Capital Markets 2006 CEMEX´s Discount Rate Factor Analysis

2 Introduction The objective of this presentation is to discuss the methodology used to calculate both CEMEX and its business units (BU) discount rate factors (DRF) –Standardizing the calculations among BU –Providing a base rate that could be adjusted for internal valuation of projects This methodology assumes that CEMEX and its BU benefit from a global system that: –Reduces volatility & risk of cash flows and provides attractive financing Capital Markets calculated the discount rate factors for CEMEX and its BU, based on the proposed methodology –The discount rates factors will be updated annually In a second stage Capital Markets & Planning Department will review this process to improve the understanding and use of DRFs by the BUs

3 The discount rate factor in the valuation analysis The discount rate is the minimum expected rate of return that the market requires in order to attract funds into a particular investment –It is a critical input in the valuation of cash flows The DRF is the discount rate used to convert expected future cash flows of a company or project into present value –It comprises the cost of different components of financing, such as debt and equity, weighted by their market value proportions –Discount rate factor must be consistent with the type of cash flow being discounted and its inherent risks –The risk of a specific project is not necessarily the same as the company/ BU overall risk –The company/BU is a bucket comprised of different projects that have different risks –Value creation for each project should be measure with the project discount rate

4 Discount Rate Factor - Calculation Where: Kd = Pretax market expected cost of debt T = Statutory tax rate for the entity being valued D = Market value of interest-bearing debt D + E = Total capital structure. Market value of debt + equity Ke = Cost of equity. Return inquired by investors E = The market value of invested capital (equity) DRF = Kd*(1-T) * D/(D+E) + Ke * E/(D+E) Formula:

5 DRF- Capital Structure Assumptions to estimate steady state capital structure –TEV/EBITDA LTM = 8.5x –Net Debt / EBITDA LTM Target = 2.7x This results in a Debt / (Debt+ Equity) ratio of 32% Even though the majority of the BUs do not have debt in their capital structure, we assume CEMEX’s leverage to estimate their DRF –BU’s cash flows sustain debt accumulated in major holdings DRF = Kd*(1-T) * D/(D+E) + Ke * E/(D+E)

6 DRF - Cost of Debt The cost of debt is the rate at which the company borrows at present time It reflects both the interest rate level and the default risk of the company Interest is tax deductible, the cost of debt after taxes is used in the calculation Cost of Debt Assumptions –Each BU has a cost of debt equal to its risk free rate plus CEMEX’s credit spread DRF = Kd*(1-T) * D/(D+E) + Ke * E/(D+E) Kd BU = R fBU + (Kd CX - R fCX ) Formula:

7 DRF - Country Risk Premium The Country Risk Premium is traditionally calculated as the spread between US$ denominated sovereign debt and US risk free rate –Emerging Markets Bond Index plus (EMBI +) is used for emerging market countries If there is no data availability, alternative methods are used to calculate the CR –Yield curve in USD$ constructed by Bloomberg –Emerging Markets Bond Index Global (EMBI Global) –Global Insight qualitative risk measure to interpolate a rate of risk –Credit Default Swap (CDS) quotations Ke = Rf + CR + B * (E [Rm] - Rf)

8 DRF - Cost of Equity (Ke) Where: Rf = Risk Free Rate U.S. –US10 Year Treasury Bond yield CR = Country Risk Premium B = Beta (E[Rm] = Expected Rate of Return of the Market Index (Diversified Portfolio) (E[Rm] - Rf) = Market Risk Premium –A Standard 5.5% market risk premium is used as base case Ke = R f + CR + B * (E [R m ] - R f ) CAPM Standard Approach Formula: DRF = Kd*(1-T) * D/(D+E) + Ke * E/(D+E)

9 Cost of Equity (Ke) - Beta Beta measures the responsiveness of a security to movements in the market portfolio The Beta is obtained by regressing the stock returns against market returns Determinants of Beta –Product or Service: Depends on sensitivity of demand for its products and of its costs to macroeconomic factors that affect the overall market –Operating Leverage: The greater the proportion of fixed costs in the cost structure of a business, the higher the beta will be of that business –Financial Leverage: The more debt a firm takes on, the higher the beta will be of the equity in that business The base case uses a re-levered Beta of 1.09 obtained from the average of CEMEX and its peers Bloomberg’s adjusted Beta Ke = Rf + CR + B * (E [Rm] - Rf)

10 CEMEX’s COSTA RICA DRF of 10.1% Risk Free Rate 6.65% CX Beta 1.03 Risk Premium 6.00% Cost of Equity 12.83% Cost of Debt 6.65% Tax Rate 30% Net Cost 4.66% Debt's Weight 34% Cost of Capital 10.05% CEMEX DRF 10.1%

Capital Markets 2006 CEMEX´s Discount Rate Factor Analysis