Sun Microsystems Case

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Rev. Mar. 20, 2013 Rev. Mar. 20, 2013

This spreadsheet was prepared by Elena Loutskina, Assistant ro!essor o! "usiness Ad#inistration. $opyri%ht & 2010 by the 'niversity o! (ir%inia )arden *+hool oundation, $harlottesville, (A. All This spreadsheet was prepared by Elena Loutskina, Assistant ro!essor o! "usiness Ad#inistration. $opyri%ht & 2010 by the 'niversity o! (ir%inia )arden *+hool oundation, $harlottesville, (A. All ri%hts reserved.

ri%hts reserved. For customer service inquiries, send an e-mail to For customer service inquiries, send an e-mail tosales-dardenbusinesspublishin%.+o#sales-dardenbusinesspublishin%.+o#. No part . No part of this publication may be reproduced, stored in a retrieval system, posted to of this publication may be reproduced, stored in a retrieval system, posted to the Internet,the Internet, or transmitted in any f

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SUN SUN T T $$oo ##aarrkkeet t dd S

Sttoocckk SShhaarreess MMaarrkkeett P Prriiccee OOuutt CCaapp T Tiicckkeerr (($$)) ((MMMM)) (($$MMMM)) Primarily ar!"are Primarily ar!"are A

Addvvaann++eed d MMii++rro o ))eevvii++eess AAMM) ) 33..556 6 6600/ / 22,,116677 A Appppllee AAAAL L 112233..882 2 7777/ / 1100//,,1133 ) )eellll ))EELLL L 1111..006 6 11,,//888 8 2211,,550055 E EMM$$ EEMM$ $ 1122..771 1 22,,00881 1 2266,,118822 9

9eewwlleetttt::aa++kkaarrdd 99; ; 3366..330 0 22,,88116 6 77,,0077 nntteell <<TT$ $ 1155..660 0 22,,55662 2 33//,,//66 nntteerrnnaattiioonnaal l ""uussiinneesss s MMaa++hhiinneess ""M M 101011..22  11,,33883 3 113366,,005522 <etApp

<etApp <T<TA A 1.5/ 1.5/ 330 330 5,7075,707

*

*uun n MMii++rroossyyssttee##ss ==AA((A A 6..66 6/ / 33/ / 88,,//8811 Primarily So#t"are

Primarily So#t"are A

Addoobbe e **yyssttee##ss AA))""E E 2828..0 0 55228 8 1122,,//8888 M

Mii++rroossoo!!tt MM**T T 11//..220 0 77,,77//6 6 1100,,//55 <ovell <ovell <>(L <>(L 3./8 3./8 383 383 1,3531,353 > >rraa++llee >>RR$$L L 11//..006 6 55,,00886 6 //66,,117700 R Reed d 99aatt RR99T T 1177..332 2 11//0 0 33,,887722

)ata sour+es? @ahoo inan+e, Moodys, "loo#ber%, and +o#pany !ilin%s. )ata sour+es? @ahoo inan+e, Moodys, "loo#ber%, and +o#pany !ilin%s.

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Ehibit / Ehibit /

ICROSYSTEMS ICROSYSTEMS

panies

panies inaninan+ial +ial )ata)ata ata

ata as as o! o! April April 1, 1, 200/4200/4 

%% CCaasshh && ''TTMM ''TTMM ''TTMM



eett ''ee**eerree!! oo++!! II++**eessttmmee++ttss SSaalleess EEIITT EEIITT,, (($$MMMM)) eettaa RRaattii++-- (($$MMMM)) (($$MMMM)) (($$MMMM)) (($$MMMM)) 8,/77 8,/77 2.1/ 2.1/ " " /33 /33 5,707 5,707 1,/551,/554 4 324324 : : 1.11 1.11 : : 28,8/0 28,8/0 3,0/6 3,0/6 ,/78 ,/78 7,3/7,3/ 2, 2,01011 1 1.1.12 12 A2 A2 /,/,58586 6 6161,1,101 01 3,3,1/1/0 0 3,3,/5/5// 3,808 3,808 1.3/ 1.3/ : : 6,886 6,886 18,76 18,76 1,56/ 1,56/ 2,6262,626 20 20,8,857 57 1.1.25 25 A2 A2 1010,1,180 80 111717,6,6/ / 1010,3,358 58 1818,1,155 1, 1,/7/77 7 1.1.20 20 A1 A1 7,7,78780 0 33,5,576 76 7,7,/5/58 8 1313,5,500 33 33,/,/25 25 0.0./3 /3 A1 A1 1212,/,/0 0 10103,3,63630 0 1616,,15 15 2222,1,16565 1,265 1,265 1.70 1.70 : : 2,608 2,608 3,868 3,868 116 116 276276 1, 1,2525  1.1.3 3 "a"a1 1 3,3,06061 1 1313,8,837 37 22,2,231314 4 11,,5544 350 350 1.32 1.32 : : 2,017 2,017 3,86 3,86 /61 /61 1,2311,231 2, 2,00000 0 0.0.// // AaAaa a 3131,8,88 8 6161,/,/71 71 2222,1,127 27 2828,8,87575 1 1222 2 11..550 0 ""1 1 11,,0066  //880 0 110 0 5555 1 11,1,23237 7 1.1.2 2 A2 A2 1212,6,628 28 2323,6,630 30 7,7,80806 6 1010,2,2/1/1 : : 11..220 0 """ " 66663 3 66227 7 770 0 1111//

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'TM *ales Multiple Ear+i+-s ($MM) E"T Multiple 3,0/74 7.54 1.0 3.174 5,27 /.7 2.30 10.6 2,87 3.5 0.23 8.37 1,386 7.7 1.55 18.2 7,050 6./ 0.73 /.8 5,2/2 2.8 0.77 3.0 12,338 .1 1.52 /.80 101 15.6 1.2/ 37.3 nBa 1.74 0.23 1.814 70/ /.2 3.28 11.8 1,232 5.7 2.27 6.3/ 154 .8 0.83 81.08 5,3/ /.2 8.01 11.27 75 23. 8.8/ 35.08 ,*era-e ./0 1/2 13/4 E"T)A M'LTLE

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Ehibit 10

SUN MICROSYSTEMS Relevant *e+urity @ields, April 200/

Corporate o+! Yiel!s

AAA 5.50C AA 5.C AD 6.2C A 6.35C A: 6.50C """D .58C """ .62C """: 7.68C ""D 11.82C "" 11.8/C "": 11.0C "D 13.27C " 18.0C ": 15.86C

U/S/ Treasury Yiel!s

170:)ay 0.38C 1:@ear 0.58C 3:@ear 1.22C 5:@ear 1.1C 10:@ear 2.72C 30:@ear 3.66C

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Ehibit 11

SUN MICROSYSTEMS

*un Mi+rosyste#s 9istori+al and roe+ted "alan+e *heet in #illions o! '.*. dollars4

5is 888 ,ssets

$urrent Assets

3,620

Marketable )ebt *e+urities 2,322

<et Re+eivables 2,/68

nventory 528

200

>ther$urrentAssets 1,057

Total$urrentAssets 10,677

roperty, lant, F EGuip#ent, <et 1,508

Hoodwill 2,518

ntan%ibleAssets 633

>ther <on+urrent Assets 8//

Total,ssets 129:4:

'iailities & E;uity $urrent Liabilities

A++ounts ayable n+ludin% A++rued ayroll 2,222

*hortB$urrent Lon%:Ter# )ebt 1

2,08

>ther $urrent Liabilities n+ludin% Iarranty Reserve 1,172

Total $urrent Liabilities 5,851

Lon%:Ter#)ebt 1,268 65/ 1,275 TotalLiabilities 7,65/ *to+kholders EGuity $o##on*to+k 6,/7 Treasury*to+k 3114 RetainedEarnin%s 17/

>ther *to+kholders EGuity 318

Total *to+kholders EGuity ,1/

Total 'iailities & E;uity 129:4:

)ata sour+es? $o#pany !ilin%s and +ase writer esti#ates.

24 )e!erred taes and related a++ounts are not epe+ted to vary with sales or +ontinue to a++u#ulate as a +o#pan

$ash14

)e!erred repaid Taes24

)e!erred Taes24

)e!erred Lon%:Ter# $har%es24

>ther <on+urrent Liabilities34

14 *un Mi+rosyste#s4 lon%:ter# strate%y is to #aintain a #ini#u# a#ount o! +ash and +ash eGuivalents in subs invest the re#ainin% a#ount o! our +ash in interest:bearin% and hi%hly liGuid +ash eGuivalents and #arketable debt

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34 n+ludes de!erred settle#ent in+o#e !ro# Mi+roso!t as o! =une 30, 200/, 2007, 200, and 2006, lon%:ter# ta l 200, and 2006 and lon%:ter# restru+turin% liabilities.

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cal Year6E+! 7u+e 40 888 300<E 2,22 1,76 1,037 1,175 3,01/ 2,257 670 566 216 177 1,217 //5 7,883 ,067 1,611 1,616 3,215 1,83 565 26/ 506 536 1=94=0 119343 2,121 1,600 : 558 2,236 2,381 1,311 1,126 5,667 5,621 1,265 6/5 673 635 1,136 /6 7,52 ,/2 ,3/1 ,572 2,264 2,56/4 830 2,0554 8/3 38 5,577 3,305 1=94=0 119343 %rowth.

idiaries !or operational purposes and to se+urities.

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Ehibit 12

SUN MICROSYSTEMS

>ra+le 9istori+al and roe+ted "alan+e *heet in #illions o! '.*. dollars4

5iscal Year6E+! May 41

300. 300: 300<E

,ssets

$urrent Assets

$ash F $ash EGuivalents ,020 11,083 12,628

<et Re+eivables 8,57/ 5,// 8,830

nventory : : :

>ther $urrent Assets 1,28 1,261 1,52

Total $urrent Assets 12,773 17,103 17,571

roperty, lant, F EGuip#ent, <et 1,603 1,677 1,/22

Hoodwill 13,8/ 1,//1 17,782

ntan%ible Assets 5,/68 7,3/5 ,26/

>ther <on+urrent Assets 683 1,0/1 702

Total ,ssets 4=92.3 =.93>: =.9=1>

'iailities & E;uity $urrent Liabilities

A++ounts ayable 315 373 21

*hortB$urrent Lon%:Ter# )ebt 1,357 1,001 1,001

>ther $urrent Liabilities ,18 7,685 ,7

Total $urrent Liabilities /,37 10,02/ /,18/

Lon%:Ter# )ebt 6,235 10,235 /,23

)e!erred Lon%:Ter# $har%es 1,121 1,217 870

>ther <on+urrent Liabilities /10 2,61 3,860

Total Liabilities 1,653 28,283 22,326

*to+kholders EGuity

$o##on *to+k 10,2/3 12,886 12,/70

Treasury *to+k : : :

Retained Earnin%s 6,223 /,/61 11,7/8

>ther *to+kholders EGuity 803 617 216

Total *to+kholders EGuity 16,/1/ 23,025 25,0/0

Total 'iailities & E;uity 4=92.3 =.93>: =.9=1>

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Ehibit 13

SUN MICROSYSTEMS

>ra+le 9istori+al and roe+ted n+o#e *tate#ent in #illions o! '.*. dollars4

5iscal Year6E+! May 41

300. 300: 300<E

*o!tware Revenues 18,211 1,783 17,7

*ervi+es Revenues 3,75 8,57 8,35

<et Revenue 1,//6 22,830 23,252

*ellin%, Heneral, F Ad#inistrative 7,/0 10,867 10,21

Resear+h F )evelop#ent 2,1/5 2,81 2,6

A#ortiJation o! ntan%ible Assets 77 1,212 1,13

>ther >peratin% Epense 15/ 165 238

Total >peratin% Epense 12,022 18,576 18,/31

>peratin% n+o#e 5,/8 ,788 7,321

n+o#e Ta on >perations 1,0/ 2,316 2,370

<et >peratin% ro!it A!ter Ta 8,265 5,527 5,/81

E!!e+tive $orporate Ta Rate 27.6C 2/.5C 27.6C

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SUN *un Mi+rosyste#s 9ist

in #i

300. 888

<et Revenue 13,73 13,770

$ost o! *ales ,607 ,825

Hross Mar%in 6,265 6,855

*ellin%, Heneral, F Ad#inistrative 3,751 3,/55

Resear+h F )evelop#ent 2,007 1,738

#pair#ent o! Hoodwill : KKK

>ther >peratin% Epense / 2/8

Total >peratin% Epense 5,/56 6,073

>peratin% n+o#e 30/ 32

)epre+iation F A#ortiJation 51 86

as ! of "rior #ear ""$% 38.8C 2/.5C

<et FE 1,611 1,616

as Co!*ales 11.6C 11.6C

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Ehibit 18

MICROSYSTEMS

ori+al and roe+ted n+o#e *tate#ent lions o! '.*. dollars4

5iscal Year6E+! 7u+e 40

300<E 3010E 3011E 3013E 3014E

11,88/ 12,665 13,08 13,526 13,775 6,17 ,675 ,573 ,35 ,77/ 8,31 8,/70 5,868 5,/1 5,//6 3,861 1,687 1,860 3/7 6,/6 8,73/ 8,//2 5,121 5,28/ 2,2364 181 82 60 8 88 536 856 80 87 2/.3C 30.0C 30.0C 30.0C 30.0C 1,77 1,520 1,566 1,623 1,666 15.6C 12.0C 12.0C 12.0C 12.0C

(15)

301=E 18,283 7,05 6,167 5,32 /6 500 30.0C 1,0/ 12.0C

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SUN in #i 300. 888 <et Revenue 13,73 13,770 $ost o! *ales ,607 ,825 Hross Mar%in 6,265 6,855

Total >peratin% Epense 5,/56 6,073

Operati+- I+come 40< 4.3 EIT?(16T) 301 3=3 E 1,611 1,616 NetPPE 2 <I$ 1,182 1,875 as ! of ales NetN@C 4=4

epreciatio+ & ,mortiAatio+ 21. =.>

as ! of "rior #ear ""$% 38.8C 2/.5C <et FE 1,611 1,616 as C o! *ales 11.6C 11.6C @ithout Sy+er-y 5C5 Termi+al %alue E+terprise %alue nterest TaE"T:nterest4 E;uity Cash 5lo" E;uity %alue o# 5irm

@ith Sy+er-y

<et Revenue 13,73 13,770

$ost o! *ales ,607 ,825

Hross Mar%in 6,265 6,855

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$usto#er Attrition nte%ration $har%es

n+rease in >peratin% n+o#e Operati+- I+come EIT?(16T) 5C5 Termi+al %alue E+terprise *alue nterest TaE"T:nterest4 E;uity Cash 5lo" E;uity %alue o# 5irm

Sy+er-y E##ect Usi+- Multiple

ndustry E"T #ultiple 12/31

ndustry E"T)A #ultiple 817

ndustry *ales Multiple 1/222

'sin% E"T Multiples !ro# ntel 37/5

'sin% E"T Multiples !ro# "M /7/

The +o#panies %ood idea to sti

(18)

Ehibit 18

MICROSYSTEMS lions o! '.*. dollars4

300<E 3010E 3011E 3013E 3014E

11,88/ 12,665 13,08 13,526 13,775 6,17 ,675 ,573 ,35 ,77/ 8,31 8,/70 5,868 5,/1 5,//6 3,861 1,687 1,860 3/7 6,/6 8,73/ 8,//2 5,121 5,28/ (3934>) 1=1 =.3 >.0 .=. (19=24) <3 40. =4> =:> 1,77 1,520 1,566 1,623 1,666 1.3 (3>:) => 2. =4 1,0/3 1,20/ 1,286 1,2/1 1,326 10.6C 3.0C 3.C 2.C (4<3) 11> 4> => 4= =.= 24> =2> =.0 =:. 2/.3C 30.0C 30.0C 30.0C 30.0C 1,77 1,520 1,566 1,623 1,666 15.6C 12.0C 12.0C 12.0C 12.0C (.2<) .:0 >:0 :03 :<2 119><4 <93>< Share Price 12.54 182.68 /.3 /.3 /.3 /.3 :732.52 21.5 13.82 206.2 233.6 (:23) 1.= >3< .20 :== .9442 11,88/ 12,665 13,08 13,526 13,775 6,17 ,675 ,573 ,35 ,77/ 8,31 8,/70 5,868 5,/1 5,//6 3,861 2,287 2,31/ 2,3/ 2,837 1,687 1,585 1,5/8 1,635 1,66 1,860 3/7 183 187 152 155 6,/6 3,/36 8,061 8,166 8,20

(19)

85 50 350 /00 /00 (3934>) 3=< 19024 19>32 19.3> (19=24) 1>3 >:2 1902> 19133 (.2<) :20 1902: 19=34 19243 1<.<= 129... Share Price 21.35 188.86 188.86 182.68 /.3 /.3 :733.16 36.8 317.6/ 581.06 56.3 (:24) 303 <>2 194.1 19=:0 14930< >920:

iven in ehibit / are bi%%er than *un Mi+rosyste# and hen+e we #ay end up over valuin% k to industry avera%es.

(20)

TaB Rate 35C

301=E Sta## EBpe+se S&, R&

18,283 25C 32C : 7,05 22C 2C : 6,167 60C 8C 32C Su+ MicroSystem 300< )ebt"(4 125 Id 20C *hares 3/ 5,32 *hare ri+e 6.6/ .<> EGuityM(4 8/88 Ie 70C

21. "eta Levered4 1.3 Hiven Ehibit /

1,0/ R! 3.66C 30 year bond Ehibit 10

=4 kd 11.82C Ratin% : "a1 Ehibit 10

1,360 Rp 5C 2.6C ke 12.31C 4= IA$$ 11.32C 200 30.0C 1,0/ Oracle D301= 12.0C )ebt "(4 11237 Id 10C *hares 5086 <=0 *hare ri+e 1/.06 EGuityM(4 /61 Ie /0C

"eta Levered4 1.2 Hiven Ehibit /

/.3 R! 3.66C 30 year bond Ehibit 10

250.72 kd 6.35C Ratin% : A2 Ehibit 10

::< Rp 5C

ke 11.65C

'nlevered "eta 1.87

<ew "eta Levered 1.60

IA$$ 10.76C 18,283 Hrowth Rate 2.72C 7,05 6,167 2,8/5 1,15 15/ 8,30

(21)

/00 19.<: 191>< 192<1 /.3 601.55 192=0

(22)

30116301= )ebt 03 Id 12C EGuity 8/88 Ie 77C 'nlevered "eta 1.87 <ew "eta 1.62 <ew ke 11.C

(23)

(24)

Ehibit 1 SUN MICROS in #illions o! '. 888 888 300<E <et Revenue 13,73 13,770 11,88/ $ost o! *ales ,607 ,825 6,17 Hross Mar%in 6,265 6,855 8,31

*ellin%, Heneral, F Ad#inistrative 3,751 3,/55 3,861

Resear+h F )evelop#ent 2,007 1,738 1,687

#pair#ent o! Hoodwill : : 1,860

>ther >peratin% Epense / 2/8 3/7

Total >peratin% Epense 5,/56 6,073 6,/6

Operati+- I+come 40< 4.3 (3934>) EIT?(16T) 301 3=3 (19=24) E 1,611 1,616 1,77 NetPPE 2 1.3 <I$ 1,182 1,875 1,0/3 as ! of ales NetN@C 4=4 (4<3)

epreciatio+ & ,mortiAatio+ 21. =.> =.=

as ! of "rior #ear ""$% 38.8C 2/.5C 2/.3C <et FE 1,611 1,616 1,77 as C o! *ales 11.6C 11.6C 15.6C @ithout Sy+er-y 5C5 (19344) Termi+al %alue E+terprise%alue 4934< nterest 182.68 TaE"T:nterest4 :732.52

E;uityCash 5lo" (1943>)

E;uity%alueo# 5irm 19.=1

@ith Sy+er-y

<et Revenue 13,73 13,770 11,88/

$ost o! *ales ,607 ,825 6,17

Hross Mar%in 6,265 6,855 8,31

*ellin%, Heneral, F Ad#inistrative 3,751 3,/55 3,861

Resear+h F )evelop#ent 2,007 1,738 1,687

#pair#ent o! Hoodwill : : 1,860

>ther >peratin% Epense / 2/8 3/7

(25)

$usto#er Attrition nte%ration $har%es

n+rease in >peratin% n+o#e

Operati+-I+come (3934>) EIT?(16T) (19=24) 5C5 (19344) Termi+al %alue E+terprise*alue <9.=. nterest 188.86 TaE"T:nterest4 :733.16

E;uityCash 5lo" (1943.)

E;uity%alueo# 5irm .9>12

Sy+er-yE##ect >920:

Usi+- Multiple

ndustry E"T #ultiple 12/31

ndustry E"T)A #ultiple 817

ndustry *ales Multiple 1/222

'sin% E"T Multiples !ro# ntel 37/5

'sin% E"T Multiples !ro# "M /7/

The +o#panies %iven in ehibit / be a %ood idea to sti+k to industry

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8

STEMS . dollars4

3010E 3011E 3013E 3014E 301=E

12,665 13,08 13,526 13,775 18,283 ,675 ,573 ,35 ,77/ 7,05 8,/70 5,868 5,/1 5,//6 6,167 8,73/ 8,//2 5,121 5,28/ 5,32 1=1 =.3 >.0 .=. .<> <3 40. =4> =:> 21. 1,520 1,566 1,623 1,666 1,0/ (3>:) => 2. =4 =4 1,20/ 1,286 1,2/1 1,326 1,360 10.6C 3.0C 3.C 2.C 2.6C 11> 4> => 4= 4= 24> =2> =.0 =:. 200 30.0C 30.0C 30.0C 30.0C 30.0C 1,520 1,566 1,623 1,666 1,0/ 12.0C 12.0C 12.0C 12.0C 12.0C 3=4 33= 443 =0: ==0 29=.> Share Price 4.38 /.3 /.3 /.3 /.3 /.3 21.5 13.82 206.2 233.6 250.72 (4>3) 1.4 3:1 42. 4:< 12,665 13,08 13,526 13,775 18,283 ,675 ,573 ,35 ,77/ 7,05 8,/70 5,868 5,/1 5,//6 6,167 2,287 2,31/ 2,3/ 2,837 2,8/5 1,585 1,5/8 1,635 1,66 1,15 183 187 152 155 15/ 3,/36 8,061 8,166 8,20 8,30

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85 50 350 /00 /00 /00 3=< 19024 19>32 19.3> 19.<: 1>3 >:2 1902> 19133 191>< 414 >03 <24 190=2 190<3 142.. Share Price 13.19 188.86 182.68 /.3 /.3 /.3 36.8 317.6/ 581.06 56.3 601.55 (442) 210 <03 <<4 190=0

re bi%%er than *un Mi+rosyste# and hen+e we #ay end up over valuin% the !ir#. 9en+e it #i%ht avera%es.

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Ta Rate 35C

Sta## EBpe+se S&, R&

25C 32C :

22C 2C :

60C 8C 32C

Su+ MicroSystem 300< 30116301=

)ebt "(4 125 Id 20C )ebt 03 Id

*hares 3/

*hare ri+e 6.6/

EGuityM(4 8/88 Ie 70C EGuity 8/88 Ie

"eta Levered4 1.3 Hiven Ehibit / 'nlevered "eta

R! 3.66C 30 year bond Ehibit 10 <ew "eta

kd 11.82C Ratin% : "a1 Ehibit 10 <ew ke

Rp 5C ke 12.31C IA$$ 11.32C Oracle D301= )ebt"(4 11237 Id 10C *hares 5086 *hare ri+e 1/.06 EGuityM(4 /61 Ie /0C

"eta Levered4 1.2 Hiven Ehibit /

R! 3.66C 30 year bond Ehibit 10

kd 6.35C Ratin% : A2 Ehibit 10

Rp 5C

ke 11.65C

'nlevered "eta 1.87 <ew "eta Levered 1.60

IA$$ 10.76C

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12C

77C 1.87 1.62 11.C