Rjr Nabisco Essay

The RJR Nabisco leveraged buyout was the largest LBO in the history. The company acquired both of tobacco and food products. Henry Kravis is a American business man who is a co-founder of Kohlberg Kravis Roberts & Co.(KKR), a private equity firm. Earlier in his life, he was working for Bear Stearns which mainly focused on purchasing business and borrow money by using firm’s asset, in the other, company purchases itself which is called leveraged buyout. He found that RJR Nabisco with the under value stock price was a perfect LBO candidate. However, the bidding was highly competitive which consisted of KKR, First Boston, Management group and Forstmann Little. At the end, Kravis won RJR Nabisco bit against Mr. Johnson with the final bit of $ 22.9 billion or

The first step is to create a set of base-case cash flow scenarios. After calculating cash flow, free cash flow of the company will be discounted in the valuation process. Moreover, the operating income will have two adjustments which are working capital adjustment and capital expenditures. The second step is to obtain the appropriate discount rate by determining cost of debt, cost of equity and weight average cost of capital. As for cost of debt, it is included cash and paid-in-kind (PIK) securities with floating interest rates based upon various base rates. As for cost of equity, an alternative evaluation of RJR’s operating beta by using two surrogate firm approach yield is 0.71 which is similar to the unlevered beta of 0.69. Moreover, the estimate RJR’s cost of capital is 12.06per cent. After that RJR Nabisco can be evaluated by using cost of capital of 12.06 per cent to discount each of projected cash flow between 1989 and 1998. Then, making an assumption of growth rate and calculating the present value to find a total firm value and then minus it with an existing long term debt. Therefore, the valuation depends on the projected growth