Assumed Free Cash Flows years 1-10 Example of a Discounted Cash Flow Analysis ($ miillions) Year...

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Assumed Free Cash Flows years 1-10 Example of a Discounted Cash Flow Analysis ($ miillions) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Sales a 3582 3840 4116 4413 4730 5071 5436 5828 6247 6696 Operating Income b 330 357 387 419 454 492 533 577 625 676 Other income - Corporate expenses (14) (14) (14) (14) (14) (14) (14) (14) (14) (14) EBIT 316 343 373 405 440 478 529 563 611 662 d Net Income 186 202 220 239 260 282 312 332 360 391 Change in NWC 0 0 0 0 0 41 42 45 49 52 Cash Flow 186 202 220 239 260 242 270 287 311 339 a. Growing at 7.2% a year. b. Operating margin improving from 9.2%-10.1% over ten years. Here operating income does not reflect other income, interest expense or corporate expense. c. FY 1988: $29.2 - $42.8 = -$13.6 d. Tax rate = 41% 1. First Ten Cash Flows Exhibit 12 Discounted Cash Flow Analysis Assumptions Furniture Group Footware Group 7.7% 13.1-14.1% 6.3% 9.1%-10.4% Apparel Group 7.1% 6.4%-7.0% Retail Group 7.6% 6.5%-7.5% Total 7.2% 9.2%-10.1% 1x 1x 1x 1x 1x d 12.5% 12.5% 12.5% 7.5% 11.6% 41.0% Sales growth a Operating margin range Capital expenditures C b Increase in working investment Tax rate a Ten-year annual compound growth rate b Projected operarting margin in 1989 and in 1998 As a multiple of depreciation d As a percent of the change in sales in 1994 forward Source: Interco Case Study Exhibit 12 Discounted Cash Flow Analysis Terminal value ($ millions) Implied stock price Discount rate 10.0% 11.0% 12.0% 13.0% Multiple of Cash Flow in Year 10 15.0x 5,085.0 14.0x 4,746.0 16.0x 5,424.0 $80.00 $84.00 $88.00 74.00 77.00 81.00 68.00 72.00 75.00 63.00 66.00 69.00 Assumed Free Cash Flows years 1-10 Example of a Discounted Cash Flow Analysis ($ miillions) Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Sales a 3582 3840 4116 4413 4730 5071 5436 5828 6247 6696 Operating Income b 330 357 387 419 454 492 533 577 625 676 Other income - Corporate expenses (14) (14) (14) (14) (14) (14) (14) (14) (14) (14) EBIT 316 343 373 405 440 478 529 563 611 662 d Net Income 186 202 220 239 260 282 312 332 360 391 Change in NWC 0 0 0 0 0 41 42 45 49 52 Cash Flow 186 202 220 239 260 242 270 287 311 339 a. Growing at 7.2% a year. b. Operating margin improving from 9.2%-10.1% over ten years. Here operating income does not reflect other income, interest expense or corporate expense. c. FY 1988: $29.2 - $42.8 = -$13.6 d. Tax rate = 41% 1. First Ten Cash Flows Exhibit 12 Discounted Cash Flow Analysis Assumptions Furniture Group Footware Group 7.7% 13.1-14.1% 6.3% 9.1%-10.4% Apparel Group 7.1% 6.4%-7.0% Retail Group 7.6% 6.5%-7.5% Total 7.2% 9.2%-10.1% 1x 1x 1x 1x 1x d 12.5% 12.5% 12.5% 7.5% 11.6% 41.0% Sales growth a Operating margin range Capital expenditures C b Increase in working investment Tax rate a Ten-year annual compound growth rate b Projected operarting margin in 1989 and in 1998 As a multiple of depreciation d As a percent of the change in sales in 1994 forward Source: Interco Case Study Exhibit 12 Discounted Cash Flow Analysis Terminal value ($ millions) Implied stock price Discount rate 10.0% 11.0% 12.0% 13.0% Multiple of Cash Flow in Year 10 15.0x 5,085.0 14.0x 4,746.0 16.0x 5,424.0 $80.00 $84.00 $88.00 74.00 77.00 81.00 68.00 72.00 75.00 63.00 66.00 69.00