Rjr Nabisco Executive Summary

Satisfactory Essays
Case Study
RJR Nabisco
Fair Value Per Share

Jacob Dobrovolny

November 18, 2014

Executive Summary

The RJR Nabisco case study was used to implement concepts that I have learned in class during the semester and apply it to the real world. The Nabisco case allowed me to develop my skills by using an Excel Worksheet, understanding how to calculate the fair value price per share, and determining the fair value price per share by changing the tax rate and growth rate. First, I was expected to construct an Excel Worksheet. Using the given data and analyzing the case, I was able to find all of the fixed variables needed in the Excel Worksheet. Using these fixed variables, I was able to use my prior skills in
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Appendix 1- Calculations

Tax on Operating Income

Operating Income * Tax Rate

After Tax Operating Income

Operating Income – After Tax Operating Income

Unlevered Cash Flow (UCF)

After Tax Operating Income + Depreciation – Capital Expenditures – Change in Working Capital + Proceeds from Asset Sale

Interest Tax Shields

Interest Expense * Tax Rate

Present Value of Unlevered Cash Flows (1989-1993)

UCF / (1+ Interest Rate)^ (Year from 1989+1)

Total Present Value of Unlevered Cash Flows (1989-1993)

Add up each Years Present Value from 1989-1993

Value at t=5 of Unlevered Cash Flows After 1993

((UCF At 1993)(1+Growth Rate)) / (Interest Rate-Growth Rate)

Present Value of UCF after 1993

(Value at t=5 of Unlevered Cash Flows After 1993) / (1+Interest Rate)^5

Total Unlevered Value of Firm

Present Value of UCF after 1993 + Present Value of UCF (1989-1993)

Present Value of Interest Tax Shield (1989-1993)

Interest Tax Shield / (1+ Cost of Debt)^ (Year from 1989+1)

Total Present Value of Interest Tax Shield (1989-1993)

Sum of Individual Years Present Value of Interest Rate Tax Shield Between 1989-1993

Return of Equity

Interest Rate + (Target Debt Ratio / Target Equity Ratio)(1-Tax Rate)(Interest Rate-Cost of Debt)

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