THEORETICAL RELATIONSHIP BETWEEN MARKET VALUE, ROIC, AND GROWTH WACC = 8% *Assumes a competitive advantage period of 10 years, after which ROIC = WACC is assumed Market value/capital ratio* Revenue growth Percent ROIC Percent

EMPIRICAL RELATIONSHIP BETWEEN MARKET VALUE, ROIC, AND GROWTH Sample of 563 North American companies *Defined as market value of operations divided by invested capital including goodwill **ROIC based on invested capital including goodwill Revenue growth CAGR Percent < Market value/capital ratio, 2003* ROIC Percent

P-value 2 Percent REGRESSIONS OF MARKET-VALUE-TO-CAPITAL WITH ROIC AND GROWTH *Defined as market value of operations divided by invested capital including goodwill **P-value represents the probability that the tested relationship does not hold, with a P-value of 5% used as the threshold of statistical significance >15 MV/IC* Growth ROIC cohort Percent Dependent variable Number of observations R 2 Percent Number of observations Dependent variable MVI/C*Full sample Variable 1 Slope 1 t-Stat 1 P-value 1 ** Percent ROIC Variable 2 Slope 2 t-Stat 2 Growth P-value 1 ** Percent Variable 1 Slope 1 t-Stat 1

VALUE OF COMMODITY CHEMICAL COMPANIES DRIVEN BY ROIC AND GROWTH *June 2002 (based on Invested Capital 2001) Source: T. Augat, E. Bartels, and F. Budde, “Multiple Choice for the Chemicals Industry,” McKinsey on Finance, Number 8 (Summer 2003), pp. 1-7 Market value/Capital ratio, 2002* Below averageAbove average ROIC Sales growth Below average Above average

DCF VALUATION CLOSE TO ACTUAL MARKET VALUE Source: Annual reports; IBES; Bloomberg; McKinsey analysis DCF results relative to market value of equity Index Electric utilities Pharmaceuticals Consumer goods Oil majors ELEENRWEASSEZYUNNSRGYPGKFTLORLY PFEGSKJNJNVSMRKXOMBPRD/SCCVXTOT EON

CHANGE IN EXPECTATIONS IS KEY DRIVER OF TOTAL RETURN TO SHAREHOLDERS *Expectations measure is based on change in analyst consensus EPS forecast for running fiscal year (FY 0), the following fiscal year (FY 1) and change in analyst consensus 5-year growth expectation (LTG) **Scaled based on actual revenues ***P-value represents the probability that the tested relationship does not hold, with p-value of 5% used as the threshold of statistical significance Source:Datastream; Compustat; IBES; Bloomberg; McKinsey analysis S&P 500 companies, Coefficient Expectations measure* Change in cash flow Actual cash flow** Change in economic profit Actual economic profit** Adjusted R 2 Percent P-value*** Percent t-Statistic LTG FY FY 0

LONG-TERM PERFORMANCE EXPECTATIONS DRIVE SHARE PRICE Source:Datastream; IBES; McKinsey analysis Abnormal return on 137 announcements of fiscal year earnings for 2002 by U.S. companies percent Lower Higher Change in expected EPS for 2004 – “change in long term expectations” Actual EPS 2002 relative to expected EPS for 2002 –“short-term surprise” (4.1)1.0 Negative Positive

MARKET REACTION TO PHARMACEUTICAL PRODUCT ANNOUNCEMENTS Source:Datastream; Factiva; McKinsey analysis Abnormal returns percent, Lilly-Zovant AstraZeneca-Nexium Lilly-Evista Wyeth-Enbrel Wyeth-Protonix Abbott-Humira Pfizer-Zeldox NovoNordisk- Ragaglitazar Schering-Angeliq NovoNordisk- Levormeloxifene BMS-Vanlev 2 AstraZeneca-Iressa BMS-Vanlev 1 Development successes (e.g., approvals) Development setbacks (e.g., withdrawals) Announcement return -1/+1 day Announcement return -3/+3 days

NO CLEAR IMPACT OF U.S. GAAP RECONCILIATIONS Source: SEC filings; Datastream; Bloomberg; McKinsey analysis Average cumulative abnormal return (CAR) index Positive earnings impact (n = 16) Negative earnings impact (n = 34) CAR t-Stat (0.5%) (1.54) 1.7% CAR t-Stat -1/+1 Day relative to announcement

NO CONSISTENT MARKET REACTION TO SFAS-142 GOODWILL ANNOUNCEMENT Source: Datastream; McKinsey analysis Abnormal return on announcement date Percent Summary statistics n = 54 R 2 = 0.0% Slope = (0.01) t-Stat = (0.15) P-value = 88.5% Goodwill amortization as percent of year end equity market value,

Average Time Warner CAR t-Stat 0.1% /+1 Day relative to announcement MARKET REACTION AT ANNOUNCEMENT OF GOODWILL IMPAIRMENT Source: SEC filings; Datastream; Bloomberg; McKinsey analysis Cumulative abnormal return (CAR) index, n =

Impact of option expense on pre-tax income Percent* VOLUNTARY OPTION EXPENSING HAS NO IMPACT ON SHARE PRICE *Defined as the absolute value of option expense divided by the pre-tax earnings before option expense Source:SEC Filings; Datastream; Bloomberg; McKinsey analysis Abnormal return on announcement date Percent Abnormal return Summary statistics n = 120 R 2 = 0.4% Slope = 0.01 t-Stat = 0.7 P-value = 47.1%

EFFECT OF INVENTORY ACCOUNTING CHANGE ON SHARE VALUE Source: S. Sunder, “Relationship Between Accounting Changes and Stock Prices: Problems of Measurement and Some Empirical Evidence,” Empirical Research in Accounting: Selected Studies, 1973 Cumulative abnormal return Percent 110 firms switching to LIFO 22 firms switching from LIFO

ESTIMATING FUNDAMENTAL MARKET VALUATION LEVELS *12-month forward-looking price-to-earnings ratio Source:IBES; McKinsey Actual P/E* Predicted P/E*