RJR NubIsco VuIuuLIon: DC MeLIod

O or u % IeveI oI sLeudy-sLuLe growLI, RJR`s cusI

IIows wouId Iuve Lo grow uL u ruLe oI uL IeusL 18 %.
O TIe vuIuuLIon oI RJR consIsLs oI sLeps:-
DeveIop u seL oI cusI IIow scenurIos
DerIve LIe upproprIuLe dIscounL ruLe
DIscounL LIe cusI IIows uL LIe cosL oI cupILuI
R AssumpLIons
O R ussumed LIe IoIIowIng:-
1. OperuLIng murgIn Ior Lobucco busIness wouId Increuse
Irom z;% Lo %
z. Tobucco suIes und operuLIng Income wouId grow by
8. % und more LIun 1o % per yeur, respecLIveIy.
O n 1q8; PIIIIp MorrIs reporLed u per cenL murgIn, LIe
RJR Lobucco unIL u z; per cenL murgIn, AmerIcun Brunds
u 11 per cenL murgIn und UnIversuI u ; per cenL murgIn.
O TIougI US Lobucco murkeL wus decIInIng by % unnuuIIy
, US exporLs oI cIgureLLes 6 % In 1q8; und by z % In
1q88.
ConLd.
TIe compIexILy oI LIe IInuncIng sLrucLure
O To uvoId reseL oI coupon uL more LIun zo%, RJR decIded Lo
buy buck Ior cusI LIe enLIre umounL oI LIe bond Issue, cosLIng
ubouL $1.; bIIIIon.
O TIe bonds were converLIbIe InLo z % oI RJR`s equILy In 1qq.
So LIe buybuck boosLed R`s IoIdIng In RJR Irom 8 % on u
IuIIy dIIuLed busIs Lo 8 %.
O DrexeI seL LIe Muy 1qq1 reseL wILIouL uny cup or IIoor.
O A second junk bond Issue uIso Iuced u munduLory reseL In Muy
1qq1.
TIIs Issue resuILed wIen RJR, on JuIy 1;, 1q8q, excIunged
ILs $q
bIIIIon CumuIuLIve ExcIungeubIe PreIerred SLock Ior
subordInuLed excIunge debenLures IuvIng un IdenLIcuI ruLe
und u muLurILy duLe oI zoo;.