RJR Nabisco

RJR Nabisco

• Some genius invented the Oreo. We’re just living off of the inheritance.
F. Ross Johnson

Fair Market Value
• Fair Market Value: “…the price at which the asset would trade between two rational individuals, each in command of all of the information necessary to value the asset, and neither under any pressure to trade.”
Rocky Higgins
Analysis for Financial
Management (p. 318)

Capital Budgeting 101
• Step 1: Estimate Discount Rate
• Step 2: Project Cash Flows
– Cash flows for 1989-98 in tables
– Terminal value

• Step 3: Compute Net Present Value (NPV)
– Accept positive NPV projects

Discount Rate
• As we discussed, the discount rate is the weighted average cost of capital (WACC).

D
E
WACC 
E ( rd )(1  t ) 
E ( re )
DE
DE where t = tax rate,
E(rd) = expected cost of debt
D = amount of debt in capitalization
E(re) = expected cost of equity
E = amount of equity capitalization

Discount Rate
• To calculate the WACC using 1989 figures under the three strategies:

5,204
12,790
Prebid :
(.09)(1  .34) 
(.168) .137
5,204  12,790
5,204  12,790
11,186
4,202
Mgmt :
(.098)(1  .34) 
(.250) .115
11,186  4,202
11,186  4,202
•

18capital
,932 structure changes over time, we
4115
NOTE: since the need to recompute
KKR :
(.102)(1  .34) 
(.330) the
.114
WACC each year to reflect the change in capital structure.
18,932  4115
18,932  4115

Projected Cash Flows
• Projected cash flows for 1989 are calculated as follows:
Rev.
- Exp.
- Depr.
TI
- Tax
Net Inc.

Prebid Mgmt
18,088
7,650
14,429
5,544
807
777
2,852
1,329

KKR
16,190
12,596
1,159
2,435

970
1,882

452
877

828
1,607

807

777

1,159

- Cap.Exp.

1,708

432

774

- Chg WC

80

41

79

0
901

12,680
13,861

3,500
5,413

+ Depr.

+ Asset

Sale
Net CF

Projected Cash Flow
• The following cash flow represent the cash flow computed from the tables:
Year
1989
1990
1991
1992

Prebid Management KKR
901
13,861 5413
1385
1486 4909
1856
1768 2526
2528
2062 2745

1993
1994
1995

2985
3261
3555

2278