Blue Cells = Inputs

Black Cells = Outputs

ONCE MODEL IS BUILT ONLY NEED TO CHANGE BLUE CELLS

For Steps, Yellow = cells that change, Blue = my notes

Select a cell and press F2 to see which cells a particular cell is dependent on
1. BUILD INCOME STATEMENT / CAPITAL EXPENDITURE / NET WORKING CAPITAL DRIVERS
This is very abbreviated, but has everything you need to determine cash flow available for debt paydown (other than taxes and interest, which will be modeled in later)
Since one of the primary drivers of LBO value is debt paydown, you need cash flow in order to calculate how much debt you can pay down at end of each year
EBITDA = Earnings Before Interest Taxes Depreciation & Amortization
EBIT = Earnings Before Interest & Taxes
D&A = Depreciation & Amortization
CapEx = Capital Expenditures (money you use to buy / build buildings / plants / warehouses / factories)
Net Working Capital = (Accounts Receivable + Inventory + Other Current Assets - Accounts Payable - Other Current Liabilities). These are assets / liabilities necessary to run a business that can be quickly turned into cash.

Operating Assumptions
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693

% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831

% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

D&A $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

CapEx $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
Assumptions 2. BUILD BASIC ASSUMPTIONS
Base Year 2005 Revolver - 5.0% Base Year = Most Recent Historical Year (Base Year + 1) = First Year the LBO firm will own the Company
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Sponsor Target IRR = The LBO firms expected annual return on the investment. Typically LBO firms wont invest unless they can earn an IRR of at least 20%
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Exit Multiple. In LBOs, businesses are valued and bought and sold as multiples of trailing EBITDA. This is the multiple of EBITDA that you think you will be able to sell the
Tax Rate 38.0% Mezzanine 0.00x 12.0% business at at the end of 2010. In this example, you are assuming you sell the business for $16,159 (6 x 2693) at the end of 2010.
Circular On? Yes Tax Rate = tax rate, im not explaning this
Will explain circular later. For now, just type in 1 in cell D7 and format the cell to show Yes if the cell is greater than 0 and No otherwise.
Type in 1 to the cell, go to Format --> Cells --> Number --> Custom then type in "Yes";"No";"No" under type
The right side of the assumption table pertains to the debt you are planning to raise in order to finance your buyout of the target
Since the goal is to pay down debt with cash flow in an LBO and since EBITDA is the largest determinant of cash flow, people think of debt amounts and how much debt a
company can support in terms of "Turns of EBITDA". If a company has $100 million of EBITDA and you are putting 5 turns of debt on, you are raising $500 million of debt.
Typically, an LBO is financed using several different types of debt.
The revolver is not used initially but is there as a credit line in case you need to borrow to meet your initial interest payments in the earlier years
Senior Debt is next in line, these are the first people to get paid back
Subordinated date is called so bc they get paid after the senior debt holders get paid (they are subordinated to senior debt)
Operating Assumptions 2005 2006 2007 2008 2009 2010 Mezzanine is the same but subordinated to both Senor and Sub Debt. Mezz is usually only used if you cant raise all the debt you need from Senior and Sub Debt
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 The %s on the right are interest rates on each level of debt. Note that as a piece of debt becomes more subordinated, it becomes riskier (since you always get paid last)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Since the sub debt is riskier, it will require a higher interest rate

EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693

% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831

% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

D&A $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

CapEx $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

3. BUILD PURCHASE PRICE CALCULATION

Basic Shares = how many shares the target currently has outstanding, get from most recent 10-Q, first page at bottom
Current Price Per Share = what the target's stock price is in the market place
Offer Premium = what premium to the current market price you think is necessary to get the shareholders to sell to you so you can take over the Company
Offer price Per Share = Current Price x Offer Premium = the price you are actually paying per share to buy the target
Now skip over to the options table on the right…The requisite inputs for this table can be found in any public company's 10-K
Operating Assumptions 2005 2006 2007 2008 2009 2010 In addition to having shares outstanding, a company's employees typically have options that give them the right to receive a share (newly issued) for a certain discounted
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 price (the strike price). You can interpret the first row as saying there are 5 million options outstanding with the right to buy shares of the target for $15 per share
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Note that options will only be exercised (and new shares will only be issued) if the offer price per share is greater than the strike price (the employees are paying less for
the stock than it is worth)
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 "Include" column says "if strike < offer price, the option holders will exercise and new shares will be created)
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% "Proceeds" column = how much cash will come into the Company as a result of the option exercise (employees paying the strike price in order to receive a new share)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Options typically cant be excerised for 5-10 years after their grant BUT IF THERE IS A CHANGE OF CONTROL (the company is bought) they can be exercised
immediately. So when you buy the Company, you need to take into account these new shares that you will have to pay the purchase price for
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 The total amount of shares (basic + new shares from option exercise) is referred to as "fully diluted shares"
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% In the above example, the company has 370 million basic shares and 12 million new shares from option exercise. So initially you might think the Company should have
% Growth - 382 million FD shares. What you also need to make into account though, is that the company also has $200 million in additional cash sitting on its books.
Under an assumption called "the treasury method", you assume that you use the cash proceeds from option exercise to repurchase shares.
D&A $800 $812 $824 $837 $849 $862 So while initially you have 382 million FD shares, you take the $200 million in proceeds from the option exercise, and repurchase shares at the offer price ($23 per share).
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% This results in a repurchase of $200 / 23 = 8.7 million shares. 382 - 8.7 gets us to the 373.3 fully diluted shares amount above
Equity Offer Price is the amount you are paying for the equity / stock of the company. It is calculated as Offer price per share x FD shares
CapEx $800 $812 $824 $837 $849 $862
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses 4. Build Sources and Uses Table

Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 Souces and Uses = What sources are you using to raise the money to buy the company, how are you "distributing" the money you raise in order to buy the company
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Build the Uses Side first
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Purchase Equity = linked to equity offer price in purchase price calculation
Sponsor Equity 3,486 1.4x 23.7% Refinance Net Debt. The target will also usually have debt that you will either have to assume or refinance. Think of this number as the amount it takes to buy out the
Total $14,736 5.9x 100.0% Total $14,736 target's bondholders. Net debt = total debt - cash. People use net debt rather than total under the assumption that you can always use your cash to pay down debt, so if
a Company has $700 million of debt and $50 million of cash, they only effectively have $650 million of "debt" / net debt
Operating Assumptions 2005 2006 2007 2008 2009 2010 Net Debt Number will come from targets most recent 10-Q
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Transaction Fees are typically 1-2% of Equity + Net Debt
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% The Total on the Uses side is just the sum of the 3 items above it
Now Build the Sources Side… We do this "backwards". We just calculated on the uses side that you need to raise $14,376 to pay for the transaction
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Therefore, total sources should be set equal to $14,736. Link D15 directly to J15
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Next, when we built our assumptions, we said that we could only raise a certain number of turns of debt for each type, so we can fill in how much senior, sub, and mezz
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% we will be able to raise to finance the transaction
Sponsor Equity is the plug
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Note that turns are calculated off of trailing EBITDA
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% The Mult and % total colums are pretty self explanatory, but let me know if you have questions
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Note that we are buying the Company for 5.9x trailing EBITDA. This is how I approximateed in the assumptions that we could sell it for about 6.0x in 5 years.
Typically you want to assume that you will be selling the Company for about the same multiple as you are buying it for. This is conservative. Idealyl after owning the
D&A $800 $812 $824 $837 $849 $862 company for years and improving it, you will be able to sell it at a higher multiple (which is called multiple expansion), but typically you assume no multiple expansion
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% for modelling purposes
As for interpretation, think of sources and uses as follows: you are paying $14.7 billion for a company. Of this amount, you are investing $3.5 billion of your own
CapEx $800 $812 $824 $837 $849 $862 money and borrowing the rest.
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes
FCF for Debt Repayment 1,718 1,744 1,770 1,796 1,823
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 5. Build Free Cash Flow Table
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% EBITDA, CapEx, Increase in NWC should all be linked to operating Assumptions
We will fill in cash interest and cash taxes later
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Free Cash Flow for Debt Repayment is just the sum of these 5 items
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831

% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

D&A $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

CapEx $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes
FCF for Debt Repayment 1,718 1,744 1,770 1,796 1,823
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693

% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831

% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

D&A $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

CapEx $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%

Debt Schedule Rate 2005 2006 2007 2008 2009 2010 6. BEGIN TO BUILD DEBT SCHEDULE
Revolver 5.0% For each level of debt, you need 4 rows: Beginning of Year balance, Paydown, End of Year Balance, and Interest Expense
BB $0 $0 $0 $0 $0 Link the interest rate on each level fo debt to the assumptions table above
Paydown Yes This is not always necessary, but also build a cell that will either contain 1 or 0 that states whether or not this debt is able to be paid down prior to maturity. This will
EB $0 $0 $0 $0 $0 $0 almost always be yes. This basically will say "do you want cells in this row to paydown / borrow additional money or do you want them always to be zero". It activates this row.
Interest Expense The ending balance in 2005 for each level of debt should be linked to the sources and uses table (or be 0 for the revolver). These are the amounts of debt that we start with.
Senior Debt 8.0% The BB in year n+1 should be set = to the EB in year n
BB $6,250 $6,250 $6,250 $6,250 $6,250 The EB in each year should be set = BB less any amount of debt paid down. Since I model debt paid down as a negative number, this is just a sum of the 2 cells above it.
Paydown Yes Total Net Debt is the sum of each piece at the end of the year. This assumes we're not keeping any cash on our balance sheet since we will be using all excess cash to pay
EB $6,250 $6,250 $6,250 $6,250 $6,250 $6,250 down debt
Interest Expense
Sub Debt 10.0%
BB $5,000 $5,000 $5,000 $5,000 $5,000
Paydown Yes
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000
Interest Expense
Mezzanine 12.0%
BB $0 $0 $0 $0 $0
Paydown Yes
EB $0 $0 $0 $0 $0 $0
Interest Expense

Total Net Debt $11,250 $11,250 $11,250 $11,250 $11,250 $11,250

Total Net Interest Expense
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes
FCF for Debt Repayment 1,718 1,744 1,770 1,796 1,823
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693

% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831

% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

D&A $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

CapEx $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%

Debt Schedule Rate 2005 2006 2007 2008 2009 2010 7. BUILD DEBT PAYDOWN MODEL
Revolver 5.0% This is the most important and most complex part of an LBO model. But it's not that hard. This is how it works.
BB $0 $0 $0 $0 $0 You start by looking at P16, cash flow available for debt repayment in the first year.
Paydown Yes 0 0 0 0 0 If this amount is negative, you will need to borrow money from your revolver. You model this in row 42
EB $0 $0 $0 $0 $0 $0 Start out by typing "-min(F41,P16)" in cell F42. This says take the minimum of my beginning balance and my cash flow available for debt paydown, then take the opposite.
Interest Expense For the revolver in the first year, this says "if my cash flow for debt repayment is negative, take this number, and borrow that much to get me back to neutral cash
Senior Debt 8.0% flow for the year". For any piece of debt with a beginning balance, it says "if my cash flow is less than my beginning balance, use all this cash to start paying down
BB $6,250 $4,532 $2,788 $1,018 $0 this debt. If my beginning balance is less than my cash flow, pay down all this type of debt.
Paydown Yes (1,718) (1,744) (1,770) (1,018) 0 The if function is only there to set the row = to zero if you don’t want a particular type of debt to be paying down.
EB $6,250 $4,532 $2,788 $1,018 $0 $0 The baseline formula says "take the opposite of the minimum of these two amounts (the BB of a particular level of debt and the cash I have available to pay down
Interest Expense this debt)
Sub Debt 10.0% One thing to make sure is that you ADJUST your cash flow for debt repayment for the lower levels of debt for cash already used to pay down higher levels of debt
BB $5,000 $5,000 $5,000 $5,000 $4,222 See cell F52, the min function says "-min(beginning balance of my sub debt, FCF for debt repayment less cash used to pay down revolver less cash used to pay down
Paydown Yes 0 0 0 (778) (1,823) senior debt)"
EB $5,000 $5,000 $5,000 $5,000 $4,222 $2,398 The same is true for F57 for mezz. Here the min function says "-min(beginning balance of mezz debt, FCF for debt repayment less cash used to pay down revolver less
Interest Expense cash used to pay down senior debt, less cash used to pay down sub debt)"
Mezzanine 12.0% This exercise makes it very clear why debt holders care if they are subordinated to others (they get paid back only AFTER the others are paid back in FULL)
BB $0 $0 $0 $0 $0
Paydown Yes 0 0 0 0 0
EB $0 $0 $0 $0 $0 $0
Interest Expense

Total Net Debt $11,250 $9,532 $7,788 $6,018 $4,222 $2,398

Total Net Interest Expense
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? No FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest 0 0 0 0 0
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes
FCF for Debt Repayment 1,718 1,744 1,770 1,796 1,823
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693

% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831

% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

D&A $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

CapEx $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%

Debt Schedule Rate 2005 2006 2007 2008 2009 2010 8. MODEL INTEREST EXPENSE INTO YOUR DEBT PAYDOWN AND FREE CASH FLOW TABLES
Revolver 5.0% Interest Expense = Interest Rate x Average Debt Balance for the year
BB $0 $0 $0 $0 $0 Ending debt balance for the year is a function of how much cash you generate and therefore how much debt you can paydown
Paydown Yes 0 0 0 0 0 How much cash you generate is a function of your interest expense
EB $0 $0 $0 $0 $0 $0 Your interest expense is a function of your average debt balance
Interest Expense 0 0 0 0 0 AHHHHHH!!! This is a circular reference. And needs to be dealt with carefully.
Senior Debt 8.0% First, go to TOOLS --> OPTIONS --> CALCULTION and make sure the "Iteration" box is checked
BB $6,250 $4,532 $2,788 $1,018 $0 Next, go to the circular on? Cell in assumptions (D5) and set it = to 0. This should change the cell to say "No" if formatted correctly.
Paydown Yes (1,718) (1,744) (1,770) (1,018) 0 In order to curb the damaging effects of a circular referemce, we will want to be able to turn it off at any time.
EB $6,250 $4,532 $2,788 $1,018 $0 $0 Therefore, in the interest expense rows of your debt schedule you will see every formula starts with "If(D7=0,0,…). This basically says, if your circular is turned off, don’t try
Interest Expense 0 0 0 0 0 to calculate interest expense, just set the cell = to 0.
Sub Debt 10.0% If the circular is turned on however (D7 does not = 0), then it calculates the interest expense appropriately (average debt balance x interest rate)
BB $5,000 $5,000 $5,000 $5,000 $4,222 Total Net Interest Expense is calculated in row 62 as the sum of the 4 different potential sources of interest expense
Paydown Yes 0 0 0 (778) (1,823) Once this is done, you can link row 14 in the free cash flow tables to these totals. Note that since interest expense is a cash outflow, row 14 in the free cash flow table is
EB $5,000 $5,000 $5,000 $5,000 $4,222 $2,398 modelled as the opposite of row 62 in the debt schedule to make the numbers negative
Interest Expense 0 0 0 0 0
Mezzanine 12.0%
BB $0 $0 $0 $0 $0
Paydown Yes 0 0 0 0 0
EB $0 $0 $0 $0 $0 $0
Interest Expense 0 0 0 0 0

Total Net Debt $11,250 $9,532 $7,788 $6,018 $4,222 $2,398

Total Net Interest Expense $0 $0 $0 $0 $0
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% 9. TURN YOUR CIRCULAR ON AND MODEL TAXES INTO YOUR FREE CASH FLOW TABLE
Change cell D7 to 1 so it reads yes. Your circular shuld now be fully functional with no errors. If there are errors, go back to step 8 and make sure everything
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 was done correctly.
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Taxes = Tax Rate x (EBIT less Interest Expense)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Since taxes are a cash outflow, I model taxes in row 15 as the opposite of the above formula
Once this is done, your free cash flow table and debt schedule should be fully linked and operational
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Also, your LBO model is now fully built. Now it is time to analyze the results.
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5%

D&A $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%

CapEx $800 $812 $824 $837 $849 $862

% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0%
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Net Working Capital $500 $508 $515 $523 $531 $539

% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%

Debt Schedule Rate 2005 2006 2007 2008 2009 2010

Revolver 5.0%
BB $0 $0 $0 $0 $0
Paydown Yes 0 0 0 0 0
EB $0 $0 $0 $0 $0 $0
Interest Expense 0 0 0 0 0
Senior Debt 8.0%
BB $6,250 $5,796 $5,303 $4,769 $4,190
Paydown Yes (454) (493) (535) (579) (625)
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565
Interest Expense 482 444 403 358 310
Sub Debt 10.0%
BB $5,000 $5,000 $5,000 $5,000 $5,000
Paydown Yes 0 0 0 0 0
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000
Interest Expense 500 500 500 500 500
Mezzanine 12.0%
BB $0 $0 $0 $0 $0
Paydown Yes 0 0 0 0 0
EB $0 $0 $0 $0 $0 $0
Interest Expense 0 0 0 0 0

Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565

Total Net Interest Expense $982 $944 $903 $858 $810
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693
Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (8,565)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $7,594
Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $7,215
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 15.7%

D&A $800 $812 $824 $837 $849 $862 10. MODEL FIRST SEGMENT OF RETURNS ANALYSIS
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Link Terminal EBITDA to EBITDA in 2010
Link Exit Multiple to Exit Multiple in Assumptons
CapEx $800 $812 $824 $837 $849 $862 As discussed earlier, the product of these two is the amount you expect to sell the company for at the end of 2010
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% So we have a company worth $16,159, but this company still has $8,565 of net debt on it, so the equity value of our company is $7,594
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% (Note that compared this represents the future value of our initial investment of $3.5 billion. In 5 years, we turned $3.5 billion into $7.6 billion, not bad)
But…. Typically in order to incentivize management to operate the business efficiently, LBO firms give them upside in the form of 5% of the equity value
Net Working Capital $500 $508 $515 $523 $531 $539 of the company
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% This means the LBO sponsors portion of the equity value is usually around 95% of the total… meaning we actually turned our $3.5 billion into $7.2 billion
of future value, again not bad
Debt Schedule Rate 2005 2006 2007 2008 2009 2010 Compare what we have now ($7.2 billion) to what we started with ($3.5 billion) in order to calculate your IRR (internal rate of return)
Revolver 5.0% your IRR represents the annualized growth of your initial investment in order for it to grow to your future value of $7.2 billion
BB $0 $0 $0 $0 $0 This is calculated as (Future Value / Present Value)^(1 / number of years you held the investment) -1
Paydown Yes 0 0 0 0 0 In this LBO model, we are assuming a 5 year holding period, so the exponent for the above equation will always be 1/5
EB $0 $0 $0 $0 $0 $0 Interpretation: We invested $3.5 billion and earned 15.7% per year on it for 5 years.
Interest Expense 0 0 0 0 0
Senior Debt 8.0%
BB $6,250 $5,796 $5,303 $4,769 $4,190
Paydown Yes (454) (493) (535) (579) (625)
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565
Interest Expense 482 444 403 358 310
Sub Debt 10.0%
BB $5,000 $5,000 $5,000 $5,000 $5,000
Paydown Yes 0 0 0 0 0
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000
Interest Expense 500 500 500 500 500
Mezzanine 12.0%
BB $0 $0 $0 $0 $0
Paydown Yes 0 0 0 0 0
EB $0 $0 $0 $0 $0 $0
Interest Expense 0 0 0 0 0

Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565

Total Net Interest Expense $982 $944 $903 $858 $810
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693 Terminal EBITDA $2,693
Exit Multiple 6.0x Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (8,565) Less: Net Debt (8,565)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $7,594 Equity Value $7,594
Sponsor Ownership at Exit 95.0% Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $7,215 Sponsor Equity Value at Exit $7,215
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486 Sponsor Required IRR 25.0%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 15.7% Sponsor Equity at Closing 2,364
Net Debt at Closing 11,250
D&A $800 $812 $824 $837 $849 $862 Implied TEV at Closing 13,614
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Less: Old Net Debt (6,000)
Less: Transaction Fees (150)
CapEx $800 $812 $824 $837 $849 $862 Equity Purchase Price 7,464
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% FD Shares 370.0
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Implied Offer PPS $20.17
Implied Offer Premium 0.9%
Net Working Capital $500 $508 $515 $523 $531 $539
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
11. BUILD SECOND SEGMENT OF RETURNS ANALYSIS IN ORDER TO RUN SENSITIVITY ANALYSES
Debt Schedule Rate 2005 2006 2007 2008 2009 2010 The ultmate question in an LBO is this… 'How much can we afford to pay per share and STILL achieve our target return"
Revolver 5.0% In the first segment of the returns analysis, the share price from the model was the input and the IRR was the output
BB $0 $0 $0 $0 $0 In the second segment, we are going to input the IRR we require in order to make the investment attractive, then determine what share price we would need
Paydown Yes 0 0 0 0 0 to pay for the business in order to achieve this IRR. If this share price is at a healthy premium to current market, then the deal might be doable. If not,
EB $0 $0 $0 $0 $0 $0 time to move on to your next investment idea
Interest Expense 0 0 0 0 0 You will note that the second segment of the returns analysis is the same as the first down to row 25, where you should recognize the $7.2 billion number
Senior Debt 8.0% Row 26, however, is different.
BB $6,250 $5,796 $5,303 $4,769 $4,190 Rather than inputting our initial equity contribution and calculating the IRR that our initial equity contribution implies, we are doing th reverse - inputting our
Paydown Yes (454) (493) (535) (579) (625) required IRR to get to the initial equity contribution that that our IRR implies
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565 We do this by discounting our sponsor equity value at exit at our IRR for 5 years (or the appropriate holding period). This results in sponsor equity value at
Interest Expense 482 444 403 358 310 closing (the end of the base year, 2005) of $2.4 billion
Sub Debt 10.0% Interpretation: If we had paid $2.4 billion at closing (end of 2005) rather than $3.5 billion, our IRR on this investment would have been 25% (compared to
BB $5,000 $5,000 $5,000 $5,000 $5,000 the 15.7% that our IRR is at $3.5 billion)
Paydown Yes 0 0 0 0 0 Since we put in $11.25 billion of new debt (as sources) at closing, if we had paid $2.4 billion of our own money at closing, we would have paid $13.614 billion
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 in total for the company
Interest Expense 500 500 500 500 500 Of this $13.614 billion, $150 million would have been from transaction fees, and $6.0 billion would have been from assuming / refinancing / buying out the
Mezzanine 12.0% target's old debt
BB $0 $0 $0 $0 $0 This implies that we would have paid $7.464 billion for the Company's equity
Paydown Yes 0 0 0 0 0 Next, we want to divide by the target company's number of fully diluted shares in order to get to the implied offer price per share we would have needed to pay
EB $0 $0 $0 $0 $0 $0 for the Company in order to achieve our target IRR
Interest Expense 0 0 0 0 0 Problem: share price is a function of fully diluted shares, but fully diluted shares is a function of share price!!! CIRCULAR!!!!
Just type in he number of basic shares in T33 for now. We will address the circular in the next step.
Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565 The final step of this step is to calculate the implied offer premium of what you could pay in order to achieve your target IRR relative to the current market
Total Net Interest Expense $982 $944 $903 $858 $810 price of the stock
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? No FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest 0 0 0 0 0
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (656) (666) (676) (686) (696)
FCF for Debt Repayment 1,062 1,078 1,094 1,111 1,127
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693 Terminal EBITDA $2,693
Exit Multiple 6.0x Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (5,777) Less: Net Debt (5,777)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $10,383 Equity Value $10,383
Sponsor Ownership at Exit 95.0% Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $9,863 Sponsor Equity Value at Exit $9,863
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486 Sponsor Required IRR 25.0%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 23.1% Sponsor Equity at Closing 3,232
Net Debt at Closing 11,250
D&A $800 $812 $824 $837 $849 $862 Implied TEV at Closing 14,482
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Less: Old Net Debt (6,000)
Less: Transaction Fees (150)
CapEx $800 $812 $824 $837 $849 $862 Equity Purchase Price 8,332
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% FD Shares 0.0
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Implied Offer PPS #DIV/0!
Implied Offer Premium #DIV/0!
Net Working Capital $500 $508 $515 $523 $531 $539
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3%
12. MODEL FD SHARES IN SECOND SEGMENT OF RETURNS ANALYSIS
Debt Schedule Rate 2005 2006 2007 2008 2009 2010 First, turn your circular off
Revolver 5.0% Then, set up cell T33 so it equals zero if you turn your circular off. (if D7=0, set the cell = to 0)
BB $0 $0 $0 $0 $0 Next, you are basically going to recreate the options table in cells P2:S8 in one cell (T33)
Paydown Yes 0 0 0 0 0 FD shares = basic shares plus IF the strike for option level one is less than T34 include those but then repurchase shares at the share value in T34 with the proceeds
EB $0 $0 $0 $0 $0 $0 and so on forth for all levels of options
Interest Expense 0 0 0 0 0
Senior Debt 8.0%
BB $6,250 $5,188 $4,109 $3,015 $1,904
Paydown Yes (1,062) (1,078) (1,094) (1,111) (1,127)
EB $6,250 $5,188 $4,109 $3,015 $1,904 $777
Interest Expense 0 0 0 0 0
Sub Debt 10.0%
BB $5,000 $5,000 $5,000 $5,000 $5,000
Paydown Yes 0 0 0 0 0
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000
Interest Expense 0 0 0 0 0
Mezzanine 12.0%
BB $0 $0 $0 $0 $0
Paydown Yes 0 0 0 0 0
EB $0 $0 $0 $0 $0 $0
Interest Expense 0 0 0 0 0

Total Net Debt $11,250 $10,188 $9,109 $8,015 $6,904 $5,777

Total Net Interest Expense $0 $0 $0 $0 $0
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693 Terminal EBITDA $2,693
Exit Multiple 6.0x Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (8,565) Less: Net Debt (8,565)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $7,594 Equity Value $7,594
Sponsor Ownership at Exit 95.0% Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $7,215 Sponsor Equity Value at Exit $7,215
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486 Sponsor Required IRR 25.0%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 15.7% Sponsor Equity at Closing 2,364
Net Debt at Closing 11,250
D&A $800 $812 $824 $837 $849 $862 Implied TEV at Closing 13,614
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Less: Old Net Debt (6,000)
Less: Transaction Fees (150)
CapEx $800 $812 $824 $837 $849 $862 Equity Purchase Price 7,464
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% FD Shares 372.0
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Implied Offer PPS $20.06
Implied Offer Premium 0.3%
Net Working Capital $500 $508 $515 $523 $531 $539
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% 13. TURN YOUR CIRCULAR BACK ON SO THAT FD SHARES CALCULATES CORRECTLY
If there is an error, turn your circular off and redo step 12
Debt Schedule Rate 2005 2006 2007 2008 2009 2010
Revolver 5.0%
BB $0 $0 $0 $0 $0
Paydown Yes 0 0 0 0 0
EB $0 $0 $0 $0 $0 $0
Interest Expense 0 0 0 0 0
Senior Debt 8.0%
BB $6,250 $5,796 $5,303 $4,769 $4,190
Paydown Yes (454) (493) (535) (579) (625)
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565
Interest Expense 482 444 403 358 310
Sub Debt 10.0%
BB $5,000 $5,000 $5,000 $5,000 $5,000
Paydown Yes 0 0 0 0 0
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000
Interest Expense 500 500 500 500 500
Mezzanine 12.0%
BB $0 $0 $0 $0 $0
Paydown Yes 0 0 0 0 0
EB $0 $0 $0 $0 $0 $0
Interest Expense 0 0 0 0 0

Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565

Total Net Interest Expense $982 $944 $903 $858 $810
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693 Terminal EBITDA $2,693
Exit Multiple 6.0x Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (8,565) Less: Net Debt (8,565)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $7,594 Equity Value $7,594
Sponsor Ownership at Exit 95.0% Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $7,215 Sponsor Equity Value at Exit $7,215
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486 Sponsor Required IRR 25.0%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 15.7% Sponsor Equity at Closing 2,364
Net Debt at Closing 11,250
D&A $800 $812 $824 $837 $849 $862 Implied TEV at Closing 13,614
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Less: Old Net Debt (6,000)
Less: Transaction Fees (150)
CapEx $800 $812 $824 $837 $849 $862 Equity Purchase Price 7,464
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% FD Shares 372.0
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Implied Offer PPS $20.06
Implied Offer Premium 0.3%
Net Working Capital $500 $508 $515 $523 $531 $539 Implied Offer Price Per Share
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% Sensitivity Analysis
EBITDA Exit Multiple 14. SET UP SENSITIVITY TABLES
Debt Schedule Rate 2005 2006 2007 2008 2009 2010 5.0x 5.5x 6.0x 6.5x 7.0x Do not link any numbers on the axes of the sensitivity tables to any
Revolver 5.0% 30.0% numbers in the model. Hard code a central number that makes sense
BB $0 $0 $0 $0 $0 Sponsor 27.5% and step up and down appropriately from there.
Paydown Yes 0 0 0 0 0 Required 25.0% These are three sensitivities, but you can sensitize the model to ANY blue
EB $0 $0 $0 $0 $0 $0 IRR% 22.5%
Interest Expense 0 0 0 0 0 20.0%
Senior Debt 8.0%
BB $6,250 $5,796 $5,303 $4,769 $4,190
Paydown Yes (454) (493) (535) (579) (625) Annual EBITDA Margin
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565 5.3% 5.8% 6.3% 6.8% 7.3%
Interest Expense 482 444 403 358 310 30.0%
Sub Debt 10.0% Sponsor 27.5%
BB $5,000 $5,000 $5,000 $5,000 $5,000 Required 25.0%
Paydown Yes 0 0 0 0 0 IRR% 22.5%
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 20.0%
Interest Expense 500 500 500 500 500
Mezzanine 12.0%
BB $0 $0 $0 $0 $0 CapEx as % of D&A
Paydown Yes 0 0 0 0 0 120.0% 110.0% 100.0% 90.0% 80.0%
EB $0 $0 $0 $0 $0 $0 30.0%
Interest Expense 0 0 0 0 0 Sponsor 27.5%
Required 25.0%
Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565 IRR% 22.5%
Total Net Interest Expense $982 $944 $903 $858 $810 20.0%
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693 Terminal EBITDA $2,693
Exit Multiple 6.0x Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (8,565) Less: Net Debt (8,565)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $7,594 Equity Value $7,594
Sponsor Ownership at Exit 95.0% Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $7,215 Sponsor Equity Value at Exit $7,215
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486 Sponsor Required IRR 25.0%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 15.7% Sponsor Equity at Closing 2,364
Net Debt at Closing 11,250
D&A $800 $812 $824 $837 $849 $862 Implied TEV at Closing 13,614
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Less: Old Net Debt (6,000)
Less: Transaction Fees (150)
CapEx $800 $812 $824 $837 $849 $862 Equity Purchase Price 7,464
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% FD Shares 372.0
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Implied Offer PPS $20.06
Implied Offer Premium 0.3%
Net Working Capital $500 $508 $515 $523 $531 $539 Implied Offer Price Per Share
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% Sensitivity Analysis
EBITDA Exit Multiple 15. LINK THE TOP LEFT CORNER OF EACH TABLE TO THE
Debt Schedule Rate 2005 2006 2007 2008 2009 2010 $20.06 5.0x 5.5x 6.0x 6.5x 7.0x OUTPUT YOU ARE SENSITIZING
Revolver 5.0% 30.0% We are sensitizing the implied offer price per share, so we link to T33
BB $0 $0 $0 $0 $0 Sponsor 27.5%
Paydown Yes 0 0 0 0 0 Required 25.0%
EB $0 $0 $0 $0 $0 $0 IRR% 22.5%
Interest Expense 0 0 0 0 0 20.0%
Senior Debt 8.0%
BB $6,250 $5,796 $5,303 $4,769 $4,190
Paydown Yes (454) (493) (535) (579) (625) Annual EBITDA Margin
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565 $20.06 5.3% 5.8% 6.3% 6.8% 7.3%
Interest Expense 482 444 403 358 310 30.0%
Sub Debt 10.0% Sponsor 27.5%
BB $5,000 $5,000 $5,000 $5,000 $5,000 Required 25.0%
Paydown Yes 0 0 0 0 0 IRR% 22.5%
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 20.0%
Interest Expense 500 500 500 500 500
Mezzanine 12.0%
BB $0 $0 $0 $0 $0 CapEx as % of D&A
Paydown Yes 0 0 0 0 0 $20.06 120.0% 110.0% 100.0% 90.0% 80.0%
EB $0 $0 $0 $0 $0 $0 30.0%
Interest Expense 0 0 0 0 0 Sponsor 27.5%
Required 25.0%
Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565 IRR% 22.5%
Total Net Interest Expense $982 $944 $903 $858 $810 20.0%
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693 Terminal EBITDA $2,693
Exit Multiple 6.0x Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (8,565) Less: Net Debt (8,565)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $7,594 Equity Value $7,594
Sponsor Ownership at Exit 95.0% Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $7,215 Sponsor Equity Value at Exit $7,215
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486 Sponsor Required IRR 25.0%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 15.7% Sponsor Equity at Closing 2,364
Net Debt at Closing 11,250
D&A $800 $812 $824 $837 $849 $862 Implied TEV at Closing 13,614
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Less: Old Net Debt (6,000)
Less: Transaction Fees (150)
CapEx $800 $812 $824 $837 $849 $862 Equity Purchase Price 7,464
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% FD Shares 372.0
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Implied Offer PPS $20.06
Implied Offer Premium 0.3%
Net Working Capital $500 $508 $515 $523 $531 $539 Implied Offer Price Per Share
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% Sensitivity Analysis
EBITDA Exit Multiple 16. HIDE THE TOP LEFT CORNER OF THE SENSITIVITY
Debt Schedule Rate 2005 2006 2007 2008 2009 2010 5.0x 5.5x 6.0x 6.5x 7.0x TABLES FOR COSMETIC PURPOSES
Revolver 5.0% 30.0% Do this by selecting the cells then --> format --> cells --> number --> custom
BB $0 $0 $0 $0 $0 Sponsor 27.5% and typing ";;;" in the box on the right under "type"
Paydown Yes 0 0 0 0 0 Required 25.0%
EB $0 $0 $0 $0 $0 $0 IRR% 22.5%
Interest Expense 0 0 0 0 0 20.0%
Senior Debt 8.0%
BB $6,250 $5,796 $5,303 $4,769 $4,190
Paydown Yes (454) (493) (535) (579) (625) Annual EBITDA Margin
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565 5.3% 5.8% 6.3% 6.8% 7.3%
Interest Expense 482 444 403 358 310 30.0%
Sub Debt 10.0% Sponsor 27.5%
BB $5,000 $5,000 $5,000 $5,000 $5,000 Required 25.0%
Paydown Yes 0 0 0 0 0 IRR% 22.5%
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 20.0%
Interest Expense 500 500 500 500 500
Mezzanine 12.0%
BB $0 $0 $0 $0 $0 CapEx as % of D&A
Paydown Yes 0 0 0 0 0 120.0% 110.0% 100.0% 90.0% 80.0%
EB $0 $0 $0 $0 $0 $0 30.0%
Interest Expense 0 0 0 0 0 Sponsor 27.5%
Required 25.0%
Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565 IRR% 22.5%
Total Net Interest Expense $982 $944 $903 $858 $810 20.0%
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693 Terminal EBITDA $2,693
Exit Multiple 6.0x Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (8,565) Less: Net Debt (8,565)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $7,594 Equity Value $7,594
Sponsor Ownership at Exit 95.0% Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $7,215 Sponsor Equity Value at Exit $7,215
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486 Sponsor Required IRR 25.0%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 15.7% Sponsor Equity at Closing 2,364
Net Debt at Closing 11,250
D&A $800 $812 $824 $837 $849 $862 Implied TEV at Closing 13,614
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Less: Old Net Debt (6,000)
Less: Transaction Fees (150)
CapEx $800 $812 $824 $837 $849 $862 Equity Purchase Price 7,464
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% FD Shares 372.0
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Implied Offer PPS $20.06
Implied Offer Premium 0.3%
Net Working Capital $500 $508 $515 $523 $531 $539 Implied Offer Price Per Share
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% Sensitivity Analysis
EBITDA Exit Multiple 17. POPULATE SENSITIVITY TABLES
Debt Schedule Rate 2005 2006 2007 2008 2009 2010 5.0x 5.5x 6.0x 6.5x 7.0x Highlight the entire table, including the axes and the top left corner
Revolver 5.0% 30.0% $20.06 $20.06 $20.06 $20.06 $20.06 For example, in the first table, highlight M39:R44
BB $0 $0 $0 $0 $0 Sponsor 27.5% 20.06 20.06 20.06 20.06 20.06 Then, Data --> Table
Paydown Yes 0 0 0 0 0 Required 25.0% 20.06 20.06 20.06 20.06 20.06 In "Row Input Cell", select the blue input in the MODEL that corresponds
EB $0 $0 $0 $0 $0 $0 IRR% 22.5% 20.06 20.06 20.06 20.06 20.06 to the items on the X-axis of your sensitivity table
Interest Expense 0 0 0 0 0 20.0% 20.06 20.06 20.06 20.06 20.06 In "Column Input Cell", select the blue input in the MODEL that corresponds
Senior Debt 8.0% to the items on the Y-axis of your sensitivity table
BB $6,250 $5,796 $5,303 $4,769 $4,190 For example, in the first sensitivity table "Row Input Cell" would be D5 (Exit
Paydown Yes (454) (493) (535) (579) (625) Annual EBITDA Margin Multiple) and "Column Input Cell" would be D4 (Sponsor Target IRR)
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565 5.3% 5.8% 6.3% 6.8% 7.3%
Interest Expense 482 444 403 358 310 30.0% $20.06 $20.06 $20.06 $20.06 $20.06
Sub Debt 10.0% Sponsor 27.5% 20.06 20.06 20.06 20.06 20.06
BB $5,000 $5,000 $5,000 $5,000 $5,000 Required 25.0% 20.06 20.06 20.06 20.06 20.06
Paydown Yes 0 0 0 0 0 IRR% 22.5% 20.06 20.06 20.06 20.06 20.06
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 20.0% 20.06 20.06 20.06 20.06 20.06
Interest Expense 500 500 500 500 500
Mezzanine 12.0%
BB $0 $0 $0 $0 $0 CapEx as % of D&A
Paydown Yes 0 0 0 0 0 120.0% 110.0% 100.0% 90.0% 80.0%
EB $0 $0 $0 $0 $0 $0 30.0% $20.06 $20.06 $20.06 $20.06 $20.06
Interest Expense 0 0 0 0 0 Sponsor 27.5% 20.06 20.06 20.06 20.06 20.06
Required 25.0% 20.06 20.06 20.06 20.06 20.06
Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565 IRR% 22.5% 20.06 20.06 20.06 20.06 20.06
Total Net Interest Expense $982 $944 $903 $858 $810 20.0% 20.06 20.06 20.06 20.06 20.06
Assumptions Purchase Price Calculation Options Table
Base Year 2005 Revolver - 5.0% Basic Shares 370.0 Potentials Strike Include Proceeds
Sponsor Target IRR 25.0% Senior Debt 2.50x 8.0% Current PPS $20.00 5.0 $15.00 5.0 $75.0
Exit Mulitple 6.0x Sub Debt 2.00x 10.0% Offer Premium 15.0% 4.0 17.00 4.0 68.0
Tax Rate 38.0% Mezzanine 0.00x 12.0% Offer PPS $23.00 3.0 19.00 3.0 57.0
Circular On? Yes FD Shares 373.3 2.0 25.00 0.0 0.0
Equity Offer Price $8,586 14.0 12.0 $200.0

Sources Mult % Total Uses Free Cash Flow 2006 2007 2008 2009 2010
Senior Debt 6,250 2.5x 42.4% Purchase Equity $8,586 EBITDA $2,538 $2,576 $2,614 $2,653 $2,693
Sub Debt 5,000 2.0x 33.9% Refinance Net Debt 6,000 Less: CapEx (812) (824) (837) (849) (862)
Mezzanine 0 0.0x 0.0% Transaction Fees 150 Less: Increase in NWC (7) (8) (8) (8) (8)
Sponsor Equity 3,486 1.4x 23.7% Less: Cash Interest (982) (944) (903) (858) (810)
Total $14,736 5.9x 100.0% Total $14,736 Less: Cash Taxes (283) (307) (332) (359) (388)
FCF for Debt Repayment 454 493 535 579 625
Operating Assumptions 2005 2006 2007 2008 2009 2010
Sales $40,000 $40,600 $41,209 $41,827 $42,455 $43,091 Returns Analysis
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Terminal EBITDA $2,693 Terminal EBITDA $2,693
Exit Multiple 6.0x Exit Multiple 6.0x
EBITDA $2,500 $2,538 $2,576 $2,614 $2,653 $2,693 Enterprise Value $16,159 Enterprise Value $16,159
% Margin 6.3% 6.3% 6.3% 6.3% 6.3% 6.3% Less: Net Debt (8,565) Less: Net Debt (8,565)
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% Equity Value at Exit $7,594 Equity Value $7,594
Sponsor Ownership at Exit 95.0% Sponsor Ownership at Exit 95.0%
EBIT $1,700 $1,726 $1,751 $1,778 $1,804 $1,831 Sponsor Equity Value at Exit $7,215 Sponsor Equity Value at Exit $7,215
% Margin 4.3% 4.3% 4.3% 4.3% 4.3% 4.3% Sponsor Equity Value at Closing 3,486 Sponsor Required IRR 25.0%
% Growth - 1.5% 1.5% 1.5% 1.5% 1.5% IRR % 15.7% Sponsor Equity at Closing 2,364
Net Debt at Closing 11,250
D&A $800 $812 $824 $837 $849 $862 Implied TEV at Closing 13,614
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% Less: Old Net Debt (6,000)
Less: Transaction Fees (150)
CapEx $800 $812 $824 $837 $849 $862 Equity Purchase Price 7,464
% Sales 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% FD Shares 372.0
% D&A 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Implied Offer PPS $20.06
Implied Offer Premium 0.3%
Net Working Capital $500 $508 $515 $523 $531 $539 Implied Offer Price Per Share
% Sales 1.3% 1.3% 1.3% 1.3% 1.3% 1.3% Sensitivity Analysis
EBITDA Exit Multiple
Debt Schedule Rate 2005 2006 2007 2008 2009 2010 5.0x 5.5x 6.0x 6.5x 7.0x
Revolver 5.0% 30.0% $20.06 $20.06 $20.06 $20.06 $20.06
BB $0 $0 $0 $0 $0 Sponsor 27.5% 20.06 20.06 20.06 20.06 20.06
Paydown Yes 0 0 0 0 0 Required 25.0% 20.06 20.06 20.06 20.06 20.06
EB $0 $0 $0 $0 $0 $0 IRR% 22.5% 20.06 20.06 20.06 20.06 20.06
Interest Expense 0 0 0 0 0 20.0% 20.06 20.06 20.06 20.06 20.06
Senior Debt 8.0%
BB $6,250 $5,796 $5,303 $4,769 $4,190
Paydown Yes (454) (493) (535) (579) (625) Annual EBITDA Margin
EB $6,250 $5,796 $5,303 $4,769 $4,190 $3,565 5.3% 5.8% 6.3% 6.8% 7.3%
Interest Expense 482 444 403 358 310 30.0% $20.06 $20.06 $20.06 $20.06 $20.06
Sub Debt 10.0% Sponsor 27.5% 20.06 20.06 20.06 20.06 20.06
BB $5,000 $5,000 $5,000 $5,000 $5,000 Required 25.0% 20.06 20.06 20.06 20.06 20.06
Paydown Yes 0 0 0 0 0 IRR% 22.5% 20.06 20.06 20.06 20.06 20.06
EB $5,000 $5,000 $5,000 $5,000 $5,000 $5,000 20.0% 20.06 20.06 20.06 20.06 20.06
Interest Expense 500 500 500 500 500
Mezzanine 12.0%
BB $0 $0 $0 $0 $0 CapEx as % of D&A
Paydown Yes 0 0 0 0 0 120.0% 110.0% 100.0% 90.0% 80.0%
EB $0 $0 $0 $0 $0 $0 30.0% $20.06 $20.06 $20.06 $20.06 $20.06
Interest Expense 0 0 0 0 0 Sponsor 27.5% 20.06 20.06 20.06 20.06 20.06
Required 25.0% 20.06 20.06 20.06 20.06 20.06
Total Net Debt $11,250 $10,796 $10,303 $9,769 $9,190 $8,565 IRR% 22.5% 20.06 20.06 20.06 20.06 20.06
Total Net Interest Expense $982 $944 $903 $858 $810 20.0% 20.06 20.06 20.06 20.06 20.06