2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Operating Activities

Net earnings 453.5 465.7 643.6 777.7 1017.4 Less: Net earnings from discontinued operations 0 0 -11.1 -6.3 -5 Less: Net gain on sale of discontinued operations 0 0 0 0 -25.7 Net earnings from continuing operations 453.5 465.7 632.5 771.4 986.7 Adjustments to reconcile net earnings from continuing

operations to net cash provided by operating activities:

Depreciation 97.2 102.7 100.2 116.7 137.1 Amortization 132.5 148.2 182.5 207.4 229.5 Share-based compensation 0 0 49.4 56.9 61.3 Income tax benefit from exercise of stock options 35.7 39.8 35 33.2 53.3 Excess income tax benefit from exercise of stock options 0 0 -30.4 -26.1 -43.5 Intangible asset impairment 0 0 0 0 19.8 Purchased in-process research and development 0 120.8 15.9 52.7 0 Restructuring and acquisition-related

items

Payments of restructuring and acquisition-related -14.7 -3.8 0 0 0 liabilities

Provision for losses on accounts receivable 15.9 18.4 4.9 3.1 7.3 Deferred income tax expense (credit) -32.9 -65.5 7.9 -27.1 -147.1

Other 8.7 10.2 7.3 5 8.2

Changes in operating assets and liabilities, net of effects of acquisitions:

Proceeds from (reductions of) accounts receivable securitization 20 -150 0 0 0 Accounts receivable -75.9 -93.5 -63.4 -105.2 -133.5 Inventories -5.8 -63 -39.7 -86.8 -89.9 Loaner instrumentation -90.3 -161.4 -189.4 -198.1 -184.9 Accounts payable 24.6 68.3 -2.6 39.1 11.1 Payments of acquisition purchase liabilities -0.8 -0.2 0 0 0 Accrued expenses and other liabilities 77.3 139 72.6 24.7 20.4 Income taxes 3.9 40 18 -8.6 83.5 Other -0.4 -22.4 11.8 -8.3 18.9 Net cash provided by (used in) discontinued operations 0 0 20.9 17.3 -9.9

Net cash provided by operating activities 648.5 593.3 833.4 867.3 1028.3 1279.2 1591.3 1979.6 2462.6 3063.5 3811.0 4740.9 5897.7 7336.7 9126.9

Investing Activities

Acquisitions, net of cash acquired -10.8 -144.7 -56.7 -93.9 -54.8 Proceeds from sale of discontinued operations, net of cash divested 0 0 0 0 144.7

Purchases of marketable securities 0 0 -1543.4 -9137.8 -14851.9 * the number used for 'net cash used in investing activities' in 2007 (-1178.2) Proceeds from sales of marketable securities 0 0 968.4 8709.7 13772.4 was replaced with a predicted number from 2006 because it was a rogue number Purchases of property, plant and equipment -144.5 -187.8 -261.8 -209.4 -187.7 that did not fit the trend.

Proceeds from sales of property, plant and equipment 3.7 8.5 3.4 0.3 0.7 Net cash used by discontinued operations 0 0 -12.9 -11.2 -1.6

Net cash used in investing activities -151.6 -324 -903 -742.3 -894.2 -1077.2 -1297.6 -1563.1 -1883.0 -2268.3 -2732.5 -3291.7 -3965.3 -4776.7 -5754.2

Financing Activities

Proceeds from borrowings 664.5 538.6 586.3 113.7 103.7 Payments on borrowings -1144.6 -556 -364.8 -340.9 -102.9

Dividends paid -28 -36.2 -44.6 -89.7 135.6907 180.921 226.1512 271.38144 316.61168 361.84192 407.07216 452.3024 497.53264 542.76288 587.99312 Proceeds from exercise of stock options 26.9 37.3 30.4 48.6 69.5

Excess income tax benefit from exercise of stock options 0 0 30.4 26.1 43.5 * dividends grew at 11 cents per share every year Other 0.6 18.7 -13.8 -6.1 -10.5

Net cash provided by (used in) financing activities -476.3 10.6 232.3 -203.2 13.6 Effect of exchange rate changes on cash and cash equivalents 7.5 3.6 -20.9 3.6 10.2 Increase (decrease) in cash and cash equivalents 28.1 283.5 141.8 -74.6 -126.1

Cash and cash equivalents at beginning of year 37.8 65.9 349.4 491.2 416.6

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Common Size Statement of Cash Flows

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 Operating Activities

Net earnings 70% 78% 77% 90% 99% Less: Net earnings from discontinued operations 0% 0% -1% -1% 0% Less: Net gain on sale of discontinued operations 0% 0% 0% 0% -2% Net earnings from continuing operations 70% 78% 76% 89% 96% Adjustments to reconcile net earnings from continuing

operations to net cash provided by operating activities:

Depreciation 15% 17% 12% 13% 13% Amortization 20% 25% 22% 24% 22% Share-based compensation 0% 0% 6% 7% 6% Income tax benefit from exercise of stock options 6% 7% 4% 4% 5% Excess income tax benefit from exercise of stock options 0% 0% -4% -3% -4% Intangible asset impairment 0% 0% 0% 0% 2% Purchased in-process research and development 0% 20% 2% 6% 0% Restructuring and acquisition-related

items

Payments of restructuring and acquisition-related -2% -1% 0% 0% 0%

liabilities 0% 0% 0% 0% 0%

Provision for losses on accounts receivable 2% 3% 1% 0% 1% Deferred income tax expense (credit) -5% -11% 1% -3% -14%

Other 1% 2% 1% 1% 1%

Changes in operating assets and liabilities, net of effects of acquisitions:

Proceeds from (reductions of) accounts receivable securitization 3% -25% 0% 0% 0% Accounts receivable -12% -16% -8% -12% -13% Inventories -1% -11% -5% -10% -9% Loaner instrumentation -14% -27% -23% -23% -18% Accounts payable 4% 12% 0% 5% 1% Payments of acquisition purchase liabilities

Accrued expenses and other liabilities 12% 23% 9% 3% 2% Income taxes 1% 7% 2% -1% 8% Other 0% -4% 1% -1% 2% Net cash provided by (used in) discontinued operations 0% 0% 3% 2% -1%

Net cash provided by operating activities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Investing Activities

Acquisitions, net of cash acquired 7% 45% 6% 13% 6% Proceeds from sale of discontinued operations, net of cash divested 0% 0% 0% 0% -16% Purchases of marketable securities 0% 0% 171% 1231% 1661% Proceeds from sales of marketable securities 0% 0% -107% -1173% -1540% Purchases of property, plant and equipment 95% 58% 29% 28% 21% Proceeds from sales of property, plant and equipment -2% -3% 0% 0% 0% Net cash used by discontinued operations 0% 0% 1% 2% 0%

Net cash used in investing activities 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 100%

Financing Activities (done as percentage of net earnings)

Proceeds from borrowings 147% 116% 91% 15% 10% Payments on borrowings -252% -119% -57% -44% -10%

Dividends paid -6% -8% -7% -12% 13% 15% 16% 16% 16% 16% 15% 14% 13% 12% 11% Proceeds from exercise of stock options 6% 8% 5% 6% 7%

Excess income tax benefit from exercise of stock options 0% 0% 5% 3% 4%

Other 0% 4% -2% -1% -1%

Net cash provided by (used in) financing activities -105% 2% 36% -26% 1% Effect of exchange rate changes on cash and cash equivalents 2% 1% -3% 0% 1% Increase (decrease) in cash and cash equivalents 6% 61% 22% -10% -12%

Cash and cash equivalents at beginning of year 8% 14% 54% 63% 41%

14

Cost of Capital Estimation

Estimating the cost of capital is a very important aspect of evaluating a firm. To find the cost of capital we took the weighted average of the cost of debt and the cost of equity which gives us the weighted average cost of capital, or WACC. The WACC is the overall required return on the firm as a whole and is used by company directors in deciding when and when not to except

expansionary projects. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm (Investipedia.com).

Cost of Equity

Cost of capital cannot be computed without first finding the cost of equity. We used the CAPM model to estimate Stryker’s cost of equity. To do so, we had to first use information found on the St. Louis Federal Reserve’s website to find the risk free rates of the three month, six month, two year, five year and ten year treasury bills. Treasury bills are considered to have risk free rates. These annual rates were then converted into their monthly form and then into decimal form. We also found the prices for the S&P 500 in order to find a market rate of return. After studying the risk free rates, we then estimated Stryker’s market risk premium to be 7.00%. Beta, which is used to measure risk, was then calculated after running a series of regressions. Regressions for each of the treasury bills was run over a 24 month, 36 month, 48 month, 60 month and 72 month time frame. We took the interest rates of Treasury Bills from five different time

periods and ran them over 5 different horizons to help us determine the stability of beta over time and to help us determine how long investors prefer to hold Stryker’s stock. It is important to determine the stability of Stryker’s beta because beta is a measure of risk.

Our beta was chosen after finding the highest adjusted R^2. We found the highest R^2 to be 0.18, or 18.10% as found under the five year, 36 month

103

regression. The corresponding Beta was 1.259. We also used a risk free rate of 2.50% and a market risk premium of 7.00% for that five year regression model. Cost of equity can then be computed as follows: