Underlying Assumptions In Exhibit B

In the DCF analysis shown in Exhibit B, multiple underlying assumptions must be made. First, the pro-forma for Robertson show in Exhibit 4 assumes a 6% sales growth rate per year, a conservative estimate as the industry is expecting 6-7% per year. The cost of goods sold (COGS) as a percentage of sales will gradually decrease from 69% in 2002 to 65% starting in 2006. Selling and administrative costs as a percentage of sales will decrease from 22% in 2002 to 19% starting in 2005 (Exhibit 4), and stabilize thereafter. Further assumptions in calculating the total free cash flows include that accounts receivable and accounts payable remain at the same percentage of sales as shown in 2002, 14.5% and 3.6% respectively, and that inventory stabilizes at 33% of sales starting in 2003.

The underlying deductions here include the dividend growth rate remaining at 0% like it has for the past 5 years (Exhibit 1), and the future growth rate of Robertson having stabilized in 2007. This multiple of 12.42 is then multiplied to Robertson’s free cash flow in 2007, obtained by subtracting both capital expenditures and the increase in net working capital from its operating cash flow. The terminal value of $61,590,262 is added to its total free cash flows in 2007, and then discounted back 5 years using the WACC. Robertson’s net present value is $48,093,904, from which the $12,000,000 of net debt needs to be subtracted before the equity value of $36,093,904 is found. Since Robertson has 584,000 outstanding shares (Exhibit 1), the price per share using the DCF analysis is $61.80. This value is notably higher than the $50 per share Simmons is asking for, showing that the future value of Robertson is higher than the price Monmouth would current have to pay. To verify this, Vincent would benefit from