Philip Morris Cost of Capital

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					                    Philip Morris Companies and Kraft, Inc.
                          Stock Prices and Daily Returns

                      Philip Morris             Kraft               S&P 500
                     Price     Return     Price       Return    Price    Return
       10/3/1988     $97.00               $60.00                638.71
       10/4/1988     $98.00      1.03%    $58.50       -2.53%   637.01    -0.27%
       10/5/1988     $97.38     -0.64%    $59.38        1.48%   640.02     0.47%
       10/6/1988     $96.88     -0.51%    $59.38        0.00%   641.36     0.21%
       10/7/1988    $100.88      4.05%    $60.63        2.08%   654.83     2.08%
      10/10/1988    $101.13      0.25%    $60.75        0.21%   655.32     0.07%
      10/11/1988    $100.75     -0.37%    $60.38       -0.62%   654.68    -0.10%
      10/12/1988     $98.88     -1.88%    $59.50       -1.46%   645.47    -1.42%
      10/13/1988     $99.25      0.38%    $59.25       -0.42%   648.48     0.47%
      10/14/1988     $98.63     -0.63%    $59.50        0.42%   649.23     0.12%
      10/17/1988    $100.00      1.38%    $60.13        1.04%   651.46     0.34%
      10/18/1988     $95.50     -4.60%    $88.25      38.37%    658.56     1.08%
      10/19/1988     $94.00     -1.58%    $90.38        2.38%   652.97    -0.85%
      10/20/1988     $99.00      5.18%    $90.25       -0.14%   666.99     2.12%
      10/21/1988     $97.38     -1.66%    $92.00        1.92%   668.92     0.29%
      10/24/1988     $97.50      0.13%   $102.00      10.32%    665.76    -0.47%
      10/25/1988     $95.88     -1.68%    $99.00       -2.99%   666.09     0.05%
      10/26/1988     $95.50     -0.39%    $97.50       -1.53%   663.82    -0.34%
      10/27/1988     $95.50      0.00%    $94.50       -3.13%   654.24    -1.45%
      10/28/1988     $94.75     -0.79%    $96.50        2.09%   657.28     0.46%

10/3 - 10/28:
Mean                           -0.12%                 2.50%               0.15%
Std                             2.12%                 9.17%               0.94%
Annual Volatility                 34%                  145%                 15%

10/3 - 10/17:
Mean                            0.30%                 0.02%               0.20%
Std                             1.61%                 1.37%               0.86%
Annual Volatility                 26%                   22%                 14%

Abnormal Returns:
10/18:                         -5.56%                37.57%
t-statistic:                     -3.45                 27.38
10/20:                          3.31%                -0.14%
t-statistic:                      2.06                 -0.10
                     cdd4e2cc-2945-4179-8cb7-992ceb6cb98c.xls




$110.00
                                                        RJR Nabisco
                                                         announces
$100.00                                                management-led
                                                        LBO proposal

 $90.00
                                                                        Kraft proposes
                                                                           leveraged
          Philip Morris                                                 restructuring it
 $80.00
          Kraft                                                         values at $110;
                                                                         KKR bids for
                                                                         RJR Nabisco
 $70.00


 $60.00
                                              Philip Morris
                                               announces
 $50.00                                        $90 bid for
                                                  Kraft

 $40.00


 $30.00


 $20.00




                                     Page 2
           Comparison of Philip Morris' bid and
             Kraft's leveraged restructuring
                     counter proposal

Kraft shares (millions):
Outstanding              119.29
Employee Options           2.40
  Total                  121.68

                     Philip Morris' Bid
                                              Prevailing
To shareholders      $ millions    per share market price
Cash payment           $10,951            $90     $60.13    Bid represents a
                                                            50% premium
                                                            over prevailing
Financing            $ millions
                                                            market price, for
Philip's free CF        $1,500
                                                            a total premium
Bank credit line        $9,451                              value of about
   Total               $10,951                     $7,317


          Kraft's Leveraged Restructing Proposal
                                              Prevailing
To shareholders      $ millions  per share market price
Cash dividend           $10,221         $84
Cram-down debt           $1,704         $14
Stub equity              $1,460         $12
 Total value            $13,385        $110       $92.00

Financing            $ millions      rate                   Bid valued by
Existing debt               $904        8.65%               Kraft at 20%
New bank debt (plug)    $6,317            12%               premium over
Junk bonds              $3,000        13.63%                prevailing
                                                            market price, for
  Subtotal             $10,221
                                                            a total premium
Cram-down               $1,704        15.25%
                                                            value of about
  Total debt           $11,925
Stub equity             $1,460
  Total financing      $13,385                    $11,195
                           Kraft, Inc. Restructuring Proposal Valuation (Ref Case Exhibit 12)
Unlevered cost of equity         12.84%
Tax Rate                            34%
                                 1989      1990      1991      1992      1993      1994     1995     1996     1997      1998
Sales                            $6,515    $6,804    $7,125    $7,481    $7,855    $8,248   $8,660   $9,093   $9,548   $10,025
EBIT                             $1,280    $1,487    $1,671    $1,755    $1,842    $1,935   $2,031   $2,133   $2,239    $2,351
EBIAT                              $845      $981    $1,103    $1,158    $1,216    $1,277   $1,340   $1,408   $1,478    $1,552
Change in NFA+NOA                 ($528)    ($387)    ($399)    ($327)    ($381)      $94     $104     $113     $123      $113
Asset sales                      $2,146        $0        $0        $0        $0        $0       $0       $0       $0        $0
Cash flow to capital             $3,519    $1,368    $1,502    $1,485    $1,597    $1,183   $1,236   $1,295   $1,354    $1,438
 Present value                   $3,118    $1,075    $1,046      $916      $873      $573     $531     $493     $457      $430
   Total PV of cash flows        $9,510

Interest (from below)           $1,573     $1,321    $1,312    $1,295    $1,296    $1,287   $1,250   $1,204   $1,148    $1,077
Net income                       ($193)      $109      $237      $303      $361      $428     $515     $613     $720      $841
Cash avail for debt svc (Ex. 12)$2,481       $496      $636      $630      $742      $334     $411     $500     $597      $728

Existing debt                     8.65%
 Beginning principal               $904     $793      $760      $703      $416      $316     $216     $116      $16        $0
 Interest                           $78      $69       $66       $61       $36       $27      $19      $10       $1        $0
 Interest tax shield                $27      $23       $22       $21       $12        $9       $6       $3       $0        $0
 Present value                      $24      $20       $17       $15        $8        $6       $4       $2       $0        $0
 Principal pmt (per Ex 12)         $111      $33       $57      $287      $100      $100     $100     $100      $16        $0
   Total PV of ITS                  $96

Bank debt                            12%
 Beginning principal              $6,800   $4,430    $3,967    $3,388    $3,045    $2,403   $2,169   $1,858   $1,458     $877
 Interest                           $816     $532      $476      $407      $365      $288     $260     $223     $175     $105
 Interest tax shield                $277     $181      $162      $138      $124       $98      $89      $76      $59      $36
 Present value                      $248     $144      $115       $88       $70       $50      $40      $31      $21      $12
 Principal pmt                    $2,370     $463      $579      $343      $642      $234     $311     $400     $581     $728
   Total PV of ITS                  $819

Junk bonds                       13.63%
 Principal                       $3,000    $3,000    $3,000    $3,000    $3,000    $3,000   $3,000   $3,000   $3,000    $3,000
 Interest                          $409      $409      $409      $409      $409      $409     $409     $409     $409      $409
 Interest tax shield               $139      $139      $139      $139      $139      $139     $139     $139     $139      $139
 Present value                     $122      $108       $95       $83       $73       $65      $57      $50      $44       $39
   Total PV of ITS                 $736

Cram-down debt                   15.25%
 Beginning principal             $1,704    $1,974    $2,286    $2,648    $3,067    $3,553   $3,553   $3,553   $3,553    $3,553
 Interest (credit)                 $270      $312      $362      $419      $486      $562       $0       $0       $0        $0
 Interest (cash)                     $0        $0        $0        $0        $0        $0     $562     $562     $562      $562
   Total interest                  $270      $312      $362      $419      $486      $562     $562     $562     $562      $562
 Interest tax shield                $92      $106      $123      $143      $165      $191     $191     $191     $191      $191
 Present value                      $80       $80       $80       $81       $81       $82      $71      $61      $53       $46
   Total PV of ITS                 $715

PV of free cash flow              $9,510
PV of financing benefits (ITS)    $2,365
PVofTerminal (perp)               $3,347
 Total value of firm             $15,223
Less Par Value of Debt           $12,408
Value of Equity                   $2,815
Per Share                         $23.14
 Value of Interest Tax Shield on $12 Billion Incremental Borrowing by
                              Philip Morris

Tax rate              34%
Interest Rate         12%
Annual Payment to Amortize in 8 years             $2,415.63

                       1989             1990       1991       1992
Beginning Balance      $12,000          $11,024     $9,932     $8,708
Principal Repayment       $976           $1,093     $1,224     $1,371
Interest                $1,440           $1,323     $1,192     $1,045
Interest tax shield       $490             $450       $405       $355
Present value          $437.14          $358.57    $288.42    $225.79

                       1993             1994       1995       1996
Beginning Balance       $7,337           $5,802     $4,083     $2,157
Principal Repayment     $1,535           $1,719     $1,926     $2,157
Interest                  $880             $696       $490       $259
Interest tax shield       $299             $237       $167        $88
Present value          $169.86          $119.93     $75.35     $35.54

Total PV              $1,309.92

				
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