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RJR Nabisco
Case Solution
Gives students the opportunity to explore issues facing the board of directors in a leveraged buyout. RJR Nabisco is valued under different operating strategies and the source of gains in leveraged buyouts is stressed.
Excel Calculations
Prebid operating strategy, MG operating strategy, KKR operating strategy
Calculating present value of cash flows 1989-1998
Calculating terminal value
Grand NPV
Calulating Weighted Average Cost of Capital (WACC)
Calculating Cost of Equity
Calculating Cost of Debt
WACC
Total Value of RJR Nabisco
Per share value
Questions Covered
1. What was the value of RJR Nabisco under:
a) the pre-bid operating strategy?
b) the Management Group’s operating strategy?
c) KKR’s operating strategy?
You need to conduct detailed valuation using the information given in the exhibits for each strategy and general information in the case
2. What accounts for any difference in the value of the three operating plans?
3. Evaluate the Special Committee’s use of an auction of RJR Nabisco?
4. Which bid should the Special Committee select, if any? What other actions should the Special Committee take?