1. - 1 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved COMPARATIVE ACCURACY OF RESIDUAL INCOME MODEL METHODOLOGIES AND PARAMETERS By Rawley Thomas President LifeCycle Returns, Inc. March 2, 2004 Rawley@LCRT.com

2. - 2 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt KEY VALUE MANAGEMENT OBJECTIVE FUNCTION AND HOW TO MEASURE IT FOR SINGLE COMPANIES AND ACROSS LARGE UNIVERSES (“What Gets Measured Gets Done”) Corporate Managers –Explain Current Stock Price Level

3. - 3 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt AN INTRINSIC VALUE CHART ENABLES US TO VISUALIZE THE MEASUREMENT OF ROBUSTNESS AND ACCURACY OF A DCF MODEL PRICE LEVEL USING ONLY ACTUAL REPORTED FINANCIAL DATA AND THE SAME GLOBAL PARAMETERS ACROSS THE ENTIRE UNIVERSE TO DRIVE A MECHANICAL LIFE CYCLE FORECAST OF CASH FLOWS FOR EACH COMPANY Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform

4. - 4 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt LCRT’S RESEARCH METHODOLOGY CONTRASTS SHARPLY WITH THE TRADITIONAL VALUATION APPROACH Traditional Approach Forecasts 3-10 Years of Cash Flows Applies Perpetuity or Multiple for Terminal Value Discounts to Present (plan valuation) Implicitly assumes the structure and parameters of the terminal valuation are robust and accurate or “plugs” the parameters to explain current price LCRT Methodology Employs only actual data to empirically test robustness and accuracy of valuation models and parameters Extends the best models to use as terminal values in traditional plan valuations

5. - 5 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt ACROSS A UNIVERSE OF 20,000 + COMPANY- YEARS, TRACKING ERROR IMPROVEMENT CHARTS MEASURE THE COMPARATIVE ACCURACY OF: Models Methodologies Parameters Tracking error equals the % absolute difference between the Model Intrinsic Value and the actual stock price at Fiscal Year + 3 Months LOG 2 of % Absolute Model Error versus Actual Price - Fiscal Year +3 Months 1994-2002 63 79 Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002 Cumulative % of Universe

6. - 6 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt ADVANTAGES OF THE LCRT TRACKING ERROR IMPROVEMENT CHARTS Don’t depend on the distribution and don’t assume Gaussian Normality Cover the entire universe and all company years without “fudging” outliers with elimination or winsorization Summarize very large amounts of time series and cross sectional data on one simple chart

7. - 7 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt A TIME HORIZON “T” = 5-YEARS MINIMIZES THE MODEL TRACKING ERROR AT THE 50 TH PERCENTILE Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002 63 126 Cumulative % of Universe LOG 2 of % Absolute Model Error versus Actual Price - Fiscal Year +3 Months 1994-2002

8. - 8 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt LCRT BETA’S HAVE SLIGHTLY BETTER TRACKING ERRORS THAN MEDIAN INDUSTRY BETA’S, BUT LESS THAN A 1%* DIFFERENCE EXISTS BETWEEN MEDIAN INDUSTRY BETA’S AND BETA’S = 1.00 Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002 LOG 2 of % Absolute Model Error versus Actual Price - Fiscal Year +3 Months 1994-2002 59 63 Cumulative % of Universe The low sensitivity of the tracking error results to employing the median industry beta over beta = 1.00 adds additional empirical evidence against the usefulness of CAPM beta as a measure of risk. * 0.5% = 100%(63.4/63.1 -1)

9. - 9 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt A 0% EQUITY RISK PREMIUM MINIMIZES TRACKING ERRORS AT 55.6, BUT MAKES NO CONCEPTUAL SENSE Hypotheses: The residual income model fails to produce sufficient cash flows, so a indefensibly low discount rate is required to match against the stock price OR Discounting the book value as terminal value produces insufficient value, when most firms sell for several multiples of book 56 63 Cumulative % of Universe Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002 LOG 2 of % Absolute Model Error versus Actual Price - Fiscal Year +3 Months 1994-2002

10. - 10 - LIfeCycle Returns, Inc. © 2004 All Rights Reserved Comparative Accuracy of Residual Income Models 3-2-04 Rt Sources: Financial Statements and Price Data – Simplystocks Calculations - LCRT’s Platform Constant Dollar Gross Investment > $100 Million, Panel Data from 1994-2002 Median = 1.90 WITH A MEDIAN ENTERPRISE VALUE TO BOOK OF 1.90 AND AN AVERAGE OF 2.41, THE RESIDUAL INCOME TERMINAL VALUE ASSUMPTION OF 1.00 IS HIGHLY UNREALISTIC