LAN-ZWB ZWB VALUATION Chapter 5 Exhibits TIM KOLLER  MARC GOEDHART  DAVID WESSELS McKINSEY & COMPANY MEASURING and MANAGING the VALUE of COMPANIES

LAN-ZWB ZWB EXHIBIT 5.1 FRAMEWORKS FOR DCF-BASED VALUATION ModelMeasureDiscount factorAssessment Enterprise discounted cash flow Free cash flow Weighted average cost of capital Works best for projects, business units, and companies that manage their capital structure to a target level Economic profit Weighted average cost of capital Explicitly highlights when a company creates value Adjusted present value Free cash flow Unlevered cost of equity Highlights changing capital structure more easily than WACC-based models. Capital cash flow Unlevered cost of equity Compresses free cash flow and the interest tax shield in one number, making it difficult to compare performance among companies and over time Equity cash flow Cash flow to equity Levered cost of equity Difficult to implement correctly because capital structure is embedded within cash flow. Best used when valuing financial institutions

LAN-ZWB ZWB EXHIBIT 5.2 ENTERPRISE VALUATION OF A SINGLE-BUSINESS COMPANY *Debt value equals discounted after-tax cash flow to debt holders plus present value of interest tax shield $ Million Discount free cash flow by the weighted average cost of capital Economic assets generate operating cash flow Financial claims on the company’s operating cash flow Year Enter- prise value Debt value Equity value Free cash flow from operations After-tax cash flow to debt holders Cash flow equity holders + =

LAN-ZWB ZWB EXHIBIT 5.3 ENTERPRISE VALUATION OF A MULTIBUSINESS COMPANY Value of operating units Corporate center Excess cash Enterprise cash Equity value Value of debt $ Million Unit AUnit BUnit C

LAN-ZWB ZWB EXHIBIT 5.4 HOME DEPOT: ENTERPRISE DCF VALUATION Year Free cash flow (FCF) $ Million Discount 9.3% Present value of FCF $ Million Continuing value 1,930 2,219 2,539 2,893 3,283 3,711 4,180 4,691 5,246 5, , Present value of cash flow Mid-year adjustment factor Value of operations Value of excess cash Value of other nonoperating assets Enterprise value Number of shares (at fiscal year-end 2003, million) Estimated share value (Dollars) 1,766 1,857 1,944 2,026 2,104 2,175 2,241 2,301 2,355 2,402 54,757 75,928 1,046 79,384 1, ,077 2, Value of debt Value of capitalized operating leases (1,365) (6,554) 73,158Equity value

LAN-ZWB ZWB EXHIBIT 5.5 HOME DEPOT AND LOWE’S: HISTORICAL ROIC ANALYSIS $ Million Home DepotLowe’s Net sales Cost of merchandise sold Selling, general and administrative Depreciation Operating lease interest Adjusted EBITA Adjusted taxes NOPLAT Invested capital Operating working capital Net property and equipment Capitalized operating leases Net other assets Acquired intangibles and goodwill Cumulative amortization and unreported goodwill Invested capital (excluding goodwill) Invested capital (including goodwill) ROIC excluding goodwill (average) ROIC including goodwill (average) 53,553 (37,406) (10,451) (756) 288 5,228 (2,020) 3,208 2,552 15,375 5,459 (216) 23, , % 14.3% 58,247 (40,139) (11,375) (895) 260 6,098 (2,117) 3,981 2,746 17,168 5,890 (247) 25, , % 16.0% 64,816 (44,236) (12,658) (1,075) 276 7,123 (2,040) 5,083 2,674 20,063 6,554 (524) 28, , % 18.2% 22,111 (15,743) (4,053) (517) 106 1,904 (654) 1,250 1,634 8,653 2, , , % 10.3% 26,491 (18,465) (4,859) (626) 106 2,647 (825) 1,822 1,451 10,352 2, , , % 12.8% 30,838 (21,231) (5,671) (758) 114 3,292 (1,069) 2,223 1,363 11,945 2, , , % 13.9%

LAN-ZWB ZWB EXHIBIT 5.6 HOME DEPOT AND LOWE’S: HISTORICAL FREE CASH FLOW $ Million Home DepotLowe’s NOPLAT Depreciation Gross cash flow Investment in operating working capital Net capital expenditures Investment in capitalized operating leases Investments in intangibles and goodwill Decrease (increase) in other operating assets Increase (decrease) in accumulated other comprehensive income Gross investment Free cash flow After-tax interest income Decrease (increase) in excess cash Decrease (increase) in non-operating assets Discontinued operations Cash flow available to investors 3, , (3,063) (775) (113) 105 (153) (3,165) (1,509) 9 0 (668) 3, ,876 (194) (2,688) (430) (164) (3,307) 1, (24) 0 1,977 5,083 1,075 6, (3,970) (664) (259) (4,372) 1, (473) ,371 1, ,767 (203) (2,135) (547) 0 (7) 3 (2,889) 1, (321) 13 0 (1,415) 1, , (2,325) (184) 0 (11) 0 (2,336) (189) (7) 0 (71) 2, , (2,351) (389) (2,719) (415) (140) 15 (268)

LAN-ZWB ZWB EXHIBIT 5.6 HOME DEPOT AND LOWE’S: HISTORICAL FREE CASH FLOW (CONTINUED) $ Million Home depotLowe’s After-tax interest expense After-tax lease interest expense Decrease (increase) in debt Decrease (increase) in capitalized operating leases Flows to debt holders Dividends Net shares repurchased (issued) Flows to equity holders Cash flow available to investors (775) (492) 396 (572) (176) (668) (430) (105) 492 1,590 2,082 1, (44) (664) (500) 595 1,276 1,871 1, (903) (547) (1,261) 60 (213) (154) (1,415) (184) (222) (156) (71) (389) (138) 87 (217) (130) (268)

LAN-ZWB ZWB EXHIBIT 5.7 ROIC AND REVENUE GROWTH PROJECTIONS Percent ForecastHistorical

LAN-ZWB ZWB EXHIBIT 5.8 HOME DEPOT: FREE CASH FLOW SUMMARY Home depotLowe’s NOPLAT Depreciation Gross cash flow Investment in operating working capital Net capital expenditures Investment in capitalized operating leases Investments in intangibles and goodwill Decrease (increase) in other operating assets Increase (decrease) in accumulated other comprehensive income Gross investment Free cash flow , , (3,063) (775) (113) 105 (153) (3,165) 799 3, ,876 (194) (2,688) (430) (164) (3,307) 1,569 5,083 1,075 6, (3,970) (664) (259) (4,372) 1,785 5,185 1,193 6,378 (294) (3,399) (721) (92) 58 0 (4,448) 1,930 5,741 1,321 7,062 (318) (3,708) (780) (99) 62 0 (4,843) 2,219 6,342 1,459 7,801 (344) (4,036) (842) (107) 67 0 (5,261) 2,539 $ Million

LAN-ZWB ZWB EXHIBIT 5.9 HOME DEPOT: CONTINUING VALUE $ Million NOPLAT 2014 Return on incremental invested capital (RONIC) NOPLAT growth rate in perpetuity (g) Weighted average cost of capital (WACC) 12, % 4.0% 9.3% Continuing value t = NOPLAT t g RONIC WACC - g =133,360

LAN-ZWB ZWB EXHIBIT 5.10 HOME DEPOT: WEIGHTED AVERAGE COST OF CAPITAL Percent Source of capital Proportion of total capital Cost of capital Marginal tax rate After-tax opportunity cost Contribution to weighted average Debt Equity WACC

LAN-ZWB ZWB EXHIBIT 5.11 HOME DEPOT: ECONOMIC PROFIT SUMMARY $ Million, percent Method 1 HistoricalForecast Return on invested capital Weighted average cost of capital 15.0% 10.1% 16.8% 9.0% 19.4% 9.3% 17.5% 9.3% 17.4% 9.3% 17.4% 9.3% Method 2 Invested capital Weighted average cost of capital Capital charge 21, % 2,159 23, % 2,124 26, % 2,438 29, % 2,761 32, % 3,064 36, % 3,392 Economic spread Invested capital Economic profit 4.9% 21,37 9 1, % 23,635 1, % 26,185 2, % 29,655 2, % 32,910 2, % 36,432 2,950 NOPLAT Capital charge Economic profit 3,208 2,159 1,048 3,981 2,124 1,857 5,083 2,438 2,645 5,185 2,761 2,424 5,741 3,064 2,677 6,342 3,392 2,950

LAN-ZWB ZWB EXHIBIT 5.12 HOME DEPOT: ECONOMIC PROFIT VALUATION *Invested capital is measured at the beginning of the year Invested capital* 2004 Invested capital plus present value of economic profit 29,655 75,928 Year Economic profit $ Million Invested Capital* $ Million Continuing value Present value of economic profit 2,217 2,241 2,259 2,271 2,278 2,281 2,278 2,270 2,258 2,241 23,679 46,273 Discount 9.3% ROIC Percent WACC Percent Present value of economic profit $ Million 9.3 2,424 2,677 2,950 3,242 3,556 3,890 4,247 4,627 5,031 5,458 57, ,655 32,910 36,432 40,235 44,329 48,729 53,445 58,488 63,870 69, Mid-year adjustment factor Value of operations ,384 Value of excess cash Value of other nonoperating assets Enterprise value 1, ,077 Equity value Value of debt Value of capitalized operating leases (1,365) (6,554) 73,158

LAN-ZWB ZWB EXHIBIT 5.13 HOME DEPOT: VALUATION USING ADJUSTED PRESENT VALUE Year Continuing value Present value Present value of ITS $ Million ,469 2,372 Mid-year adjustment factor Value of operations ,384 Value of excess cash Value of other nonoperating assets Enterprise value 1, ,077 Value of debt Value of capitalized operating leases Equity value (1,365) (6,554) 73,158 Discount 9.5% Interest tax shield (ITS) ,626 Free cash flow $ Million 1,930 2,219 2,539 2,893 3,283 3,711 4,180 4,691 5,246 5, ,734 Present value of FCF $ Million 1,763 1,852 1,936 2,016 2,090 2,158 2,220 2,276 2,326 2,369 52,550 73,557 Present value of FCF using unlevered cost of equity Present value of interest tax shields (ITS) Present value of FCF and ITS 73,557 2,372 75,928

LAN-ZWB ZWB EXHIBIT 5.14 HOME DEPOT: FORECAST OF INTEREST TAX SHIELDS Year Interest tax shield $ Million Expected interest rate Percent Prior year net debt $ Million Interest payment $ Million Marginal tax rate Percent Continuing value 6,310 6,737 7,179 7,637 8,107 8,589 9,081 9,579 10,081 10,583 11,

LAN-ZWB ZWB EXHIBIT 5.15 HOME DEPOT: EQUITY CASH FLOW SUMMARY $ Million HistoricalForecast Net income Depreciation Amortization Increase (decrease) in deferred taxes Gross cash flow Dividends Share repurchases (issued) Cash flow to equity 3, (6) 3, (572) (176) 3, , ,590 2,082 4,304 1, , ,276 1,871 5,318 1, , ,731 2,466 5,882 1, , ,975 2,788 4,796 1, ,203 Investment in operating working capital Investment in net long-term assets Decrease (increase) in excess cash Investment in other nonoperating assets Increase (decrease) in short-term debt Increase (decrease) in long-term debt Cash flow to equity 834 (3,224) (1,509) (295) (176) (194) (2,683) 383 (24) (211) 71 2, (3,780) (473) (465) 1,871 (318) (3,745) (191) (10) (54) (91) 2,466 (344) (4,076) (207) (11) (66) (112) 2,788 (294) (3,433) (177) (9) (44) (73) 2, ,510 2,173

LAN-ZWB ZWB EXHIBIT 5.16 HOME DEPOT: CASH-FLOW-TO-EQUITY VALUATION Year Continuing value Present value of cash flow to equity Midyear adjustment amount Equity value 2,173 2,466 2,788 3,143 3,530 3,954 4,416 4,917 5,459 6, ,492 Discount 9.9% Cash flow to equity $ Million Present value of CFE $ Million 1,978 2,042 2,101 2,155 2,203 2,245 2,282 2,312 2,336 2,353 47,695 69,702 3,456 73,158