"There seems to be some perverse human characteristic that likes to make easy things difficult.“ – Warren Buffett www.jeffreytowson.com

Main Ideas Separate Out the Operating Engine Convert to Steady-State Economic (R&D, Leases, 1x, etc.) Asset Values – Liquidation and Reproduction Earnings Power Value (zero growth and no investment) Perpetual Growth (constant growth and investment) Discount Rates vs. Cost of Capital Explicit DCF and Terminal / Continuing Value Scenarios for Rule-Out and Big Changes Theme for Today is “increasing global transactions” and the “business strategies that drive them”. If you have a good grasp of the business strategies, then easy to understand. That’s the foundation. 1) Quickly go through some strategy. 2) Then break into teams and each team is going to have to come up with a Yes / No decision on doing a deal. www.jeffreytowson.com

The Process According to Damadaran In many cases, the biggest errors in valuation occur after you think you are done, where you are tempted and even encouraged to start adding or detracting arbitrary amounts from your carefully estimated value for thinks that sound good or ominous - control, synergy and illiquidity are common examples. We need to fight this tendency since it undercuts the integrity of the process…. Liquidity, control and synergy might have value but we should try to assess the value rather than assume it is always 20% or some other arbitrary proportion of estimated value. Chart by A Damodaran www.jeffreytowson.com 2

Separate Out the Operating Engine Financial Assets and Stuff THE OPERATING ENGINE Excess cash and marketable securities Cross-holdings Financial assets Unused operating assets Excess pension funding Contingent liabilities (lawsuits) Underfunded pensions? Other? Operating Assets and Operating Liabilities Net Operating Cash Flow After Taxes Remove interest (and its tax shield) Remove taxes on non-operating income Equity and equity equivalents Debt and debt equivalents Interest bearing liabilities Leases? View them as loans www.jeffreytowson.com

Explicit DCF Projection Valuation Like Warren Buffett X Rule Out? Intrinsic Value (Economic Value) Explicit DCF Projection Scenario 1 Scenario 2 PG EPV Scenario 3 Time Minimum Scenario? RV X ? LV Rule Out? ? www.jeffreytowson.com

Corrected Income Statement Operating Engine: Valuation Ranges & Probabilities Year 0 Year 1 Baseline (Birds in Hand) Min Max Prob Non-Operating & Financial Assets Steady-State Corrections Liquidation Value -1x charges Reproduction Value -Key person Min Max EPV -Cyclical -Op leases Discount Rate? Excess Cash -Exclude non- operating -Cap R&D Perpetual Growth Value Investments Unused op assets Growth? Revenue Investment? Excess pension Discount Rate? Other Explicit DCF + Terminal Cost of Rev Big Changes Scenarios (Birds in Bush) Debt & Debt Equivalents Growth Lever (5 yr compound growth rate) Profitability Lever (EBIT in yrs 5 10) Interest-Bearing CL & Debt Growth Efficiency Lever (Sales/Capital) Gross Profit One Time Event or Change Op Expenses Interest Expense Rule Out Scenarios: Minimum vs. Max Minimum Rev and EBIT in yrs 5 10 Coverage Ratio Terminal Value EBITA, EBITDA, EBITAR Investment & Discount Rate Liquidation Value Depreciation Corrected Operating Assets and Operating Liabilities Amortization Working Capital Tangible Assets Intangible Assets Year 0 Year 1 Year 0 Year 1 Year 0 Year 1 Steady-State Steady-State Steady-State EBIT Cash PP&E net AR Land Taxes (on Op income) Inventory Other AP EBIT(1-tax) AE Other NIBCL NOPLAT Capex for Maintenance Capex for Growth M&A ROIC without Goodwill Invested Capital by Operations ROIC with Goodwill Invested Capital by Financing www.jeffreytowson.com

For Each Case, Tell Me Your valuation range or ranges (with 95% confidence) What is the bird in the hand? What are the birds in the bush? And when they will arrive? Theme for Today is “increasing global transactions” and the “business strategies that drive them”. If you have a good grasp of the business strategies, then easy to understand. That’s the foundation. 1) Quickly go through some strategy. 2) Then break into teams and each team is going to have to come up with a Yes / No decision on doing a deal. www.jeffreytowson.com