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In-Class Project 2: Due 4/13/2019 Your Name: Valuation of The Leveraged Buyout (LBO) of RJR Nabisco 1. Cash Flow Estimates

This document outlines an analysis of the leveraged buyout of RJR Nabisco including cash flow estimates, debt and interest expense projections, and valuation calculations to determine the price per share under different growth rate assumptions. It estimates the value of the firm at $30.77 billion and the equity value at $25.77 billion, corresponding to a price per share of $112.53 assuming a 3% growth rate of cash flows after 1993. A sensitivity analysis is presented showing how the estimated price per share varies with different long-term growth rate assumptions.

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Dinhkhanh Nguyen
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79 views5 pages

In-Class Project 2: Due 4/13/2019 Your Name: Valuation of The Leveraged Buyout (LBO) of RJR Nabisco 1. Cash Flow Estimates

This document outlines an analysis of the leveraged buyout of RJR Nabisco including cash flow estimates, debt and interest expense projections, and valuation calculations to determine the price per share under different growth rate assumptions. It estimates the value of the firm at $30.77 billion and the equity value at $25.77 billion, corresponding to a price per share of $112.53 assuming a 3% growth rate of cash flows after 1993. A sensitivity analysis is presented showing how the estimated price per share varies with different long-term growth rate assumptions.

Uploaded by

Dinhkhanh Nguyen
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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In-class project 2: due 4/13/2019

Your Name: Cham Nguyen

Valuation of the Leveraged Buyout (LBO) of RJR Nabisco

1. Cash flow estimates


RJR's projected CFs ($ million)
1989 1990 1991 1992
EBIT 2620 3410 3645 3950
Depreciation 449 475 475 475
Capital expenditures 522 512 525 538
Change in working capital -203 -275 200 225
After-tax Proceeds from asset sales 3,545 1,805

Annual grwoth rate of FCFF after 1993 3%


Tax rate 0.34

Estimate RJR's final overall cash flow each year


Year 1989 1990 1991 1992
Relative year 1 2 3 4
Final Cash flow ($ million) 5,404.20 4,293.60 2,155.70 2,319.00

2. Debt/Interest expense estimates


Projected Interest Expense and Tax Shields ($ millions)
1989 1990 1991 1992
Interest expense ($ million) 3,384.00 3,004.00 3,111.00 3,294.00
Tax shield cash flow ($ million) 1,150.56 1,182.86 1,219.24 1,281.46

Debt level from 1993 ($ million) 9,000


Annual grwoth rate of TS CF after 1993 0%

3. Other information
Cost of asset (ra) 14%
Cost of debt (rd) 13.50%
Current debt level ($ million) 5,000
Number of shares outstanding (million) 229

I. Estimate VU
Relative year 1 2 3 4
Discount Final Cash flow ($ million) 4,740.53 3,303.79 1,455.04 1,373.03
VU ($ million) 24,428.87
II. Estimate PV(TS)
Relative year 1 2 3 4
Discounted tax shield cash flow ($ million) 1,013.71 918.21 833.88 772.19
PV(TS) ($ million) 6,341.19

III.
Value of the firm [V] ($ million) 30,770.05
Equity value [E] ($ million) 25,770.05 E
Price per share [P] ($) 112.53
12

Sensitivity analysis
10
Report the price per share if growth rate of FCFF after 1993 is estimated to be:
Growth rate of FCFF after 1993 Price Estimate
112.532988106
8
0%
1%
2%

Price
6
3%
4%
5%
4
6%
7%
8%
2

Draw the graph of estimated price per share vs growth rate below:
0
0% 1%
1993
4310
475
551
250

1993 1994
5 6
2,518.60 2,594.16

1993 1994
3,483.00 1,215.00
1,345.72 413.10

5 Terminal value
1,308.08 12,248.40
5 Terminal value
714.46 2,088.75

Estimated price per share vs growth rate


12

10

8
Price

0
0% 1% 2% 3% 4% 5% 6% 7% 8%

Grow Rate
Texas Instrument's Projected CFs ($ million)
Year 1 2 3 4
Revenues 6 6 6 6
Cost 2 2 2 2
EBIT (Revenue - Cost) 4 4 4 4
Depreciation 3 3 3 3
Change in working capital 1 1 2 0

Tax rate 0.35

FCFF = EBIT*(1-.35)+Depreciation-Change in working capital


Year 1 2 3 4
Final Cash flow ($ million) 4.60 4.10 3.60 5.10

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