1. LAN-ZWB887-20050620-13749-ZWB VALUATION Chapter 5 Exhibits TIM KOLLER  MARC GOEDHART  DAVID WESSELS McKINSEY & COMPANY MEASURING and MANAGING the VALUE of COMPANIES

2. LAN-ZWB887-20050620-13749-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

3. LAN-ZWB887-20050620-13749-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 Year12345 427.5 200.0 227.5 Enter- prise value Debt value Equity value Free cash flow from operations After-tax cash flow to debt holders Cash flow equity holders + =

4. LAN-ZWB887-20050620-13749-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

5. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.4 HOME DEPOT: ENTERPRISE DCF VALUATION Year Free cash flow (FCF) $ Million Discount factor @ 9.3% Present value of FCF $ Million 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Continuing value 1,930 2,219 2,539 2,893 3,283 3,711 4,180 4,691 5,246 5,849 133,360 0.915 0.837 0.766 0.700 0.641 0.586 0.536 0.491 0.449 0.411 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 1,609 84 81,077 2,257 32.41 Value of debt Value of capitalized operating leases (1,365) (6,554) 73,158Equity value

6. LAN-ZWB887-20050620-13749-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 200120022003200120022003 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) 23,170 419 46 23,635 14.5% 14.3% 58,247 (40,139) (11,375) (895) 260 6,098 (2,117) 3,981 2,746 17,168 5,890 (247) 25,557 575 54 26,185 16.3% 16.0% 64,816 (44,236) (12,658) (1,075) 276 7,123 (2,040) 5,083 2,674 20,063 6,554 (524) 28,767 833 55 29,655 18.7% 18.2% 22,111 (15,743) (4,053) (517) 106 1,904 (654) 1,250 1,634 8,653 2,189 134 12,611 0 730 13,341 10.9% 10.3% 26,491 (18,465) (4,859) (626) 106 2,647 (825) 1,822 1,451 10,352 2,373 145 14,321 0 730 15,051 13.5% 12.8% 30,838 (21,231) (5,671) (758) 114 3,292 (1,069) 2,223 1,363 11,945 2,762 211 16,281 0 730 17,012 14.5% 13.9%

7. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.6 HOME DEPOT AND LOWE’S: HISTORICAL FREE CASH FLOW $ Million Home DepotLowe’s NOPLAT Depreciation 200120022003 2001 20022003 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 3,208 756 3,964 834 (3,063) (775) (113) 105 (153) (3,165) 799 33 (1,509) 9 0 (668) 3,981 895 4,876 (194) (2,688) (430) (164) 31 138 (3,307) 1,569 49 383 (24) 0 1,977 5,083 1,075 6,157 72 (3,970) (664) (259) 277 172 (4,372) 1,785 36 (473) 23 0 1,371 1,250 517 1,767 (203) (2,135) (547) 0 (7) 3 (2,889) 1,122 15 (321) 13 0 (1,415) 1,822 626 2,448 183 (2,325) (184) 0 (11) 0 (2,336) 112 13 (189) (7) 0 (71) 2,223 758 2,981 88 (2,351) (389) 0 66 0 (2,719) 262 9 (415) (140) 15 (268)

8. LAN-ZWB887-20050620-13749-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 200120022003200120022003 17 177 88 (775) (492) 396 (572) (176) (668) 23 162 140 (430) (105) 492 1,590 2,082 1,977 38 170 (44) (664) (500) 595 1,276 1,871 1,371 123 66 (903) (547) (1,261) 60 (213) (154) (1,415) 125 65 78 (184) 85 66 (222) (156) (71) 121 71 60 (389) (138) 87 (217) (130) (268)

9. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.7 ROIC AND REVENUE GROWTH PROJECTIONS Percent ForecastHistorical

10. LAN-ZWB887-20050620-13749-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 20012002200320012002 2003 3,208 756 3,964 834 (3,063) (775) (113) 105 (153) (3,165) 799 3,981 895 4,876 (194) (2,688) (430) (164) 31 138 (3,307) 1,569 5,083 1,075 6,157 72 (3,970) (664) (259) 277 172 (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

11. LAN-ZWB887-20050620-13749-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) 12,415 9.3% 4.0% 9.3% Continuing value t = NOPLAT t + 1 1 - g RONIC WACC - g =133,360

12. LAN-ZWB887-20050620-13749-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 4.7 9.9 38. 2 2.9 9.9 WACC 8.3 91.7 100.0 0.2 9.1 9.3

13. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.11 HOME DEPOT: ECONOMIC PROFIT SUMMARY $ Million, percent 200620022001200320042005Method 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 21,379 10.1% 2,159 23,635 9.0% 2,124 26,185 9.3% 2,438 29,655 9.3% 2,761 32,910 9.3% 3,064 36,432 9.3% 3,392 Economic spread Invested capital Economic profit 4.9% 21,37 9 1,048 7.9% 23,635 1,857 10.1% 26,185 2,645 8.2% 29,655 2,424 8.1% 32,910 2,677 8.1% 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

14. LAN-ZWB887-20050620-13749-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 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 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 factor @ 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 57,671 17.5 17.4 17.3 17.2 29,655 32,910 36,432 40,235 44,329 48,729 53,445 58,488 63,870 69,600 0.915 0.837 0.766 0.700 0.641 0.586 0.536 0.491 0.449 0.411 Mid-year adjustment factor Value of operations 1.046 79,384 Value of excess cash Value of other nonoperating assets Enterprise value 1,609 84 81,077 Equity value Value of debt Value of capitalized operating leases (1,365) (6,554) 73,158

15. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.13 HOME DEPOT: VALUATION USING ADJUSTED PRESENT VALUE Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Continuing value Present value Present value of ITS $ Million 103 100 98 95 92 89 86 83 80 77 1,469 2,372 Mid-year adjustment factor Value of operations 1.046 79,384 Value of excess cash Value of other nonoperating assets Enterprise value 1,609 84 81,077 Value of debt Value of capitalized operating leases Equity value (1,365) (6,554) 73,158 Discount factor @ 9.5% 0.914 0.835 0.763 0.697 0.636 0.581 0.531 0.485 0.443 0.405 Interest tax shield (ITS) 113 120 128 136 145 153 162 171 180 189 3,626 Free cash flow $ Million 1,930 2,219 2,539 2,893 3,283 3,711 4,180 4,691 5,246 5,849 129,734 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

16. LAN-ZWB887-20050620-13749-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 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Continuing value 6,310 6,737 7,179 7,637 8,107 8,589 9,081 9,579 10,081 10,583 11,082 4.7 295 315 336 357 379 402 425 448 472 495 518 38.2 113 120 128 136 145 153 162 171 180 189 198

17. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.15 HOME DEPOT: EQUITY CASH FLOW SUMMARY $ Million 200620022001200320042005 HistoricalForecast Net income Depreciation Amortization Increase (decrease) in deferred taxes Gross cash flow Dividends Share repurchases (issued) Cash flow to equity 3,044 756 8 (6) 3,802 396 (572) (176) 3,664 895 8 173 4,740 492 1,590 2,082 4,304 1,075 1 605 5,985 595 1,276 1,871 5,318 1,321 0 237 6,876 735 1,731 2,466 5,882 1,459 0 262 7,603 813 1,975 2,788 4,796 1,193 0 214 6,203 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) 9 207 (295) (176) (194) (2,683) 383 (24) (211) 71 2,082 72 (3,780) (473) 23 509 (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) 2,173 663 1,510 2,173

18. LAN-ZWB887-20050620-13749-ZWB EXHIBIT 5.16 HOME DEPOT: CASH-FLOW-TO-EQUITY VALUATION Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 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 6,044 122,492 Discount factor @ 9.9% 0.910 0.828 0.754 0.686 0.624 0.568 0.517 0.470 0.428 0.389 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