% 7.5% 7.8% 6.2% 6.8% 5.6% 7.1% Smoothed Average Premium 12.5% 11.4% 11.1% 10.8% 10.6% 10.4% 10.2% 9.9% 9.8% 9.7% 9.4% 9.3% 9.0% 8.9% 8.7% 8.5% 8.3% 8.0% 7.9% 7.6% 7.3% 7.0% 6.6% 6.1% 4.8% 0.1467 -0.0260 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Sales Arithmetic Average Premium 13.1% 11.1% 12.4% 10.0% 9.1% 9.4% 9.7% 8.9% 10.9% 7.9% 8.4% 8.5% 10.0% 11.8% 8.6% 8.5% 6.1% 7.5% 8.3% 7.9% 8.5% 8.4% 7.9% 6.1% 7.4% Smoothed Average Premium 11.7% 10.9% 10.6% 10.4% 10.2% 10.1% 9.9% 9.8% 9.6% 9.5% 9.4% 9.3% 9.2% 9.1% 8.9% 8.8% 8.6% 8.4% 8.2% 8.1% 7.9% 7.6% 7.3% 7.0% 6.1% 0.1515 -0.0197 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Number of Employees Arithmetic Average Premium 12.9% 10.4% 10.6% 10.7% 9.4% 11.2% 8.3% 8.8% 7.7% 9.5% 10.4% 7.9% 9.1% 9.2% 9.1% 9.1% 9.2% 7.9% 7.2% 8.9% 8.8% 8.2% 7.9% 7.4% 6.6% Smoothed Average Premium 11.5% 10.8% 10.4% 10.2% 10.1% 9.9% 9.8% 9.6% 9.5% 9.4% 9.3% 9.2% 9.1% 9.0% 8.9% 8.8% 8.6% 8.5% 8.4% 8.2% 8.0% 7.8% 7.6% 7.3% 6.6% 0.1526 -0.0165 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1
Average ($mils.) 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 Constant Slope 44 124 179 234 305 386 448 510 616 753 875 1,015 1,190 1,431 1,733 2,072 2,485 2,816 3,440 4,342 5,357 7,417 10,011 16,054 64,877
Average ($mils.) 27 65 93 117 141 175 202 225 263 297 354 395 450 531 634 701 834 982 1,187 1,496 1,790 2,303 3,150 5,037 12,407
Average ($mils.) 1 4 6 9 11 13 16 19 22 27 32 39 43 51 61 77 91 105 124 147 195 268 401 625 2,207
Average ($mils.) 62 168 255 332 422 514 595 714 834 1,013 1,186 1,398 1,618 1,900 2,326 2,652 2,958 3,856 4,587 5,839 7,459 9,406 14,066 21,551 80,044
Average ($mils.) 57 143 200 268 322 370 438 534 623 715 847 1,001 1,207 1,342 1,494 1,834 2,209 2,653 3,278 4,332 5,506 7,215 9,823 15,937 47,803
Average ($mils.) 7 18 24 32 37 43 54 66 76 86 106 121 146 170 202 235 275 354 408 509 667 901 1,306 1,929 6,339
Average ($mils.) 55 145 206 262 310 382 449 545 631 709 807 956 1,046 1,235 1,457 1,702 2,073 2,512 3,301 3,897 4,940 6,733 9,127 13,187 40,333
Average 195 533 848 1,166 1,454 1,766 2,148 2,580 3,124 3,712 4,167 5,058 5,759 6,747 7,406 8,808 10,527 12,325 15,322 19,995 25,670 33,745 43,921 67,920 184,237
Convert Subject Company Results to Millions COMPANY ABC Implied Basket Implied Smoothed Premium 25 12.9% 25 12.2% 25 12.8% 25 12.8% 25 12.4% 25 12.5% 25 11.7% 25 11.5%