# Rjr Nabisco Essay

1026 Words Sep 28th, 2008 5 Pages
RJR Nabisco
Case Study

1. The RJR Nabisco Company passed trough some amazing facts of its financial life in the years of operating, starting as a tobacco company in 1875. In order to analyze RJR Nabisco company as a potentially candidate for leverage buyout (LBO) it is important to understand that all firms may be the targets of a leveraged buyout, but because of the importance of debt and the ability of the acquired firm to make regular loan payments after the completion of a leveraged buyout. Some features of potential target firms make for more attractive leverage buyout candidates. For one company to be said that is good candidate for LOB needs to include the following: low existing debt loads, a multi-year history of
In theory, if all information is provided, all three methods lead to the same value. As a guide line, one should use WACC or FTE if the firm’s target debt-to-value ratio applies to the project over its life time, and one should use APV if the project’s level of debt is known over the life of the project. In Exhibits 5, 6 and 7, it is given information about the level of debt during the time of the project, and debt-to-value ratio is not constant. The optimal decision was to use APV approach.
The first step was to calculate R0. As the asset beta is not given, we used CAPM to calculate the equity cost of capital. To calculate the equity beta, we used an arithmetic average of the historical betas (from 1982 to 1987). Because beta is a very volatile quantity, the beta of 1987 may not fully represent the real equity beta of RJR Nabisco. We obtained βS=0.89. The risk-free rate and the market premium are assumed to be 9% and 8%, respectively, so we obtained an equity cost of capital of (RS) of 16.15%. To obtain R0, we solved the equation in MM II Proposition: Note that we want to calculate the value of RJR Nabisco for the year of 1987, so we used exhibit 3 to get the debt-equity ratio in 1987 and exhibit 2 to calculate the value of taxes paid in the same year. We assume that Net income is operational Income minus Interest and minus taxes, which leads to the following formula:
T=1-Net

## Related Documents

• ###### Essay Case Study Nabisco

Case Study: RJR Nabisco By July 20, 2013 One of the most famous leveraged buyouts (LBOs) that have has been studied is the RJR Nabisco LBO. There was also a movie made about this LBO entitled Barbarians at the Gate, which you may be interested in watching. Review this case study in Chapter 7 of your text and conduct your own research. In a 3–4-page case study, address the following: 1. Discuss the background of the case. Who were the players? What prompted…

Words: 1371 - Pages: 6
• ###### Henry Kravis : A Successful Businessman And An American Billionaire

the company and continued growth of the firm KKR investment into the multimillions. They made many of high successful investments. The firm completed becoming leveraged buyout of RJR Nabisco after Jerry Kohlberg left the firm KKR. After that, Henry Kravis started to have a conflict with Ross Johnson who was a CEO of Nabisco. Then, Henry Kravis loss his teenage son and became bankruptcy. However, he continued to reinforce himself to increase the profits as a successful financial businessman. He was…

Words: 958 - Pages: 4
• ###### Essay RJR case

Harvard Business School 9-290-021 Rev. August 7, 1995 RJR Nabisco - 1990 In the spring of 1990, the firm of Kohlberg Kravis Roberts & Co. (KKR) was in negotiation with lenders regarding the refinancing of a \$1.2 billion bridge loan due to be repaid in full by February, 1991. The bridge loan was part of the \$24 billion financing of KKR's leveraged buyout of RJR Nabisco in early 1989. Originally, KKR had planned to retire the loan with the proceeds of a \$1.25 billion public offering of…

Words: 5843 - Pages: 24
• ###### Barbarians at the Gate Essay

A Book Review Barbarians At The Gate The Fall of RJR Nabisco By Bryan Burrough and John Helyar Barbarians at the Gate has been called one of the most influential business books of all time - the definitive account of the frenzy that overtook Wall Street in October and November of 1988 from the leveraged buyout of RJR Nabisco, Inc. by Kohlberg Kravis Roberts & Co. for \$24.9 billion. It was the largest takeover in Wall Street history. It was co-written by Bryan Burrough and John Helyar…

Words: 2230 - Pages: 9

History of Nabisco Incorporated Nabisco Food Groups has been one of the widely known names in the food industry. Nabisco is among the world’s largest manufacturers of cookies and crackers. Nabisco Brands was formed in 1981 through a merger of Nabisco and Standard Brands. In 1985 R.J. Reynolds Industries acquired Nabisco brands in one of the largest takeovers in business history. In earlier years the company was called N.B.C. In 1941 the company took on the name Nabisco, but it was in…

Words: 2242 - Pages: 9
• ###### Essay Rjr Finance

9 billion acquisition of Nabisco Brands Inc. To finance the acquisition, RJR was proposing the issue of \$1.2 billion of 12 year notes and the same amount in preferred stock. It had already funded \$1.5 billion of the acquisition leaving \$1 billion more to finance. Challenges facing RJR: Of the \$1.5 billion that had been funded, \$500 million came from cash and the remaining was through bank borrowings and commercial paper. These borrowings added to the debt that RJR had issued in 1984 and brought…

Words: 1880 - Pages: 8
• ###### Essay Financial Principals and Policies

only to maximize bonuses, they will not consider the benefit of shareholders. So they will not consider things by using the shareholder wealth model. 13. Metropolitan Life Insurance Company, Swiss Bank Corporation, and several other holders of RJR Nabisco bonds filed suit against the company to prevent it from completing the leveraged buyout acquisition from Kohlberg Kravis Roberts. Why do you think the bond-holders wanted to block this transaction? What arguments can you make for and against the…

Words: 873 - Pages: 4
• ###### Financial Management Essay

the prices to efficiency. Exercise 3: (18 points) (18) In 1987 RJR Nabisco, the food and tobacco giant, had \$5 billion of A-rated debt outstanding. In that year the company was taken over, and \$19 billion of debt was issued and used to buy back equity. The debt ratio skyrocketed, and the debt was downgraded to a BB rating. The holders of the previously issued debt were furious, and one filed a lawsuit claiming that RJR had violated an implicit obligation not to undertake major financing changes…

Words: 1992 - Pages: 8
• ###### Essay R J Reynolds

acquisit ion of Nabisco Brands I nc. To finance t he acquisit ion, RJR was pr oposing t he issue of \$1.2 billion of 12 year not es and t he sam e am ount in pr efer r ed st ock . I t had alr eady funded \$1.5 billion of t he acquisit ion leav ing \$1 billion m or e t o finance. Challenges facing RJR: Of t he \$1.5 billion t hat had been funded, \$500 m illion cam e from cash and t he r em aining was t hr ough bank bor r owings and com m er cial paper. These borrow ings added t o t he debt t hat RJR had issued…

Words: 4448 - Pages: 18
• ###### Essay American Express - Corporate Governance Case

impetuous ex-CEO of RJR Nabisco. • Vernon Jordan, the civil-rights lawyer. Decisions Required Warner brought to light evidences of setbacks that had befallen AmEx under Robinson’s leadership. He pointed out many events proving this, which All this had a cost of billions of dollars to shareholders: • Attempted takeover of Philadelphia Life Insurance Co. in 1977. • Aborted mergers • Problems at Shearson • episodes involving Safra and RJR Nabisco • the losses from…

Words: 2003 - Pages: 9