Rjr Nabisco Valuation Essay
RJR Nabisco Valuation
When assessing the valuation of RJR Nabisco bids, the Special committee should utilize the Capital Cash Flow method. The Capital Cash Flow method, when applied appropriately, should yield the same valuation when discounting a company’s Free Cash Flow. To get Capital Cash Flows (CCF), Net Income is adjusted by adding back non-cash expenses and other reconciliations to form cash flow, decreasing Capital Expenditures, decreasing changes in Net Working Capital and finally, adding Cash Interest. The Capital Cash Flow Method is algebraically equivalent to the Free Cash Flow Method because the CCF’s are discounted by the Expected Asset Return (Ka) and not by the Weighted Average Cost of Capital. The key advantage with the use of the CCF method is that the valuations do not require Year over Year changes in the discount rate if the capital structure of a company is projected to change. In particular, it is useful …show more content…
It is also part of a leveraged buyout, part of which is financed by long term debt, altering the capital structure going forwards. More debt leads to a greater valuation of the firm.
KKR, while still a leveraged buyout, does not plan on selling off the entirety of the food business. Instead it plans on running both the tobacco business and most of the existing food business, resulting in cash flows similar to those of the pre-bid strategy. However, since it is also will result in a new capital structure including more long term debt, the valuation is increased even higher.
The three operating plans account for different amounts of assets due to varying operating strategies as well as various amounts of long-term debt. This reflects the idea that operating decisions are the main motivation behind the value of RJR Nabisco.
The
When assessing the valuation of RJR Nabisco bids, the Special committee should utilize the Capital Cash Flow method. The Capital Cash Flow method, when applied appropriately, should yield the same valuation when discounting a company’s Free Cash Flow. To get Capital Cash Flows (CCF), Net Income is adjusted by adding back non-cash expenses and other reconciliations to form cash flow, decreasing Capital Expenditures, decreasing changes in Net Working Capital and finally, adding Cash Interest. The Capital Cash Flow Method is algebraically equivalent to the Free Cash Flow Method because the CCF’s are discounted by the Expected Asset Return (Ka) and not by the Weighted Average Cost of Capital. The key advantage with the use of the CCF method is that the valuations do not require Year over Year changes in the discount rate if the capital structure of a company is projected to change. In particular, it is useful …show more content…
It is also part of a leveraged buyout, part of which is financed by long term debt, altering the capital structure going forwards. More debt leads to a greater valuation of the firm.
KKR, while still a leveraged buyout, does not plan on selling off the entirety of the food business. Instead it plans on running both the tobacco business and most of the existing food business, resulting in cash flows similar to those of the pre-bid strategy. However, since it is also will result in a new capital structure including more long term debt, the valuation is increased even higher.
The three operating plans account for different amounts of assets due to varying operating strategies as well as various amounts of long-term debt. This reflects the idea that operating decisions are the main motivation behind the value of RJR Nabisco.
The