Rjr Nabisco Case Study Solution

Value of RJR under Three Methods:

The Nabisco RJR is calculated using a discounted cash flow model (DCF) based on three strategies. First, the debt-free free cash flow was obtained from the cash flow projections provided at the exhibition. The cash flow projections in the line “cash available for payment of principal” can be used directly as non-indebted cash flow, as these data do not satisfy interest income / expense. Cash flow (i.e., terminal value) after 1998 was calculated using the Gordon model, setting the average dividend growth rate after 1998 to still 3 percent. Cash flow is then discounted by an appropriate percentage and weighted average cost of capital (WACC). To obtain the WACC, equity and debt costs must be calculated separately. The cost of capital is calculated using the well-known CAPM (Capital Asset Pricing Model). According to the CAPM, the rate of return required by shareholders or the cost of capital of a company is equal to the risk-free rate of return + the market risk premium multiplied by the beta. The other element of the WACC, the cost of debt, is simply seen as the company’s interest rate, which is calculated by dividing the annual interest expense by the total outstanding debt.

Operating Strategy Net Present Value
Pre-bid operating strategy $26,411
The Management Group’s operating strategy $36,629
KKR’s operating strategy $30,253

Difference in the Valuation of Three Operating Strategy:

The difference in value is attributed to the different management views and styles of the three operating planes. In terms of market value and internal operations, the three operational plans show a completely different picture of the company’s current situation and different future plans that affect the company’s current valuation……………………..

 

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