Posted: December 3rd, 2022

Valuation of Bachrach Clothing, Inc.

Valuation of Bachrach Clothing, Inc.
Bachrach Clothing, Inc. (BCI) was a family-owned men’s apparel company that was acquired in February
2005 through a leveraged buyout (LBO) led by Sun Capital, a private equity firm that specializes in
distressed investments.1 An LBO is an acquisition in which the new owners add substantial debt to the
company’s balance sheet. The $8 million purchase price was funded with a $2 million equity investment
from Sun Capital for BCI’s outstanding common stock, $2 million in asset based lending secured by
certain BCI assets, and a new $4 million loan from the former (pre-LBO) equity owners, secured by the
remaining assets of BCI.2 Before the buyout, BCI had no long-term debt, and ran on cash from
operations.
Bachrach filed for Chapter 11 about 16 months after the LBO was completed. When LBOs fail, it is
common for the company to sue the secured lenders financing the buyout and/or the old owners who
sold their stock, arguing that the LBO was a “fraudulent transfer”. The basic idea behind fraudulent
transfer is that the company engaged in a transfer in which the corporation gave away more than it got,
at a time when the company was in a financially shaky position. The debtor (i.e., the company that
eventually files for bankruptcy) may engage in these unfair transfers to shield assets from their creditors
when they know they will go bankrupt in the near future. Bankruptcy law allows the company to “claw
back” the value that was unfairly given away, for the benefit of the defrauded creditors.
Fraudulent transfer litigation involves looking back to value the company at the time of the LBO,
because the plaintiffs (the company and its unsecured creditors) need to show that the corporation was
insolvent (or nearly so) at that time. Insolvency requires showing that the face value of liabilities
exceeds the value of assets, valuing the assets using the methods we’ve studied in class.
Two experts were asked to evaluate the impact of the LBO on BCI. Among other issues, they were asked
to determine whether BCI was rendered insolvent as a result of the LBO, unable to pay its debts as they
would mature and/or left without adequate capital.
The first expert, Elson, of the consulting firm LECG, was hired to represent the debtor, Bachrach
Clothing, Inc. (the “plaintiff”, “Debtor”, or “BCI”).
The second experts, Ciancanelli and Murphy, both of the consulting firm Navigant, were hired to
represent the former pre-LBO CEO, equity owners, and others (the “defendants”).
All experts used the post-LBO cash flow forecasts prepared by Sun Capital at the time of the buyout.

1
See Exhibit 1 for the back story of the company.
2 The owners of BCI (the “Sellers”) – Edgar Bachrach and his two sisters Sally Robinson and Barbara James – sold their
common stock of BCI in connection with the LBO. In exchange, they received $4 million cash plus the $4 million new
secured note. The Sellers also retained $3.4 million of pre-LBO cash and marketable securities; the logic was that
Sun wanted the Sellers to withdraw cash and securities in excess of required working capital, since retention of the
cash would simply increase the purchase price and debt service.
Answer the questions below, submitting your responses directly to canvas. This assignment should be
completed INDIVIDUALLY; please address any questions directly to myself, and do not discuss your
answers with others in our class. Follow the format given to enter your answers to Canvas; use a semicolon ( ; ) and avoid a carriage return (enter) between items in your answer.
1. Using information available at the time of the buyout, give two reasons why BCI might have been a
good target for a leveraged buyout by Sun Capital? (max 20 words)
2. Using information available at the time of the buyout, give two reasons why BCI might NOT have
been a good target for a leveraged buyout by Sun Capital? (max 20 words)
3. The DCF model in the Elson report discounts unlevered free cash flows at the weighted average cost
of capital (WACC). Given your knowledge of typical secured lending contracts for leveraged loans, as
discussed during our class, do you agree with this choice of DCF model? Why or why not (20 words
or less)?
4. Exhibit 4, also available to you in excel, provides the DCF model assumptions used by Elson to
calculate the total enterprise valuation for BCI. Using those assumptions, please complete the
following:
a. What is the cash flow you would discount for the year ending December 2005? ($ millions)
b. What is the cash flow you would discount for the year ending December 2009 (not including
the terminal value)?
c. What is the terminal value of cash flows, as of December 2009?
d. What is your estimate of the TEV as of January 1, 2005?
e. What does your estimate of TEV indicate about the solvency of BCI upon closing of the LBO?
(max 10 words)
5. The second set of experts, Ciancanelli and Murphy (Navigant), used the same project ( help with nursing paper writing from experts with MSN & DNP degrees)ions of BCI’s
cash flows as prepared by Sun, but differed in their assumptions used for the DCF valuation. One
significant difference was that they calculated the terminal value using a 6.5x multiple of project ( help with nursing paper writing from experts with MSN & DNP degrees)ed
terminal period EBITDA. Their analysis supporting this assumption is given in Exhibit 5.
a. What argument would you make, using the information in Exhibit 5, that this assumption is
justified (30 words or less)?
b. What argument would you make, using the information in Exhibit 5, that this assumption is
NOT justified relative to Elson’s terminal value assumptions (30 words or less)?
c. What is your estimate of TEV using the Navigant assumption for the terminal value?
($million)
d. What does this estimate of TEV indicate about the solvency of BCI upon closing of the LBO
(10 words or less)?
6. Another source of disagreement between the experts was the appropriate discount rate used for
the DCF valuation. Details of Elson’s calculation of WACC is given in Exhibit 6 ; details for Navigant’s
WACC calculation are given in Exhibit 7. Notice that the two experts use different capital structure
weights (i.e. debt-to-capital). The Navigant report uses 24%, which is based on Bachrach’s actual
capital structure, while the LECG report uses industry average of 17.3%.
a. Suppose you were to revise Elson’s WACC to use the 24% debt-to-capital ratio. What would
be the revised WACC? (xx.xx%)
b. Choose one other assumption that you believe significantly explains differences in the
WACC between the experts, and provide an argument in favor of the Navigant approach (20
words or less). Does Navigant’s choice for this assumption lead to a higher or lower TEV? (5
words or less)
7. Ultimately, the bankruptcy judge needed make a determination of BCI’s solvency at the time of the
LBO. Although both sides used Sun’s project ( help with nursing paper writing from experts with MSN & DNP degrees)ions of BCI’s cash flows, the Defendants’ expert
concluded that BCI’s enterprise enterprise value was over six times higher than the value calculated
by Elson. As the judge stated in her opinion, “the disparate valuations in this case confirm the
warning … : [T]he DCF ‘‘methodology has been subject to criticism for its flexibility; a skilled
practitioner can come up with just about any value he wants.’’ Thus, the judge considered additional
factors in her decision. The following facts were revealed during the court hearings. Do you believe
the judge should consider any of the following facts in her final decision? If yes, explain why (30
words or less)
a. The auditor hired by Sun (KPMG) to conduct due diligence for BCI revealed the $8 million
purchase price was below BCI’s book value;
b. Sun, a sophisticated investor, believed the $8 million price was attractive;
c. A reputable bank, LaSalle, extended a $20 million credit line several weeks after the LBO;
d. Sun invested an additional $5 million into BCI shortly after the LBO.
8. BCI emerged from bankruptcy by 2010, and returned to profitability. However, its fortunes were
short lived and it filed again for Chapter 11 in 2017. The company emerged from Chapter 11 within a
few months, but, filed a third time in 2018 and liquidated all remaining stores. Any firm which
reorganizes and emerges from bankruptcy as a going concern must demonstrate to the court that its
post-bankruptcy operating plan is feasible. Do you believe the story of BCI reflects a failure of the
U.S. bankruptcy system to achieve its goals? Why or why not? (30 words or less).
Exhibit 1
Background of Bachrach Clothing, Inc. (BCI)
Source:
BACHRACH CLOTHING, INC., Debtor v. Edgar Bachrach, et al., Defendants
United States Bankruptcy Court, N.D. Illinois
Oct. 10, 2012
Events Leading up to (LBO) Sale of Debtor
BCI, or ‘‘Bachrach,’’ was a mall-based retailer of men’s apparel. Until 2005, BCI was owned
and operated by the Bachrach family. Ed’s great grandfather, Henry Bachrach, founded the
business in 1877, after selling civilian suits to returning Civil War soldiers for twenty five cents.
Henry’s original Decatur, Illinois store was called ‘‘Cheap Charley’’. The business grew to a
peak of 82 stores in the mid– 1990s. Until the business was sold in 2005, there were only four
presidents: founder Henry; his son Edgar, Edgar’s son Henry and Henry’s son—Ed Bachrach, a
defendant in this action. Before the 2005 sale, one hundred percent of the business’ stock was
owned by trusts in favor of Ed and his two sisters. Ed, his sisters, and brother-in-law Ronald
James, who is married to sister Barbara James, sat on BCI’s board of directors, and constituted
BCI’s entire board of directors up until the sale (the ‘‘Directors’’).
Ed Bachrach’s trust held the majority of BCI’s shares. Ed worked in the family business starting
at the age of seven. He received an accounting degree from Northwestern University in 1970,
and returned to Bachrach as a controller in 1976, following a stint in the Army and four years as
a staff accountant with Ernst & Whinney. Ed became a licensed CPA in 1971.
Ed reported to his father Henry when he started as controller in 1976. Ed became President of
BCI in 1979 and held that position until the company was sold in 2005. During Ed’s time with
the company from 1976 up to 2005, he was intimately familiar with its financial situation.
During most of those years, BCI was profitable. BCI’s assets never exceeded its liabilities, and
the company was always able to pay its debts as they became due. Not a single vendor refused
favorable credit terms because of a concern that BCI could not pay its debts, nor was the
company ever sued for failing to pay its debts. The company never experienced negative
working capital nor did anyone express a concern that its working capital was too small. Also
during the years that Ed ran the company, BCI’s operations were financed primarily by the
positive cash flow generated by the company. ‘‘We always carried significant cash balances.
And when it was time for us to make an investment in either additional working capital or other
fixed assets, we did it with that cash.’’
Although operations were generally funded with cash, the business had lines of credit with
financial institutions. BCI used the lines only two or three years in the late 1990s when the
business was rapidly expanding. The funds were borrowed on a seasonal basis and all loans were
paid off after the holiday season. The banks never required any personal guarantees for the loans,
and the lines were unsecured when they were actually used. BCI never had any long term debt
during Ed’s tenure.
Sometime during the 1990s Ed determined that stores located in smaller cities were not as
profitable as those located in major markets. He decided to prune these less profitable stores in
favor of consolidating the business into larger markets. BCI’s overall sales revenues declined
between years 2000 and 2004, due at least in part to planned store closures. However, same store
sales were up and down in some of those years and remained flat on an aggregated basis,
notwithstanding 9/11’s general assault on the economy. During this discrete period, BCI was
using more cash than it was generating, although in 2004 it did report positive earnings before
interest, taxes and depreciation (EBITDA) after adjustments for non-recurring items. Such items
included store closings and consultant fees incurred to evaluate replacing Ed with outside
management so he could pursue other goals.
Between 1999 and 2004 Ed explored selling the family business to pursue a lifelong goal of
returning to school for an advanced degree in economics and political science. He conferred with
investment bankers and consultants but received no offers. During that time, a number of options
were discussed. Ed’s notes of various meetings included information communicated by the
consultants on selling the business, liquidation, bankruptcy, preference actions and elements of
fraudulent transfer actions. While there was no evidence on why these matters were discussed,
none of the consultants suggested that BCI was insolvent or unable to pay its debts. Ed does not
specifically recall why he took notes on these issues—indicating he simply wrote down
comments of others but cannot recall the context.
Eventually a William Blair investment banker introduced Ed to Sun Capital Partners (‘‘Sun’’).
On January 11, 2005, Sun delivered to Ed a letter of intent to purchase BCI. In that letter, Sun
described itself as follows:
Sun Capital Partners, Inc. is a leading private investment firm focused on leveraged buyouts and
investments in market leading companies that can benefit from our in-house operating
professionals and experience. Sun Capital has invested in more than 75 companies since our
inception in 1995 with combined sales in excess of $18.0 billion. On a consolidated basis, Sun
Capital’s portfolio companies would rank in the top 100 of Fortune Magazine’s listing of the
500 largest companies in the United States. Sun Capital has offices in Boca Raton, Florida, Los
Angeles, New York and London but has acquired and manages companies worldwide.
Exhibit 2: Pre-LBO performance of BCI
Comparable Store Sales
Year Prior Year Current Year %
2000 80,118 80,580 0.58%
2001 77,787 75,192 -3.34%
2002 72,183 71,586 -0.83%
2003 73,200 71,176 -2.77%
2004 69,049 72,338 4.76%
Total 372,337 370,872 -0.39%
Bachrach Clothing, Inc.
Consolidated Revenue
(1988 – 2004)
160,000,000
140,000,000
120,000,000
100,000,000
80,000,000
60,000,000
40,000,000
20,000,000
–
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
Fiscal Year Ended 12/31/XX
Exhibit 2: Pre-LBO performance of BCI (continued)
Exhibit 3: Historical versus project ( help with nursing paper writing from experts with MSN & DNP degrees)ed BCI performance
Prior to purchase by Sun Capital, BCI had suffered from a poor merchandising strategy that led to large
markdowns on inventory; turnover of key personnel; and aging information technology. Based on
project ( help with nursing paper writing from experts with MSN & DNP degrees)ed revenues, Sun Capital forecast that 2005 EBITDA would improve to approximately $1.0
million.
Exhibit 4: Cash flow Projections and Assumptions used for Elson’s DCF
Bachrach Clothing, Inc.
Publicly Traded Comparables Analysis (1)
Valuation as of February 15, 2005
($ in Millions)
As of January 31, 2003 As of January 31, 2004 As of January 31, 2005 3 Year Avg.
Enterprise EV / Enterprise EV / Enterprise EV / EV /
Company Name Value EBITDA EBITDA Value EBITDA EBITDA Value EBITDA EBITDA EBITDA
Jos. A Bank Clothiers Inc. 149.6$ 21.3$ 7.0x 356.3$ 39.4$ 9.1x 423.9$ 52.6$ 8.1x 8.1x
The Menʹs Wearhouse, Inc. 577.1 108.3 5.3x 901.9 139.0 6.5x 1,238.7 173.6 7.1x 6.3x
S&K Famous Brands Inc. 41.3 8.6 4.8x 59.1 9.0 6.5x 56.3 9.4 6.0x 5.8x
Casual Male Retail Group, Inc. 246.7 10.0 24.6x 354.4 24.6 14.4x 361.5 17.9 20.2x 19.7x
Haroldʹs Stores Inc. 37.7 (3.9) n/a 55.9 3.8 14.6x 47.1 5.2 9.2x 11.9x
Dillardʹs Inc. 4,337.7 748.1 5.8x 4,027.5 490.7 8.2x 4,092.1 549.5 7.4x 7.2x
First Quartile 68.4 8.9 5.3x 132.9 12.9 7.0x 132.6 11.5 7.2x 6.5x
Median 198.2 15.7 5.8x 355.3 32.0 8.6x 392.7 35.2 7.8x 7.6x
Third Quartile 494.5 86.6 7.0x 765.5 114.1 13.1x 1,035.0 143.3 8.9x 10.9x
(1) Source: Capital IQ.
Exhibit 5: Valuation multiples for BCI Expert
Report of Navigant Consulting Inc.
Bachrach Clothing, Inc.
Comparable Transactions Analysis (1), (2)
Valuation as of February 15, 2005
($ in Millions)
Date Announced Target/Issuer Buyers/Investors
Enterprise Value
($Millions) LTM Revenue LTM EBITDA EV / Revenue EV / EBITDA
1) 4/26/2003 Tommy Bahama Group, Inc. Oxford Industries Inc. (NYSE:OXM) 373.7 319.4 46.4 1.2x 6.9x
2) 11/17/2004 Maurices Incorporated Dress Barn Inc. (NasdaqGS:DBRN) 315.5 342.2 34.0 0.9x 10.1x
3) 2/5/2004 Hat World Corporation Genesco Inc. (NYSE:GCO) 174.3 199.4 27.8 0.9x 7.2x
4) 4/22/2004 Loehmannʹs Holdings, Inc. Arcapita Bank, Corporate Investment 170.1 366.6 52.7 0.5x 7.0x
5) 7/31/2003 White House Inc. Chicoʹs FAS Inc. (NYSE:CHS) 90.6 67.1 6.1 1.4x 11.0x
6) 3/20/2003 Todayʹs Man Inc. Christopherʹs Menʹs Stores, Inc. 28.4 114.1 1.3 0.2x 86.8x
First Quartile 110.5 135.4 11.5 0.6x 7.0x
Median 172.2 259.4 30.9 0.9x 8.6x
Third Quartile 280.2 336.5 43.3 1.1x 10.7x
(1) Source: Capital IQ.
(2) Screening criteria based on transactions with a target industry of apparel retail and a closing date between 2/14/02 and 2/15/05.
Exhibit 5 (continued) – Navigant Valuation multiples for BCI
CAPM Based WACC Calculation Using Average Industry Statistics
Statistic Value Notes
Risk Free Rate 4.55% (1)
Equity Risk Premium 7.20% (2)
Average Unlevered Industry Beta 1.016 (3)
Size Premium 9.82% (4)
Estimated Pre-Tax Cost of Debt 5.74% (5)
Assumed Tax Rate 40.00% (6)
Average Debt to Capital Ratio 17.29% (7)
Average Debt to Equity Ratio 28.47% (8)
Relevered Beta 1.189 (9)
Cost of Equity 22.93%
Cost of Debt (after tax) 3.44%
WACC 19.56%
Notes and Sources:
[3] Average unlevered industry beta of select retailers.
[6] LECG assumed tax rate.
[7] Average debt to capital ratio of select retailers.
[8] Average debt to equity ratio of select retailers.
[9]. The unlevered beta has been relevered at the industry average debt to equity
ratio using the following formula: (Unlevered Beta * (1+(1-assumed tax
rate)*average debt/equity ratio)).
[1] Yield on constant 20-year maturity treasury as of 2/15/05. See
http://www.federalreserve.gov/releases/h15/data.htm
[5] Estimates by LECG based on seasoned ‘baa’ rated bonds (per Moody’s) as of
2/15/09. See
http://www.federalreserve.gov/releases/h15/data/Business_day/H15_BAA_NA.txt.
Additionally, LECG has reviewed the interest rate provided in loan agreements to
validate the reasonableness of this assumption. See HB00263 (indicating prime plus
0.25%). See also SUN-BACH-E 207448 (indicating prime). The WSJ indicated
that the prime rate was 5.50% from February 2, 2005 through March 21, 2005. See
http://www.wsjprimerate.us/wall_street_journal_prime_rate_history.htm
[2] Per Ibbotson SBBI Valuation 2004 Yearbook, Long-Horizon Equity Risk
Premium. See page 252.
[4] 2004 Ibbotson Associates Yearbook (Stocks, Bonds, Bills & Inflation) size
premium for decile 10b. The 10b decile represents companies with a market
capitalization less than $96.928 million. Bachrach would fall within this category.
Exhibit 6
Expert Report of Craig T. Elson – discount rate calculation
CAPM BASED COST OF CAPITAL CALCULATION OF SELECT RETAILERS
Aeropostale Buckle, Inc. Men’s Warehouse Jos. A. Bank Casual Male Nordstrom Saks, Inc. Avg.
Ticker Symbol ARO BKE MW JOSB CMRG JWN SKS
Risk Free Rate (1) 4.55% 4.55% 4.55% 4.55% 4.55% 4.55% 4.55%
Equity Risk Premia (2) 7.20% 7.20% 7.20% 7.20% 7.20% 7.20% 7.20%
Beta Estimate (5-year monthly) (3) 1.529 0.638 1.768 0.840 0.790 1.700 1.729 1.285
Beta Estimate (2-year weekly) (3) 1.149 0.942 1.114 1.067 0.805 0.885 1.454 1.059
Beta Estimate (6-month daily) (3) 1.253 1.463 1.558 1.092 1.034 0.978 1.173 1.222
Average Beta 1.310 1.014 1.480 1.000 0.876 1.188 1.452 1.189
Selected Beta (closest to avg.) 1.253 0.942 1.558 1.067 0.805 0.978 1.454
Unlevered Beta (4) 1.253 0.942 1.469 1.001 0.511 0.901 1.034 1.016
Size Premia 1.36% 1.57% 1.36% 2.25% 2.90% 0.50% 1.11% 1.58%
Company Specific Risk 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%
Share Price (20) $ 30.020 $ 29.98 $ 35.82 $ 27.62 $ 5.37 $ 51.56 $ 15.89
Shares Outstanding (6) 21,619,290 55,669,342 (8) (10) 13,394,608 36,153,850 (18) 34,217,796 (12) 140,076,823 (14) 139,730,302 (16)
Market Cap (as of 2/15/05) $ 1,671,193,647 $ 648,146,314 $ 1,295,030,907 $ 369,959,073 $ 183,749,565 $ 7,222,360,994 $ 2,220,314,499
Preferred Stock $ – $ – $ – $ – $ – $ –
Total Debt $ – (7) $ – (9) 131,000,000 $ (11) 40,685,000 $ (19) 176,579,000 $ (13) 1,035,405,000 $ (15) 1,504,218,000 $ (17)
Debt to Capital Ratio 0.00% 0.00% 9.19% 9.91% 49.00% 12.54% 40.39% 17.29%
Debt to Equity Ratio 0.00% 0.00% 10.12% 11.00% 96.10% 14.34% 67.75% 28.47%
Estimated Pre-Tax Cost of Debt (5) 5.74% 5.74% 5.74% 5.74% 5.74% 5.74% 5.74%
Debt to Capital Debt/Equity Relevered Beta Based on Debt to Capital Structure
0.0% 0.0% 1.253 0.942 1.469 1.001 0.511 0.901 1.034 1.016
5.0% 5.3% 1.293 0.972 1.515 1.033 0.527 0.929 1.066 1.048
10.0% 11.1% 1.337 1.005 1.567 1.068 0.545 0.961 1.103 1.083
15.0% 17.6% 1.386 1.042 1.624 1.107 0.565 0.996 1.143 1.123
20.0% 25.0% 1.441 1.083 1.689 1.151 0.587 1.036 1.189 1.168
Debt/Capital Debt/Equity WACC
0.0% 0.0% 14.93% 12.90% 16.49% 14.01% 11.13% 11.53% 13.10% 13.44%
5.0% 5.3% 14.63% 12.63% 16.15% 13.69% 10.85% 11.32% 12.84% 13.16%
10.0% 11.1% 14.32% 12.36% 15.82% 13.38% 10.58% 11.11% 12.58% 12.88%
15.0% 17.6% 14.02% 12.09% 15.48% 13.07% 10.30% 10.90% 12.32% 12.60%
20.0% 25.0% 13.72% 11.82% 15.15% 12.76% 10.03% 10.69% 12.06% 12.32%
Sources and Notes:
(1). Represents the 20-year constant maturity treasury yield as of 2/15/05. See http://www.federalreserve.gov/releases/h15/data/Business_day/H15_TCMNOM_Y20.txt
(2). Represents the long-horizon equity risk premia per the 2004 Ibbotson SBBI Valuation Yearbook (page 252).
(3). Represents raw, unadjusted betas from Bloomberg over the period indicated (with a 2/15/05 end date).
(4). The selected levered beta has been unlevered using the following formula: = Levered Beta/(1+((1-tax rate)*Debt/Equity)). The tax rate has been assumed to be 40%.
(5). The cost of debt has been estimated using the Moody’s seasoned “baa” rated bond yield as of 2/15/05. See http://www.federalreserve.gov/releases/h15/data/Business_day/H15_BAA_NA.txt
(6). Aeropostale shares outstanding as of November 21, 2004 (as disclosed in the firm’s 10-Q filed 12/3/04).
(7). Represents debt as of October 30, 2004 (as disclosed in the firm’s 10-Q filed 12/3/04).
(8). The Buckle shares outstanding as of December 1, 2004 (as disclosed in the firm’s 10-Q filed 12/7/04).
(9). Represents debt as of October 30, 2004 (as disclosed in the firm’s 10-Q filed 12/7/04).
(10). The Men’s Warehouse shares outstanding as of December 3, 2004 (as disclosed in the firm’s 10-Q filed 12/9/04).
(11). Represents debt as of November 1, 2004 (as disclosed in the firm’s 10-Q filed 12/9/04).
(12). Casual Male shares outstanding as of December 1, 2004 (as disclosed in the firm’s 10-Q filed 12/9/04).
(14). Nordstrom shares outstanding as of November 16, 2004 (as disclosed in the firm’s 10-Q filed 12/3/04).
(15). Represents debt as of October 30, 2004 (as disclosed in the firm’s 10-Q filed 12/3/04).
(16). Saks shares outstanding as of November 27, 2004 (as disclosed in the firm’s 10-Q filed 12/9/04).
(17). Represents debt as of October 30, 2004 (as disclosed in the firm’s 10-Q filed 12/9/04).
(18). Jos A. Bank shares outstanding as of December 1, 2004 (as disclosed in the firm’s 10-Q filed 12/8/04). See: http://phx.corporate-ir.net/phoenix.zhtml?c=113815&p=irol-sec&secCat01.1_rs=211&secCat01.1_rc=10
(19). Represents debt as of October 30, 2004 (as disclosed in the firm’s 10-Q filed 12/8/04).
(20). Share prices are from Bloomberg.
(13). Represents debt as of November 1, 2004 (as disclosed in the firm’s 10-Q filed 12/9/04). This figure includes “notes payable” due to the fact that the companies’ borrowings under its line of credit are classified here. See notes to 10-K filings
in periods prior (and subsequent) to (under debt obligations).
Exhibit 6 (continued)
Expert Report of Craig T. Elson – discount rate calculation
CALCULATION OF COST OF EQUITY
Risk free rate of return33 4.67%
Equity Risk Premium34 5.60%
Beta35 0.89
Size Premium36 4.02%
CAPM – Cost of Equity 13.6%
We determined the debt capital component of the WACC based on the after‐tax cost of the
Company’s borrowing.
CALCULATION OF COST OF DEBT
Cost of Debt37 5.75%
Tax Rate38 38.82%
After‐Tax Adjusted Cost of Debt 3.5%
We weighted the equity capital rate and debt capital rate based on equity and debt capital as a
percentage of the purchase price of BCI. The determination of the WACC is shown in the table
below:
33 Source: Bloomberg. Risk‐free rate represents the long‐term (20‐year) U.S. Treasury Bond Yield.
34 Ibbotsonʹs 50‐year equity risk premium ‐ SBBI Valuation Edition 2005 Yearbook.
35 Source: Bloomberg. Beta represents the median re‐levered beta of the guideline companies.
36 Ibbotsonʹs Micro‐Capitalization equity size premium ‐ SBBI Valuation Edition 2005 Yearbook.
37 BCI cost of debt; MP 001125.
38 The Tax Rate represents the effective combined rate of the Federal Tax Rate of 34% and the Illinois
Tax Rate of 7.3%.
Exhibit 7: Cost of Capital Calculation
Navigant Consulting
CALCULATION OF WACC
Cost of Equity
Calculated Cost of Equity 13.6%
Equity to Total Capitalization Ratio (rounded) 39 76%
Weighted Cost of Equity 10.3%
Cost of Debt
Calculated Cost of Debt 3.5%
Debt to Total Capitalization Ratio (rounded) 24%
Weighted Cost of Debt 0.8%
Total Weighted Average Cost of Capital 11.1%
Total WACC (Rounded) 11.0%
Exhibit 7: Cost of Capital Calculation (continued)
Navigant Consulting

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