Viacom Equity Analysis Report by Abhit Sahota

Executive Summary .....................................................................................................................................4 Viacom Corporation …................................................................................................................................6 Business Description....................................................................................................................................6 VIAB’s Geographic Exposure........................................................................................................................6 Reformulated Financial Statements............................................................................................................7 Balance Sheet Reformulation.........................................................................................................................7 Income Statement Reformulation ................................................................................................................10 Ratio Analysis.............................................................................................................................................11 Common Size & Trend Analysis.................................................................................................................11 Financial Statement Analysis.......................................................................................................................11 Profitability & Growth .................................................................................................................................14 Accounting Quality ....................................................................................................................................16 Assessing Sales............................................................................................................................................16 Assessing Expenses......................................................................................................................................17 Credit Quality.............................................................................................................................................19 Balance Sheet Analysis................................................................................................................................19 Forecast.......................................................................................................................................................22 Business Strategy .........................................................................................................................................22 Macroeconomic Exposure............................................................................................................................23 Industry Outlook..........................................................................................................................................25 Company Outlook ........................................................................................................................................28 Conclusion ...................................................................................................................................................30 Revenue Model........................................................................................................................................... 31 Revenue & Risk........................................................................................................................................... 31 Expense Forecast..........................................................................................................................................33 Turnover Forecast........................................................................................................................................ 34 Valuations...................................................................................................................................................35 Discounted Cash Flow (DCF)....................................................................................................................35 Abnormal Operating Income (AOI) Valuation..........................................................................................35 Abnormal Operating Income Growth (AOIG) Valuation...........................................................................35 Option Overhang..........................................................................................................................................36 Comparable Company Analysis................................................................................................................36 Universe Selection .......................................................................................................................................36 Multiples Analysis .......................................................................................................................................39 Sensitivity Analysis ....................................................................................................................................40 Investment Recommendation ...................................................................................................................42 Exhibits .......................................................................................................................................................43 Exhibit 1 – Reformulated Balance Sheet ...................................................................................................43 Exhibit 2 – Operating Lease Capitalization & Pensions..........................................................................44 Exhibit 3 – Reformulated Income Statement..............................................................................................45 Exhibit 4 – Common Size Analysis............................................................................................................46 Exhibit 5 – Trend Analysis .........................................................................................................................48 Exhibit 6 – Financial Statement Ratio Analysis .........................................................................................50 Exhibit 7 – Profitability & Growth Analysis............................................................................................51 Exhibit 8 – Credit Analysis.........................................................................................................................53

Exhibit 9 – Revenue Forecast .....................................................................................................................54 Exhibit 10 – Expenses, Key Income Statement Ratio & Turnover Forecasts.........................................54 Exhibit 11 – Pro-Forma Consolidated Financial Statements......................................................................55 Exhibit 12 – DCF Valuation .......................................................................................................................55 Exhibit 13 – Abnormal Operating Income Valuation.................................................................................56 Exhibit 14 – Abnormal Operating Income Growth Valuation....................................................................56 Exhibit 15 – Option Overhang & WACC Calculation............................................................................57 Exhibit 16 – Comparable Company Analysis...............................................................................................58

Executive Summary Business Description: Viacom Inc. (hereafter referred to as VIAB, the Company or Viacom) operates as an entertainment content company. The company creates television programs, motion pictures, short-form content, applications (apps), games, consumer products, social media experiences, and other entertainment content for audiences in 180 countries. Recommendation and Target Price: We are issuing a buy recommendation on VIAB Inc., with a target price of $43.45. This target represents a 14.04% increase from the September 30th, 2016 closing price of $38.10. Valuation: Regarding the valuation we looked at the macron economic exposure, the outlook of the industry and specific trends facing Viacom. The macro economic environment can be characterized as vulnerable and very uncertain, mainly due to recent political events. The media and entertainment industry is an industry largely dependent from technological development and its therefore a fast-moving industry, which makes it hard to keep up with but offers very attractive opportunities if you can do so. On a company level, therefore, it will be important how Viacom will cope with these changes and adopts its business model to stay competitive. Accounting Quality: Viacom’s accounting quality is not fantastic in recent years and this was identified through assessing sales and expenses over a specific period. In this section, we seek to detect any manipulation to the income statement and balance sheet. Buildup of accounts receivables and deferred tax assets combined with declining sales and asset turnovers are some of the items extensively analyzed to help conclude that Viacom has questionable accounting quality and investors should be aware. Credit Quality: Through analyzing Viacom’s credit quality it became clear that the company needs to de-lever its balance sheet to ward off increasing bankruptcy risk. Through analyzing ratios that measure liquidity and solvency it can be concluded that Viacom has weak credit short-term credit quality and moderate long-term credit prospects. The growing debt load is something investors should be weary of. Risks: There are several risks associated with Viacom that could affect the business’ financial conditions and operations now and in the future. The most significant risks include: (i) tension between management and the board; raising questions about the governance structure, (ii) the potential merger with CBS; carries many uncertainties that cannot be foreseen right now (ex. Shareholders do not approve the transaction) and (iii) success in the entertainment industry is dependent on the acceptance of the company’s brands, content and motion pictures; which is hard to predict. Catalysts: In terms of catalysts, there is the possibility to increase operational and business performance due to the possibilities generated by the expansion of the global spending on advertising (particularly digital advertising), by the expected growth of filmed entertainment segment and by the overall improvement in the global economy and in

consumer spending. The unpredictable and unique impact that technology has had on the entire media and entertainment industry has deeply influenced the operating results in the last few years, but overall there are good signs of recovery driven by the Media and Entertainment growth in North America and EMEA and by the possibility of future largescale synergistic mergers.

Viacom, Incorporated Business Description Ticker: VIAB (Nasdaq) Founded in: 1971 Industry: Movies and Entertainment Headquarters: 1515 Broadway New York, NY Market Cap (mm): 14,480.9 Company Size: 9,300 employees Viacom, Inc. operates as a worldwide media brand that creates compelling television programs, motion pictures, short-form content, applications (“apps”), games, consumer products, social media experiences and other entertainment content for audiences in more than 180 countries. The Company operates through two segments, Media Networks and Filmed Entertainment. The Media Networks segment provides entertainment content and related branded products for consumers through approximately 250 locally programmed and operated TV channels, as well as through online, mobile, and apps. The Filmed Entertainment segment produces, finances, acquires, and distributes motion pictures, television programming, and other entertainment content under the Paramount Pictures, Paramount Animation, Nickelodeon Movies, MTV Films, and Paramount Television brands; and distributes films released under the Paramount Vantage, Paramount Classics, and Insurge Pictures brands. This segment exhibits motion pictures theatrically through home entertainment, licensing to television and digital platforms, and ancillary activities. The company releases its content through download-to-own, download-to-rent, DVDs, Blu-ray discs, transactional video-on-demand, pay television, subscription video-on-demand, basic cable television, free television, and free video-ondemand, as well as airlines and hotels.

VIAB’s Geographic Exposure Revenue by Geography (2016) Revenues generated from international markets were approximately 25% of total consolidated revenues in 2016. The largest international markets are located in Europe. The United Kingdom and Germany together accounted for approximately 57% of total revenues in the Europe, Middle East and Africa (“EMEA”) region in 2016, 2015, and 2014, respectively.

Reformulated Financial Statements Balance Sheet Reformulation Reformulation of the balance sheet required differentiating between assets and liabilities that support operations and those that are held for financial purposes. The following items appear in VIABâ&#x20AC;&#x2122;s reformulated balance sheet (Exhibit 1). Operating Assets: Operating Cash: VIAB does not make the distinction between amount of cash held on hand that is working cash or excess cash. VIAB requires working cash as the company develops entertainment content year-round both in their media network and filmed entertainment segments. It is assumed that the cash equivalent of 0.5% of net sales is used as operating cash. Accounts Receivable: Consists of monetary payment owed to VIAB for their services or products, directly related to operations and thus, an operating asset. Also, VIAB determined that credit loss allowances are generally not considered necessary for these stated amounts and has stated a calculation for doubtful accounts. Inventory: Inventory consists of film, television, and home entertainment productions consolidated into one of three states of released, completed but not released, and in process. This balance sheet item directly generates sales, consequently is considered an operating asset. Prepaid Expenses: Considered to be an operating asset. VIAB has not released a breakdown of prepaid expenses. Deferred Tax Assets, Current & Long-Term: The future tax consequences of temporary difference between financial statement tax rates and applied tax rates. This difference arises from operations; thus, it is an operating asset. VIABâ&#x20AC;&#x2122;s tax assets are a product of accrued liabilities, post-retirement and other employee benefits, and tax credit and loss carryforwards. Other Assets, Current & Long-Term: Considered to be operating assets. The long-term portion consists primarily of long-term inventory and other long-term assets, which VIAB released no further disclosure to the nature of this item in reports. Gross Property, Plant & Equipment: PP&E consists of buildings (i.e studios), land, and equipment (i.e. production equipment) used to produce inventory (i.e. a movie) for sales, consequently is considered an operating asset.

Goodwill: The residual difference between the consideration paid for a business and the fair value of the net assets acquired (i.e. acquisition of Channel 5, and Telefe) and thus, it is considered an operating asset. Other Intangibles: Consists of identifiable intangible assets of both indefinite and definite lives (i.e. trademarks on movie brands, patents on production techniques, etc.). These assets are directly related to operating activities and are considered operating assets. Accounts Receivable, Long-Term: Long-term accounts receivables are primarily related to long-term television license arrangements in Filmed Entertainment and distribution agreements in Media Networks. As this item directly supports operating activities it is considered an operating asset. Capitalized Operating Leases: Includes the present value of VIABâ&#x20AC;&#x2122;s operating lease commitments that must be honored because they are essential to operating activities therefore are considered operating assets. Refer to Exhibit 2 for further calculations and assumptions regarding Capitalized Operating Leases. Re: NOA - Excluded discontinued operations as the values were not stated in any previous 10K filing and ultimately the values over previous years was not substantial to the total operations of VIAB and thus, differences would be negligible. Operating Liabilities Accounts Payable: Consists of payables to suppliers such as contractors or equipment manufacturers. Supports operating activities and thus is considered an operating liability. Accrued Expenses: Considered to be an operating liability. VIAB has not released the breakdown of this balance sheet item. Pension & Other Post-Retirement Benefits: This line item is a by-product of employee compensation and includes the approximate value of outstanding obligations (consisting of one-time pension settlements, domestic plans, multiemployer benefit plans). Since the pension and additional benefit were accrued as part of employee consideration, this line item is considered an operating liability. Refer to Exhibit 2 for further calculations and assumptions. Other Liabilities, Current & Non-Current: Includes all unfunded amounts of the pension plan, tax liabilities for uncertain tax positions, etc. All the included other liability items support the operations of the company and are considered an operating liability. Unearned Revenue, Current: This line item is a current liability that indirectly affects the operating cash flow of VIAB therefore is considered an operating liability. Deferred Tax Liability, Current & Non-Current: A deferred tax liability occurs when taxable income is smaller than the income reported on the income statements. This

difference arises from operations; thus, it is an operating liability. In VIABâ&#x20AC;&#x2122;s it driven primarily by different depreciating methods used for financial reports and the government for their property, equipment & intangible assets used for production. Financial Assets Non-Operating (Excess) Cash: The remainder of cash that is not used for operations of the company rather held as a financial asset. Short-term Investments: This line item consist of financial assets such as marketable securities and derivatives used to modify exposure to foreign-exchange and interest rate changes. Long-term investments: VIAB owns large percentage equity and operates several regional entertainment channels and production facilities that would be considered securities that are held-to-maturity, a financial asset. Financial Liabilities Long-Term Debt: A financial liability, VIABâ&#x20AC;&#x2122;s debt consists of a variety of fixed-rate interest bearing notes, maturities ranging from 2016 to 2044. VIA has a credit facility, which has a zero-outstanding balance. Capitalized Operating Leases: The corresponding financial liability for capitalizing operating leases as an operating asset.

Income Statement Reformulation Reformulation of the income statement required differentiating between core operating and unusual or non-operating items. The following items appear in VIAB reformulated income statement and require reasoning for classification (Exhibit 3). Operating revenue: All sales are considered core operating revenue. Revenue is recognized and earned when there is persuasive evidence of an arrangement, delivery has occurred, the sale price is fixed or determinable, and collectability is reasonably assured. Cost of sales: The direct cost of products sold. These costs are incurred for each product produced and sold, and therefore fall directly under operating revenue. Selling, general & administration: SG&A expenses consist primarily of employee compensation, marketing, research and professional service fees and facility and occupancy costs. Depreciation & Amortization: Reflects the depreciation of fixed assets, including transponders financed under capital leases, and amortization of finite-lived intangible assets. Currency exchange gains (losses): In converting currencies to the United States dollar, foreign currency are translated at exchange rates existing at the respective balance sheet dates. Meanwhile, foreign subsidiary operations are translated at the average exchange rates during the respective periods. Gains and losses resulting from foreign currency do not directly generate sales, but are consistently predicted to arise year over year (YoY) moving forward given Viacomâ&#x20AC;&#x2122;s significant international operations. Thus, this line item is recorded under other operating income. Income (loss) from affiliates: Partnerships with affiliates such as Paramount and CBS have allowed Viacom to realize unusual income through various ventures. Restructuring charges and other: The restructuring charge includes the cost of separation payments and the acceleration of equity-based compensation expense. Restructuring charges also reflect programming charges and restructuring charges workforce reductions. These charges were recognized in connection to company- wide review, resulting in the implementation of operational improvements. Gain (loss) on sale of investment: Fiscal year 2013 experienced a gain on sale of investment. This is a one-time gain from sale and thus is recorded as unusual income on the reformulated income statement. Asset write-down: Asset impairment is not a consistent or regular expense, displayed by the unique write-down in 2013 & 2014 only, and is recorded as an unusual expense.

Ratio Analysis Common Size & Trend Analysis The common size and trend analysis for Viacom (Exhibits 4 and 5, respectively) indicate a couple significant trends. The increase in operating assets was driven by a buildup in accounts receivable and a decrease in operating liabilities was supported by reduced accrued expenses and other liabilities. Viacom’s sales and gross margin have seen a significant decline from 2011-2016, reflecting poor business performance. Total operating expenses have remained at a rather stable level causing operating margin to be lower. There are random spikes under unusual income that need to be further investigated under the Accounting Quality section, that could signal earnings manipulation. There is a large increase in deferred revenue which is another trend that supports the idea of earnings manipulation. In summary, the common size and trend analysis has identified that Viacom’s business is generating less sales and in turn performing poorly in more recent years. Alongside recent poor performance, Viacom has an increasing amount of long-term debt and declining shareholders’ equity, which are both a bad sign. Management has publicly addressed the issue of the increasing the debt load, with a potential solution of divesting in one of its holdings and raising capital to pay back debt. The discovered trends give reason to believe that Viacom’s business is facing trouble generating sales and managing debt loads. It is positive that management is aware of these issues and has communicated to shareholders’ that they are going to manage through these issues and improve the business both operationally and financially

Financial Statement Analysis To support our assessment, we broke down what drives ROCE. The first level will analyze the effects of financial leverage (FLEV) and operating liability leverage (OLLEV), the second level will analyze the operating profitability of Viacom and the third level will analyze the drivers of that profitability such as individual margins as well as asset turnovers. First Level Breakdown Analysis The first level seeks to assess a company’s efficiency at generating profitability from every unit of common shareholders’ equity. Exhibit 6 depicts the drivers behind each level of profitability, and the first level analysis reveals what is driving ROCE growth from 20122016. As seen in the graphs below, ROCE increases until 2014 and then sees a significant drop. To further analyze ROCE, it is critical to analyze RNOA, FLEV and the

spread earned above the company’s net borrowing cost. Over the five-year period, RNOA and the spread increase in until 2014 and decline thereafter. However, FLEV is dramatically increasing year over year, due to Viacom taking on more debt. It is evident that FLEV is the dominating contributor to ROCE and the effects of RNOA are lesser. In general, ROCE can be levered using financial liabilities and RNOA can be levered using operating liability. Over the five years, OLLEV is steadily declining and OLSPREAD is increasing until 2014 then begins to decline, which is reflected in RNOA’s gradual increase until 2014 and decline thereafter. Diving deeper, it is revealed that ROOA is increasing until 2014 and then starts to decline which is reflected in the OLSPREAD. It is evident that operating income gradually rises until 2014 and then begins to decline. In conclusion, the increase then decrease in both ROOA and OLSPREAD are the drivers behind the slight changes in RNOA year over year. The decline in the SPREAD should be noted as it identifies that leverage has a negative impact and that Viacom is levering ROCE year over year. We find that several of metrics measuring profitability returns decline after fiscal year 2014 – after this year VIAB had an unusual restructuring expense on their balance sheet. Analyst reports attribute the decline in profitability and high restructuring expense to the departure of several senior executives and VIAB’s attempt to catch up with online streaming platform.

ROCE

RNOA

40%

20%

30%

15%

20%

10%

0% 2012

2013

2014

2015

2016

2012

RNOA vs. ROOA 20%

10%

15%

2015

2016

0.38 0.36 0.34 0.32 0.3 0.28

15%

2012

2013

2014 RNOA

2015

2016

2012

ROOA

2013

2014 RNOA

2015

2016

OLLEV

ROCE vs. FLEV

OLLEV vs. OLSPREAD 40%

0.4

30%

0.3

20%

0.2

10%

0.1

0 2012

2013 OLLEV

2014

RNOA vs. OLLEV

20%

2013

2014

2015

OLSPREAD

2016

1 0 2012

2013

2014 ROCE

2015

2016

FLEV

Second Level Breakdown Analysis The second level breakdown analysis of profitability looks at the effects of profit margin and asset turnovers on operating profitability. Profit margin reflects the profitability of each dollar of sales and it was increasing until 2014 when it started to decline. Asset turnover reflects the sales revenue per dollar of net operating assets and it is constantly declining year over year. The company is progressively getting worse at generating sales given its asset base and profit on sales. Generally, increasing asset turnover is the most sustainable method of boosting operating profitability and least likely to be due to manipulation. Viacomâ&#x20AC;&#x2122;s operating profitability is deteriorating which is supported by declining asset turnover and profit margin. NFO vs. NBC

PM 25%

NFO

20% 15% 10%

$15,000

15%

$10,000

10% 5%

$5,000

5% 0%

NBC

$2012

2013

2014

2015

2016

Third Level Breakdown Analysis The third level breakdown analysis of profitability looks at the individual profit margins, asset turnovers and net borrowing costs. It is important to breakdown profit margin into core and unusual profit margins, to remove any potential distortion. Core profit margin only includes expenses incurred to generate sales and it is growing until 2014 when it begins to decline. In 2015 and 2016 we see an increase in unusual losses, in turn unusual profit margin negatively impacts the overall profit margin in combination declining core profit margin. As result of unusual losses, profit margin in lower than core profit margin in some years. To further assess Viacom, asset turnover ratios should be analyzed to determine the effectiveness of corporate activity and asset utilization. Core PM vs. Total PM 30% 20% 10% 0%

2012

2013

2014 Core PM

2015

2016

Profitability and Growth Viacom’s growth can be analyzed by observing the change in ROCE and the change in Common Shareholders’ Equity (CSE) from 2012 to 2016. Such change can be analyzed by breaking down RNOA into its components, core operating income and unusual income. It is necessary to mention for this analysis that other operating income and unusual income were combined and defined as Unusual income. All metrics referred to in this analysis are shown in further detail in Exhibit 7. First, to analyze RNOA, the formula must be derived. RNOA is calculated by determining the Core OI/NOA then adding it to Other OI&UI/NOA. Over the years analyzed (2012 to 2016), Core OI/NOA has shown to be the primary driven of RNOA, representing over 100% in each year. The other factor, which barely drives any RNOA, Other OI&UI/NOA is consistently very low, except for 2015, which represented ~17% of RNOA. Core OI/NOA increases every year until 2015, then decreases steeply in 2016, this is clearly reflected in the RNOA as it follows a similar trend. RNOA’s trend only slightly differs from Core OI/NOA’s trend in 2015 (decreasing more than Core OI/NOA) due to the previously mentioned Other OI&UI/NOA irregularity in 2015. Therefore, RNOA is increasing until 2014 then seeing a significant decrease in 2015 and an even more significant decline in 2016. Next, to analyze the change in RNOA, this formula must be broken down into its parts. The change in RNOA can be derived as the change in cores sales at the prior year’s asset turnover level, change driven by changes in asset turnover and change due to changes in unusual items. The primary driver behind the change in RNOA can be clearly identified as the change in core sales PM at previous year’s ATO in 2013, 2014 and 2016. However, in 2015 the primary driver was the change due to change in other core income and unusual Items. This irregularity was due to a loss in other core income and unusual income in 2015, which differed significantly from other years. In regards to change in financial leverage, Viacom consistently increased their debt to artificially increase returns. This is clearly demonstrated by the increasing amount of financial leverage each year until 2016, in which the change was slightly negative. This was coupled with a SPREAD change that only increased in 2013, followed by three years of decrease until 2016. These metrics and their respective changes are further calculated to analyze overall profitability, which is represented by change in ROCE. Change in ROCE increased for the first two years in this analysis, only to decrease significantly in the final two years. These ROCE change values were driven primarily by the change due to change in financial leverage every year, which further shows that Viacom was artificially increasing this metric using leverage. In years of positive change in financial leverage, ROCE change was also positive. Finally, in assessing change in CSE, both change in ending CSE and change in average CSE must be broken down and compared. In terms of ending CSE, in all 4 years of change analyzed, it was negative by fluctuating amounts. It was driven by a combination of both Change in NFO and Change in NOA. Both contributed relatively equally, with Change in NFO contributing more in 2013 and 2014, and Change in NOA contributing

more in 2015 and 2016. In terms of average CSE, it was negative in the first 3 years until in 2016 in which it was positive. This reflects a slightly similar trend to ending CSE, as it was significantly negative in the first two years then much closer to being positive in the final two years (with average CSE coming out positive in 2016). The most notable driver in average CSE was a combination of an increasing financial leverage and decreasing change due to change in sales at previous ATO over this period.

Accounting Quality It is important to perform an accounting quality assessment when analyzing a business to identify any operational red flags.

Assessing Sales For the Fiscal Period Ending Sales Average AR AR Turnover

2012 $ 13,887 $ 2,590 5.36

2013 $ 13,794 $ 2,726 5.06

2014 $ 13,783 $ 2,995 4.60

2015 $ 13,268 $ 2,903 4.57

2016 $ 12,488 $ 2,719 4.59

Sales are generally viewed positively when they are very close to the cash generated from sales because it means the company is collecting on sales rather than selling on credit. Throughout the period 2011-2016, Viacom has been experiencing declining sales and increasing accounts receivables, indicating they may have reduced their credit standards to keep sales afloat. This theory is supported by declining accounts receivables turnover ratio.

For Accounting Quality

For the Fiscal Period Ending Net Sales Accounts Receivable Allowance for Doubtful Accounts Net Accounts Receivable Net Sales/Net AR Ratio

$ $ $ $

2011 14,914 2,732 49 2,683 5.46

$ $ $ $

2012 13,887 2,533 36 2,497 5.48

$ $ $ $

2013 13,794 2,987 33 2,954 4.62

$ $ $ $

2014 13,783 3,066 30 3,036 4.50

$ $ $ $

2015 13,268 2,807 37 2,770 4.73

$ $ $ $

2016 12,488 2,712 44 2,668 4.60

The net sales/accounts receivable ratio shows a significant drop beginning in 2013; which could reflect management engaging in earnings manipulation by understating net sales. Allowance for Doubtful Accounts is declining up until 2014 than it begins to rise reflecting accounts receivable being carried forward because of increased customer defaults. For the Fiscal Period Ending Sales Total operating expenses Total operating income after tax

2011 100% 100% 100%

2012 93% 94% 110%

2013 92% 96% 114%

2014 92% 98% 123%

2015 89% 100% 104%

2016 84% 99% 79%

In 2015 and 2016 margins are decreasing as sales begin to decline at an increasing rate than operating expenses. Investors should note that sales are declining over the entire analyzed period but operating income is deceptively rising. Increasing operating income through reducing expenses alongside declining sales in not sustainable and has a negative impact on earnings quality. When assessing sales, it is important to assess the current macroeconomic environment and whether it supports the businessâ&#x20AC;&#x2122; products. The macroeconomic exposure section of this report will further discuss systematic events and environment changes that will have an impact on sales.

Assessing Expenses For the Fiscal Period Ending Sales NOA ATO RNOA

$ $

2011 14,914 16,515 0.9 15%

$ $

2012 13,887 17,050 0.81 16%

$ $

2013 13,794 16,770 0.82 16%

$ $

2014 13,783 17,741 0.78 17%

$ $

2015 13,268 17,766 0.75 14%

$ $

2016 12,488 18,127 0.69 11%

It is concerning that Viacom’s asset turnover ratio is declining year over year excluding 2013. The increase in net operating assets (excluding 2013) has been a direct result of increased capitalized operating leases, current and long-term accounts receivables and reduced operating liabilities. Generally, declining asset turnover can be attributed to management trying to boost profit margins. RNOA shows that Viacom was not trying to boost margins as RNOA declines significantly in 2015 and 2016. For the Fiscal Period Ending Depreciation Expense Capital Expenditure Ratio

$ $

2011 271 155 1.75

$ $

2012 236 154 1.53

$ $

2013 237 160 1.48

$ $

2014 217 123 1.76

$ $

2015 222 142 1.56

$ $

2016 221 172 1.28

Capital expenditure is lower than depreciation expense, signaling that Viacom is divesting or investing less than the amount needed to compensate for the annual depreciation on fixed assets. This is aligned with declining PP&E meaning that Viacom might have to increase capex soon to sustain business operations or may have to borrow more in the future to fund capex. For the Fiscal Period Ending Deferred Tax Assets, Curr. Deferred Tax Assets, LT

2011 41

$ -

2012 68 -

$ $

2013 58 45

$ $

2014 8 105

2015

2016 -

Another important item we considered was deferred tax assets. This item was decreasing in the current and increasing in the long-term which could be a signal of income manipulation where the company is borrowing income from the future. This is aligned with the decrease in total expenses to match decreasing sales. During this period, there was an increase in restructuring charges which is generally seen as a signal of manipulation. When this happens, we can see an increase in NOA. All signals implicate Viacom of manipulating earnings. Manipulation of earnings is common when (i) management teams are changing – they may want higher net income to boost confidence in new leaders and (ii) weak governance structure – internal management dominates the advisory boards. In 2016, tensions flared between Shari Redstone, Vice-Chairwoman of Viacom and Philippe Dauman, former CEO of Viacom over the strategic direction of the business. Dauman expressed that the business needs to lessen their exposure and raise money that could be used to pay down debt. In February of 2016, Dauman said that he would sell a significant stake in the film studio Paramount; he said a sale “will bring significant benefit to Paramount and Viacom, both strategically and financially”. In the summer of 2016, Redstone filed a motion for Dauman and other executives to be removed from the board; which has not been accepted nor declined yet. The management turmoil could be viewed as a reason to

manipulate financial statements to keep investors calm and confident in the future of the business. For the Fiscal Period Ending Cash from Ops. Operating Income NOA

$ $ $

2011 2,644 2,433 16,515

$ $ $

2012 2,498 2,674 17,050

$ $ $

2013 3,083 2,764 16,770

$ $ $

2014 2,597 3,000 17,741

$ $ $

2015 2,313 2,540 17,766

$ $ $

2016 1,371 1,920 18,127

CFO/OI

1.09

0.93

1.12

0.87

0.91

0.71

CFO/NOA

0.16

0.15

0.18

0.15

0.13

0.08

The cash flow from operations to operating income ratio (CFO/OI) has deteriorated under a value of 1. As cash flows, have fallen below operating income, this indicates that earnings may have been manipulated. From 2014-2016 Viacom experienced unusually large changes in inventory significantly impacting cash flow from operations. The cash flow from operations to net operating assets ratio (CFO/NOA) has shrunk in half over time showing that Viacomâ&#x20AC;&#x2122;s ability to generate cash per dollar invested in operating assets is declining quickly. In summary, the accounting quality of Viacom is not very good. When looking deeper into different accounts it is evident that management was manipulating earnings. Signals that led to this conclusion include the increase in long-term deferred tax assets and allowance for doubtful accounts when sales are declining as well as the decline in CFO/OI and CFO/NOA. All the manipulation signals are supported by the management turmoil between the CEO and Vice-chairwoman over business strategy.

Credit Quality Balance Sheet Analysis Overview A detailed credit quality analysis with all metrics and ratios is included in the appendices as Exhibit 8. In general, Viacomâ&#x20AC;&#x2122;s credit quality is moderate with a few clear concerns that are driven primarily from their significant annual increase in debt. As more debt is added to the balance sheet each year, it becomes increasingly likely that Viacom will not be able to pay it off. This is shown through a strong decreasing trend across most credit metrics over the past 5 years. It will be become a severe issue, with bankruptcy potentially on the horizon, if they do not start to de-lever their balance sheet or increase free cash flows in the next 24 months. These are however, not unrealistic possibilities as management can de-lever their balance sheet and they could reasonably see increased cash flows in the near term with the forecasted growth in this segment. Philippe Dauman, former Viacom CEO, has already expressed that Viacom needs to raise money to pay off their debts. Considering the credit metrics, Viacomâ&#x20AC;&#x2122;s Altman z-score accurately represents the overall state of their credit quality. From 2011 to 2013 there is a slight increase each year, indicating improvement of credit quality. It improved to 3.17, which is above 3, implying a reduction in the probability of bankruptcy. However, from 2013 to 2016, there is a strong decreasing trend, as credit quality significantly deteriorated. This bottomed out in the most recent fiscal year at 2.48, which is below the level of low bankruptcy probability, but also still above the level of high bankruptcy. This infers that they have moderate probability of bankruptcy that will become a high probability of bankruptcy unless the recent decreasing trend is reversed. The general trend shown by the Altman z-score echoes the trend seen with liquidity stock and flow measures. There is an increase from 2011 to 2013 then a stark decrease from 2013 until 2016. The decrease is driven primarily by decreasing cash flows (as mentioned above) over this period. For Viacom, this means that they have a relatively weak ability to pay their short-term debt. Since they are already at alarming levels of liquidity, this decreasing trend is extremely worrisome, reflecting very poorly on their credit quality. On the other hand, the trend seen with solvency stock and flow measures is less reflective of the trend seen with Altman z-scores. Over the entire period analyzed, all metrics are decreasing y/y, except for the fixed charge coverage in one year (which is only due to an irregular debt repaid). This is primarily driven by the increasing debt y/y throughout this period and then further magnified with the decreasing cash flows seen in the second half of this period. For Viacom, this means that their ability to meet longer term debt obligations is diminishing. However, unlike liquidity, their solvency metrics are not yet at alarming levels as they started decreasing from a higher point. If they continue to decrease at this rate they will quickly dip into high bankruptcy probability levels.

Short-term Viacom’s short-term credit prospects look quite weak, in terms of both liquidity stock and flow measures. Looking first at liquidity stock, their cash and current ratios immediately look the weakest at 0.13, and 1.23 in 2016, respectively. In Financial Ratios as Predictors of Failure, this cash ratio trend from the past 2 fiscal year ends, signal that Viacom is currently in year 4 before failure. The current ratio scores even worse (1.23) when compared to a prediction of failure at 2.0. Viacom’s is significantly below 2 and steadily decreasing. These faltering metrics indicate that Viacom would have serious issues using near-cash assets to meet their short-term debt obligations. Next, looking at liquidity flow, their cash flow ratio is at an appropriate level with only a significant decrease this past fiscal year, which may only be a 1-year irregularity. Defensive interval and Cash Flow to CapEx have both decreased significantly since 2014 but not to alarming levels. These decreases are only due to decreasing operating cash flows, not increases in CapEx. The entertainment industry is not heavily dependent on CapEx so this is also less of a concern. These liquidity flow metrics reflect moderately well on Viacom’s credit quality, indicating that they should have the cash flow from operations to meet current short term liabilities. Overall the short-term outlook of Viacom’s credit quality is very poor. Their liquidity stock metrics are very concerning, and decreasing at an equally concerning rate. Their liquidity flow metrics are less concerning, but also decreasing at a concerning rate. Viacom’s management must either decrease their debt levels or increase operating cash flows in the next fiscal year for their short-term credit quality to improve to moderate levels. Long-term Viacom’s long-term credit prospects look moderate, in terms of both solvency stock and flow measures. In general, this indicates that Viacom can comfortably satisfy their longterm debt obligations. There is, however, a deteriorating trend y/y for every year in this analysis, which shows that they have become weaker every year. Looking first at solvency flow metrics, for Debt to Assets, Debt to Equity and LT Debt Ratio, all three are increasing quite significantly each year. This is primarily driven by Viacom taking on significant amounts of debt each year without increasing their assets or equity. Their Debt to Equity ratio stands out as the most significant increase over this period because Viacom’s equity also decreased significantly y/y, magnifying the impact on this ratio. Although both the Debt to Assets and LT Debt Ratios are both increasing at semialarming rates, they are not yet at levels that are worrisome. Debt to Equity is the most worrisome, because of the rate at which it is increasing and the level that it is at in 2016 (2.77). These solvency stock metrics are not yet of concern but if they continue at the rates they have been increasing, Viacom could be at risk of not being able to meet their long-term debt obligations. Next, analyzing solvency flow metrics, there is a general decreasing trend across all 5 metrics as cited in Figure 8. This is with exception to the Fixed Charge Coverage in 2013, which jumps to 9.50 and 8.64 because of an irregular Total Debt Repaid in that year of $0. Similar to the solvency stock metrics, these metrics

are all decreasing but not yet to alarming levels. Interest coverage of 4.44 and 2.88 in 2016 is still a reasonable level for the number of times operating earnings and cash flow from operations will cover the interest requirement. Similarly, Fixed Charge Coverage of 3.78 and 3.02 in 2016 is not yet at an alarming level. This will still allow Viacom to comfortably cover their total debt service long term. These two metrics have also not decreased as much as the other solvency flow metrics and are therefore less concerning considering the future. Finally, CFO to Debt at 0.15 in 2016 is starting to hit a concerning level that is even more concerning when coupled with the decreasing rate it has been on since 2011. This indicates that Viacom is increasingly being incapable of covering total debt with their yearly cash flows from operations. Returning Value to Shareholders It is observed that year over year Viacom is taking on more debt, which is diminishing the amount of value flowing to shareholders. The increased amount of leverage on the balance sheet combined with underperforming sales and weaker cash flow in recent years raises questions about the return to be earned as an equity investor. It is positive that management has initiated programs to recover sales and align the business with lucrative industry trends as well as made de-levering a strategic goal. In summary, the value being returned to shareholders and the equity portion of the capital structure has been deteriorated by increased leverage. A confident and clearlyfocused board gives reason to believe that the balance sheet will be cleaned up, debt will be better-managed and sales will improve going forward.

Forecast Business Strategy Focus on the creation of high- quality original content, which is the primary driver of multiplatform viewing and engagement, theatrical admissions and library revenues, as well as the creation of original content to build value for new platforms. VIABâ&#x20AC;&#x2122;s principal revenue generator derives from their Media Network segment. VIAB creates, acquires and distributes programming and other content across their customer base on multiple platforms, this is done by segmenting their entertainment offerings targeting certain demographics allowing them to sell advertisement space, one of the four main revenue streams, to companies, license to content distributors and sell to retailers who resell Viacomâ&#x20AC;&#x2122;s entertainment offerings such as access to television channels. Prominent television channels include Nickelodeon, Comedy Central, MTV, and CMT. Revenues from the Media Network account for 79% of total VIAB revenues for the fiscal year 2016, steadily rising from accounting for 66% of VIAB revenues in in fiscal year 2012. The second revenue source operates under the title of Filmed Entertainment, this segment produces, finances, acquires and distributes motion pictures, television programming and other entertainment content under labels such as Paramount Pictures, Nickelodeon Movies, MTV Films, amongst others. Its revenue sources are box office receipts from cinemas, home entertainment, and by licensing to television and other digital platforms. Consequently, contribution to total revenue has diminished over the last four years from 34% to 20%, this can be attributed to a greater decline in the Filmed Entertainment revenues rather than a growth in the Media network segment. Work with our business partners, while retaining maximum flexibility and rights ownership, to apply technology- driven innovation to expand the distribution of our content, improve the consumer experience across multiple platforms, and develop engaging new consumer products, recreation and hospitality initiative. VIABâ&#x20AC;&#x2122;s business strategy has been shifting with the introduction of online platforms such as Netflix and this has contributed significantly to negative outlook on Viacom the past four years, with their stock price being slashed by half in that time. The primary focus was always to develop high-quality content but more important than ever is the distribution network and interaction with customers. VIAB was slow to adopt online channels and create an effective digital strategy contributing to the decline in revenues specifically worldwide affiliate revenues decreased $352 million, or 7%, to $4.556 billion in the fiscal year 2016. However, worldwide ancillary revenues increased $2 million to $577 million over the same time, this is inline with their new business strategy. The higher ancillary revenue is being generated from the new and hospitality initiatives Viacom has undertook, leveraging their Nickelodeon brand group to adolescents. Continue to develop our sophisticated data capabilities and to pioneer new methods to

improve monetization and measurement of viewing of, and audience engagement with, our content across all platforms. With VIAB’s worldwide advertising revenues decreasing due to the shift in advertising dollars towards online giants Facebook and Google; Viacom must innovate and provide greater value to the customers of their largest revenue stream. Media Networks segment expenses increased $111 million, or 2%, to $6.458 billion in the fiscal year 2016. With programming costs staying flat – this represents a greater investment by Viacom into their improving their multi-platform strategy and leveraging digital technologies to improve return to advertising customers. Continue to build our international scale and capabilities by capitalizing on opportunities in new markets and expanding our reach in existing territories with the most potential for growth. International focus has seen major boon as the newly appointed CEO was the former head of the Viacom International division mentioning he would bring a lot of the tactics and strategy employed during his tenure as head to the company. VIAB looks successfully on their way to making significant headway in this strategy as (excluding foreign exchange) international advertising revenues increased 9%, despite advertising revenues being down 4% in fiscal year 2016. This is primarily due to increase in offerings from their flagship entertainment channels and increased convenience for the audience to digest content with multi-platform viewing. In conclusion, going into 2017 Viacom’s strategic plans comprise of investing in growth in all its markets internationally, delivering consumer-relevant brand and product innovation, and streamlining its portfolio to allow for a greater expansion in operating margins. It is expected for the economic hardships to carry into the new fiscal year, however it will be bolstered by a strong growth in international demand for consumer products, fruition of recently implemented digital strategy, reaping the benefits of massive investment into restructuring the past 2 years, and clarity in forecasting after being hit with an overly negative outlook with regards to the disruption from new players in the industry.

Macroeconomic Exposure To understand Viacom’s macroeconomic exposure better, we first analyze in which major geographic segments revenue is being generated.

Revenue from international markets has stayed stable at a mark of 25% over the last three years. This portion can be broken down further, the EMEA segment is driven by the United Kingdom and Germany who collectively account for 57% of revenue, rising from 45% in 2014. On the hand, emerging markets such as India demonstrate a huge growth opportunity for VIAB’s Media Network business line due to improvement in standards of living and desire in emerging markets for higher-quality entertainment content. On the macro level, the company is influenced largely by the overall economic conditions, as it indicates how much money consumers have and how likely they are to spend money on leisure activities such as movies or pay-tv. If the economy is booming and private households have money to spend, they will be far more likely to consume Viacom’s products. If they, in contrast, first look how they pay all their bills for their necessary needs this will have consequences on Viacom’s revenue. A beta coefficient of 1.32 supports the general argument that despite a portion of VIAB’s revenue coming from established multi-year contracts, ultimately their operations are cyclical. As observed from the figure above, the US market is the core of VIAB’s revenue streams, an economy showing signs of strength after a lengthy recovery. A particularly promising sign is rise of retail sales, a key metric of consumer spending, which accounts for about twothirds of the U.S. economy. Over the summer, retail sales beat estimates by a wide margin, rising by 0.6%. Furthermore, initial unemployment benefit claims came in under the forecasted 265,000 at a seasonally adjusted 254,000. The health of US economy will be a windfall for an entertainment company as it is directly correlated with consumer spending habits and household spending dollars allocated to recreational purposes. With the change of office in regards to the US presidency we can expect shift in fiscal policy and legislation to impact the outlook of Viacom’s largest geographic segment. It is uncertain what economics measures president-elect Trump and the Republican party have planned going forward, however we do know that there is an intention to reduce statutory tax rates for large corporations. The current statutory tax rate and effective tax rates are 35 and 22.7%, respectively; And for example, a 1% change in VIAB’s effective

income tax rate would result in additional income tax benefit of approximately $20 million.1 Furthermore, it is unlikely that there will be any significant regulatory changes that will affect VIABâ&#x20AC;&#x2122;s operations as most regulations that do pertain to VIAB are concerning the content that is developed and shown, which is unlikely to change with a new administration.

The above figure illustrates the anticipated rise in interests over the next three years, a rise in interest rate will be a double-edged sword for VIABâ&#x20AC;&#x2122;s valuation. As described above demand for VIABâ&#x20AC;&#x2122;s is to a degree driven by overall economic conditions and growth, as such a rise in interest rates signals a stronger US economy and it also provides a fiscal tool to drop the interest to drive growth if necessary again in the future. On the other hand, debt will become more expensive for companies to raise debt, specifically, VIAB has been loading debt over the last two year and management has indicated to continue to do so in the upcoming years.

Industry Outlook The entertainment and media industry is one the fastest moving industries in the economy, as the entire sector is recovering well after being hit hard by the financial crises when consumers cut back on entertainment expenditures. New technologies such as ultra-high-definition, digital distribution, 3D and virtual reality are gaining prominence and show promise in bolstering innovation within the industry. Concerns include rising production costs, piracy issues, and increased competition. The Filmed Entertainment group shows signs of growth as cinema attendance domestically and abroad is rising, relative to previous years. TV production has zero growth with cable TV subscription being attacked by online competitors.

Viacom Inc. 10-K 2016 Filing 25

Emergence of Online Platforms The largest trend in the entertainment and media industry has been the paradigmatic shift in how audiences consume content, moving over from traditional television distribution to multi-platform viewing, particularly online. The value proposition for online platforms is convincing as consumers can watch and interact with content on demand. The content itself remains the same, however the distribution and packing will be different. The above trend is especially prevalent amongst young consumers, most importantly millennials â&#x20AC;&#x201C; one of the main target demographic groups for Viacom who by 2018 will have the most spending power of any generation.2 Along with convenience of multi-platform viewing online platforms excel on capitalizing on generating engagement and interactions with their viewers who no longer remain passive observers of content rather desire to connect with brands through social media. The content developed should no longer only attract the eyeballs of the customers but create active fans, united by shared ideas, interests, and experiences. This will translate into stronger loyalty and connection to brand titles, this activity can be transferred into more sustainable revenue throughout the Filmed Entertainment segment, particularly in the Media Networks segment generating more value for advertisers and higher ancillary revenue. Content providers have been aligning themselves with the shift towards digital distribution after a period of resistance. According to Greenfield's survey, 37 percent said they had at least thought about canceling their subscriptions in favor of online-only options, however if it meant losing out on live sports that number dropped to just five percent.3 Recently, Twitter completed an agreement to stream NFL football games. Content creators and distributors have shifted towards digital platforms; however, the switching costs have significantly reduced and VIABâ&#x20AC;&#x2122;s late market entry has seen advertising partners move towards providers with stronger prospects and data. Fall of Traditional Pay-tv Due to the mentioned developments, the home entertainment industry is faced with a high competition and a high pressure for the involved companies to attract customers. In 2014, 91 percent of U.S. consumers said they planned on subscribing to cable in the following year, but a year later this number had fallen to 79 percent. Experts believe, that this direction will be the one that will dictate the future of the media and entertainment industry, if these companies do not manage to adapt their business models successfully to the rising demand of online content.

Stats about Millenials, https://www.aabacosmallbusiness.com/advisor/22-shocking-statsmillennials-help-chart-tomorrow-change-112531305.html 3 Live sports keep people from cutting cable cord, http://arstechnica.com/business/2010/09/sports-are-what-keep-people-from-cutting-the-cord/

This results in a revolution in how media and entertainment creators and providers interact and add value. There is a constant battle between serving short-term benefits and long-term goals for companies such as Viacom, who have been pressured to create alliances with streaming providers whilst also changing their business models to become streaming providers themselves. For example, Fox has invested in streaming service Hulu which lets Fox control the advertising in exchange for exclusive rights to shows on one of its cable channels, FX, according to Bloomberg. The conundrum for content creators and providers is that in short-term they are bleeding out from not licensing to streaming services, however if they do license their content to streaming providers they hurt their chances of building their own sustainable digital distribution ecosystem. Need for Investment Due to all this trends and developments, a high pressure for investing in content, technology and experience is necessary for the companies in this industry to survive and compete successfully. Existing industry incumbents have spent quite a bit to get a handle on an industry being disrupted â&#x20AC;&#x201C; combatting new rivals by publishing and creating their own digital media channels and changing relationships with new market entrants from competition to co-opetition, as seen by the FOX example in the preceding section. Meaning the need for investment calls for greater investment into capital expenditures within their own company as well as potential equity investments in other companies. Investment also delves into higher production costs and the need to develop recognizable, global franchises to increase ROI in domestic and foreign markets. Viacom has noted the increase in production costs due to their desire for high-quality content from their viewership. Thirdly, the largest revenue generator for all media and entertainment companies is their advertising revenues generated in their respective Media Networks segment. Just this year digital advertising spending in social media and other online sites has surpassed traditional television advertising spending.4 Media companies have been restructuring portfolios and investing into data analytics to better target consumers and create value for advertising partners in the face of competition from Google and Facebook, who can create and target accurate digital profiles.

US Digital Ad Spending to Surpass TV this Year, https://www.emarketer.com/Article/USDigital-Ad-Spending-Surpass-TV-this-Year/1014469

Company Trends The biggest impact on the future of Viacom and its strategy is founded on whether its merger with CBS will take place. These two companies merged in 2000 and split apart again in 2006. Both, however, are controlled by the holding company National Amusements. This holding company claims about 80% of the voting shares in each of the companies. The holding is owned by the media mogul Sumner Redstone, who holds 80% of the holding and his daughter Shari Redstone holds the remaining 20%. On September 29, 2016, the board of Viacom received a letter from National Amusements requesting that the board explores a potential combination of CBS and Viacom. The strategy of a newly merged firm, consisting of CBS and Viacom, would be subject to speculation and therefore should not be of concern in this analysis. A likely outcome of this potential merger process might be, however, that both firms would not create the necessary merger gains. Therefore, it is rewarding to look at the strategic outlook, if Viacom stays independent. Online Strategy As shown above in the industry level analysis, the major trend which overshadows everything in this industry, is the switch from the traditional style of television to the more customized approach which happens largely through online platforms which provide ondemand content. In the past, Viacom was criticized for not recognizing this movement early enough and not responding to the industry shift in a suitable fashion. One example critics point to for Viacom’s mistreatment regarding the technological shift, is the $1 billion law suit Viacom filled against Google in 2007, claiming that YouTube had engaged in “brazen” copyright infringement. Instead of searching for potential cooperation which would benefit them in the long run, they chose fighting this new development. Even in 2016, a former executive at MTV still criticized the real issue of the company to be the complete lack of a digital strategy. He blames the change in Viacom’s culture for that, as the company has “chased out the creatives” who ultimately created value for the organization. During last year, Viacom announced a new partnership with snapchat. Viacom has exclusive third party rights to directly sell advertising surrounding Snapchat’s owned and operated content. Viacom will also add two new channels to Snapchats “Discover” page. As the MTV generation reached adulthood, this deal might help gain the attraction of millennials, where Snapchat is very successful and growing in an impressive manner. If Viacom can leverage this partnership and generate new ideas to strengthen this future relationship, they might finally be able to profit from the new developments rather than suffer from them like they have in the past. A development which treads in a different direction is the breaking of the deal Viacom had with PlayStation Vue. PlayStation Vue is a streaming TV service from Sony, which

enables people to watch this provider over the PlayStation console. First, they arranged a deal with Viacom but in mid-November both sides announced that this deal was no longer existing. Creativity In both of Viacom’s Media Network and its Filmed Entertainment segments, their success is highly dependent on the ability to attract customers on a recurring basis. If they can develop movies which are box office hits, they can generate high revenue. However, this will just last for a rather short period and after that they are in need for a new success. in The Media Network’s successes, can capitalize on successes for longer periods of time but also, channels can easily lose or win viewers’ attention. This is exactly where Viacom struggled in prior years. From 2014 to 2015 alone, they lost 10% of its viewership. Its major channel MTV lost a remarkable 23% of their viewers in 2015. However, this decline has been put into perspective, as all channels are losing viewership due to the consumer shift towards more online based viewing habits. The lost viewership in the Filmed Entertainment segment, particularly Paramount their flagship brand, can be likened to a patent cliff, where major movie franchises such as Mission: Impossible, Transformers, Terminator, amongst other have reached the end of their current cycle. Viacom is struggling to replace these household names with investment into reviving old franchises such as Teenage Mutant Ninja Turtles, which even in the best-case scenario cannot replace the $1.1 billion in revenue the latest Transformers movie had brought. However, Viacom’s largest segment - Media Networks aligns well with their business strategy of focusing on a lean portfolio and targeting specific segments with high-quality content. Brand such as Nick Jr., Nickelodeon, MTV, CMT, and Spike demonstrate a great range and ability to transition consumers throughout their viewership lifecycle from adolescence to adulthood. Future Strategy Future strategy will largely depend on the new CEO, Bob Bakish, who followed the interim CEO Tom Dooley at the 15th of this year’s November. Mr. Bakish has worked at the company for 19 years and he was CEO of the Viacom International Media Network in his most recent position. He oversaw Viacom´s large and growing portfolio of international channels, as Viacom operates more than 200 television channels in more than 180 countries. Mr. Bakish announced “to bring lessons” from what he has experienced in the international division into his strategy for Viacom’s future success. Therefore, to gain an outlook on what Mr. Bakish is planning to do with Viacom, it will be helpful to investigate his past experiences at the international media network. During his time in the international division, he increased the amount of digital content it produced internationally and expanded Viacom brands into ancillary areas like theme

parks and hotels. These two areas are developing trends in the industry and if Mr. Bakish can transform his successes form his former division to the company this might be the right direction for Viacom. He further announced that he wants to take a tight focus on a small number of channels which are MTV, Nickelodeon, Nick Jr., Comedy Central, Paramount channel and spike. He plans to “invest [in the growth of] these brands while maintaining a lean, powerful portfolio that will be attractive to both, pay-tv and emerging distributors”. A reduction of the portfolio may be possible and would not have a major effect, as 80% to 85% of all revenues are generated by these six major networks. Another venue where Mr. Bakish plans to act is expanding abroad. The CEO’s prior experience with new market entry and international operations was the catalyst for Viacom’s expanding subscription revenue, from 2 billion in 2010 to 3.4 billion in 2014, and advertising revenue, growing from roughly 3 billion in 2010 to 3.4 billion in 2014. These figures are shown as revenue from the United States, as the company used their TV channels from the United States to generate this revenue. Especially in countries like India or in the Middle East, where the middle class is growing, pay-tv is an attractive growth market rather than a declining one like it is in the United States. In India, only half of the 250 million households have pay-tv, moreover there are expectations of high growth in subscription based revenue for this region. If Viacom can grow its consumer products it might open another revenue stream. The consumer products segment bundles revenue from licensing of Viacom brands and characters for consumer products, restaurants, park themes, publishing and video games. Their current consumer products segment is valued at $3 billion, but their big role model is Disney, whose consumer products segment is valued at $25 billion. Like Disney, Viacom’s Nickelodeon brand will can generate revenue as its target group is children, which are more likely to be attracted by this product offering. Conclusion To sum up the strategic outlook for Viacom, it can be said that the industry is moving very fast and is currently a highly competitive industry within the economy. This puts pressure on businesses but is also a good sign that the industry is profitable. Especially through the expansion of media companies into online content and into other venues such as livestream events, licensing and social media, the sources of revenue could diversify. Furthermore, the development in the United States market can be alleviated through international developments. To make use of this new opportunity, it is critical that Viacom develops a robust online strategy, an effective international strategy, and a strategy to expand its consumer products segment. Additionally, when Viacom manages to resume focus back on its core capability, which is making contemporary content that appeals especially to young customers, we believe that Viacom can create and claim additional value within the market, ultimately enhancing their financial performance in future years.

Revenue Model and Risks Corporate revenues are analyzed and projected as follows and are shown in Exhibit 9. Revenues should be evaluated on two main drivers: -

Geographic Area Segment

Revenue analysis is a function of the two drivers that, in addition to industry forecasts, will be used to confirm our claims and assumptions when determining projections. The starting point of the revenue analysis reflects the wide geographic diversification of the company, with content distribution throughout 180 countries. For simplicity, regions are divided into four main categories: United States, UK & Germany, EMEA (excluding UK and Germany) and all Other. Furthermore, we can segment VIABâ&#x20AC;&#x2122;s operations into two major business lines: Media Network and Filmed Entertainment. 1. Media Network: Revenues generated by this segment should be split into three main sources, Advertising, Affiliate and Ancillary revenues, which proposes the following analysis to better understand the main factors that influence revenues to justify our assumptions. a. Advertising revenues: The demand, and consequently the price of the advertising, is deeply influenced by three principal factors: Attractiveness of offering to advertisers, viewership, and overall market conditions. To these three factors, another portion of the demand is linked to the integrated sales of multi-platform advertising and marketing opportunities. In general, advertising revenues remain strongly dependent on the advertising market and on general economic conditions of the industry. These factors, defined as either global or systematic, have the availability of programming and the associated seasonal variations. b. Affiliate revenues: In practical terms these revenues are affected by the fees paid by programming and program service suppliers. The volatility of this source of revenue remains very subdued since it is connected to multi-year carriage agreements with set rate increases. c. Ancillary revenues: In brief, it should be said that this source of revenue is deeply influenced by factors such as consumer consumption propensity, programming quality, and total volume of content available in a specific period. Broadly speaking, all these factors should be lumped together by a common denominator: overall market conditions. 2. Filmed Entertainment: In general revenues generated by this segment, should be split into four main sources: Theatrical, home entertainment, licensing, and ancillary revenues. a. Theatrical revenues: Many factors such as consumer tastes, consumption habits and overall economic conditions influence these revenues that in general are affected also by seasonality.

b. Home entertainment revenues, licensing revenues, and ancillary revenues are dependent upon consumer tastes and habits, as well as overall economic conditions. According to the 2015 McKinsey Global Media Report5 the global spending over the next three years (2017-2019) is projected to expand at a 5.1% compounded annual growth rate. Digital advertising, broadband, and TV advertising are expected to be the fastestgrowing segments over the next years, with a projected compounded annual increase of 12.7%, 7.8% and 5.0%, respectively. The growth expected for Filmed Entertainment segment is overall steady with an average 3.87% CAGR. Under a regional point of view, the global media spending is projected to rise over the next years of 4.0% CAGR in North America, whereas EMEA will also rise at a projected 4.0% CAGR, nevertheless Western Europe will still be the slowest growing area, with a projected 2.8% CAGR over the next three years. As we have noticed before, revenues are strictly connected with consumer spending. In this sense, it is worth to consider in our analysis the impact of the overall consumer spending. 2017 is favoured to be the year in which, for the first time, digital consumer spending will overcome traditional spending and the digital side is expected to continue driving the market, increasing by a projected 8.6% compounded annually to 2019 (only 1.3% projected CAGR for traditional consumer spending). Consumer spending will rise at a 3.9% CAGR in EMEA (in Western Europe at 2.4%) and in North America is expected to increase at a 3.8% CAGR. Consumer spending is positively correlated to the general economic conditions (in respect to historic advertising growth slowing when the economy is weak and increased growth when the economy has been strong). Under a regional point of view, EMEA is expected to grow in the overall economic conditions, leading to faster advertising growth (4.3% CAGR); whereas the projected CAGR for a;; of North America will be 4.5%. Matching this data with the specific condition of Viacom, we can say that the revenue drivers are positive in terms of expected growth. At this point, another consideration regarding the specific risk component should be made to assess the true level of uncertainty, in terms of deviation from the expected results. The specific risk is connected to governance uncertainty and the historic variability in operating results. In fact, over the last five years, growth has been obstructed by an abnormal variability in operating results. With this said, we have decided to establish a conservative expected sales growth CAGR of 1.25% and an average operating income growth rate of 3.4% over the next five years. The forecasting of operating revenues is a function of different risk factors that should increase in some ways their variability, compromising Viacomâ&#x20AC;&#x2122;s profitability. In this sense, we have identified four main risk operating factors: -

Foreign exchange: Conducting business in various countries outside the United States results in exposure to movements in foreign exchange rates when translating currencies (particularly the British Pound, Euro, Canadian Dollar, etc.) to the U.S. Dollar.

McKinsey Global Media Report, 2015 32

Viacom and CBS merger: The uncertainty due to a potential business combination with CBS and the possibility that the agreement may or may not be reached, impacts the Company’s ability to negotiate contractual arrangements on commercially advantageous terms; to attract, retain and motivate key employees; to access the capital markets on the most cost- efficient terms; and otherwise to operate its business in the most efficient manner. These factors may cause volatility in the stock price.

Consumer behaviour, new technologies, and distribution platforms: In specific, technology and business models in the industry continue to evolve rapidly. Consumer behavior related to changes in content distribution and technological innovation affect Viacom’s economic model and viewership in ways that are not entirely predictable.

Competition: The industry is characterized by a high level of competition for content, audiences, advertising and distribution. This competition comes from broadcast television, online and mobile properties, movie studios and independent film producers and distributors. In recent years, the increase in competition has been caused by the entrance in the market of OTT such as Netflix, Amazon and Hulu. As a result, this has ultimately caused the increase in content costs to create competing high quality, original content.

Advertising Market conditions: Considering that advertising represents a huge part of Media Network’s revenue, the strength of the advertising market can fluctuate in response to the economic prospects of specific advertisers or industries, advertisers’ current spending priorities and the economy in general. This may adversely affect Viacom’s advertising revenues.

Variability of operating results: Seasonal factors and general economic conditions may increase the deviation of operating income. Economic conditions may affect Viacom business in two ways: on one side, it can affect the consumer’s discretionary spending, while on the other it can influence advertising revenue.

Expenses Forecast Corporate expenses are analyzed and projected as follows and are shown in Exhibit 11. Costs of sales: Since the FY 2016 gross margin is considered an abnormal calculation compared to the historical results, costs of sales are expected to increase less than revenues over the next years. Selling and administrative expenses: SG&A expenses are expected to increase in the future resulting from the sales increase.

Restructuring charges: Viacom has not regularly incurred restructuring expenses in the past five years. On the other hand, in the last two years this item occurred. It is projected that these expenses will persist due to the on-going company restructuring process. Core effective tax rate: This was held constant at the FY 2016 rate of 14.7% Other items: Amortization of goodwill & intangibles, pension obligations, lease obligations, non-core income after tax were assumed to remain at the 2016 level.

Turnover Forecast Forecasted inverse turnovers are provided in Exhibit 10. Broadly, turnovers for operating assets and liabilities were held constant while taking into consideration the last year level of ratios, adapted by the average level of the five-year historical period. In this consideration, Goodwill should be dually noted. In fact, we have decided to include the Sales/Goodwill ratio in the turnover since it represents a significant part of the Net Operating Asset, and it has remained constant to the 2016 level. Other NOA turnover was held constant at the average of 2014 and 2015 values.

Valuation Discounted Cash Flow (DCF) Exhibit 12 breaks down the Discounted Cash Flow valuation for Viacom, using free cash flows. The valuation is premised on the methodology that the Company’s value is the sum of the present value of its future cash flows. We forecasted the Company’s free cash flows for the next five years, as well as a perpetuity to represent the continuing value of cash flows. Both forecasts were discounted at the Company’s weighted average cost of capital of 6.88% to derive a present value of free cash flows. Free cash flow was calculated as operating income less the change in net operating assets. The free cash flows used in this valuation were taken from the forecasted pro-forma financial statements, and the continuing value was calculated using a perpetuity growth rate of 1.25%. The sum of the present value of free cash flows is $8.24 billion, and the present value of the continuing value is $22.26 billion. Summing the two, the value of Viacom’s operations is $30.50 billion. To derive the equity value, net financial obligations, option overhang, and minority interest were subtracted from the value of operations. Ultimately, the discounted cash flow valuation provided an equity value of $17.2 billion, resulting in a value per share of $43.50.

Abnormal Operating Income (AOI) Valuation Exhibit 13 breaks down the Abnormal Operating Income valuation for Viacom, using abnormal operating income to derive a value for Viacom. In the valuation, AOI is connected to NOA. If Viacom can earn a return on these assets greater than the cost of capital, this AOI is accumulated on top of NOA. AOI is calculated as the difference between normal income, which is the product of NOA and the cost of capital, and the operating income. Residual operating income is calculated by multiplying RNOA by NOA and subtracting the cost of capital. After summing the PV of residual earnings, discounted continuing value and NOA in 2015, the value of Viacom’s operations amounts to $30.83 billion. To derive the equity value, net financial obligations, option overhang, and minority interest were subtracted from the value from operations. Ultimately, the AOI valuation provided an equity value of $17.59 billion, resulting in a value per share of $44.33.

Abnormal Operating Income Growth (AOIG) Valuation Exhibit 14 breaks down the Abnormal Operating Income Growth valuation for Viacom, using abnormal operating income growth to derive a value for Viacom. Residual operating income figures are derived from the difference between free cash flow operating income and normal operating income. After summing the PV of abnormal earnings, discounted

continuing value and operating income 2016, the value of Viacom’s operations amounts to $29.99 billion. To derive the equity value, net financial obligations, option overhang, and minority interest were subtracted from the value from operations. Ultimately, the AOIG valuation provided an equity value of $16.74 billion, resulting in a value per share of $42.19.

Option Overhang Information from Viacom's disclosed 2016 filings were analyzed to arrive at a value for the option overhang of the Company, which was subsequently subtracted from the value of operations. Data such as the weighted-average exercise price, time to maturity, and the number of options outstanding were captured from the Company's 10-K. Furthermore, the Black-Scholes model was used to calculate the value of an option outstanding, which was then multiplied by the total number of options outstanding to arrive at the total estimated value of outstanding options. As seen in Exhibit 15, the after-tax value of the Company attributable to option holders is $176.43 million.

Comparable Company Analysis Exhibit 16 breaks down the comparable analysis for Viacom. For an accurate comparable analysis, we thought to start with a two-level analysis: 1. Qualitative Analysis: The objective is to understand the business in which we are pursuing, trying to prioritize the drivers that will distinguish companies in the process of value creation. 2. Quantitative Analysis: the leitmotiv of this analysis is the importance of the different size and financing choices that influence companies in this industry. The list of possible comparable and the ratios that will be used to evaluate them, are only a function of this preliminary step and are necessary to have a better comprehension of the heterogeneity of the competitive scenario in Viacom’s business environment. Qualitative analysis The business of Viacom: breaking down the business, we can assess that Viacom operates as a media brand worldwide. The company creates television programs, motion pictures, short-form content, applications, games, consumer products, social media experiences, and other entertainment content for audiences. In addition, it operates through two segments, Media Networks and Filmed Entertainment. In the light of this, the following companies should be considered comparable under a “core business” as well us under an international presence point of view:

1. Time Warner Inc. (NYSE:TWX) operates as a media and entertainment company in the United States and internationally through three segments: Turner, Home Box Office that provides premium pay and basic tier television services, and Warner Bros that produces, distributes, and licenses television programming and feature films and distributes digital and physical home entertainment products. 2. Twenty-First Century Fox, Inc. (NasdaqGS:FOXA) operates in the United States and worldwide through Cable Network Programming; Television; Filmed Entertainment; and Other, Corporate and Eliminations segments. The company produces and licenses news, sports, movie, and general and factual entertainment programming for distribution primarily through cable television systems, direct broadcast satellite operators, telecommunications companies, and online video distributors. 3. CBS Corporation (NYSE: CBS) operates as a mass media company worldwide through four segments: Entertainment through which CBS distributes a schedule of news and public affairs broadcasts, sports and entertainment programming, Cable Networks through which CBS offers subscription program services, Publishing, and Local Broadcasting. 4. The Walt Disney Company (NYSE:DIS) operates as an entertainment company worldwide. In specific, our attention is focused on the companyâ&#x20AC;&#x2122;s Media Networks segment that operates cable programming services producing and selling original live-action and animated television programming as well as subscription video on demand services and in home entertainment. 5. Discovery Communications, Inc. (NasdaqGS:DISCA) operates as a media company worldwide owning various television networks producing television contents and websites. 6. Lions Gate Entertainment Corp. (NYSE: LGF) operates in Canada, the United States, and internationally, through two segments: Motion Pictures, which is involved in the development and production of films and home entertainment. The Television Production segment engages in the development, production, and worldwide distribution of television productions, syndication, home entertainment, and branded channel platforms. 7. AMC Networks Inc. (NasdaqGS: AMCX) is engaged in the ownership and operation of various cable television brands delivering content to audiences in the United States and internationally. On the other side of the coin, Live Nation Entertainment and Scripps e Regal Entertainment have been discarded for the following reasons:

Live Nation Entertainment operates through Concerts, Ticketing, Artist Nation, and Sponsorship & Advertising segments. The Company has therefore been discarded due to the main operations being quite distant from that of Viacomâ&#x20AC;&#x2122;s.

Scripps Networks Interactive has been discarded for the same reason: it develops lifestyle-oriented content for linear and interactive video platforms in the United States, and internationally, enriching its offer with contents that focus on specifically defined topics of interest for audiences and advertisers.

Regal Entertainment Group is not in the list of comparable as it substantially operates in the United States as a motion picture exhibitor. It is focused on midsized metropolitan markets and suburban growth areas of larger metropolitan markets.

Quantitative analysis The second step attracts greater importance to the different size and financing options of companies. In general, we can say that the industry is characterized by a very high variance in each firmâ&#x20AC;&#x2122;s level of debt. Furthermore, the capitalization and the enterprise value present a significantly high heterogeneity. What has been said is confirmed from this simplistic direct analysis: LTM Net Debt: - Mean = 7,888.2 - SD = 6,987 Market Capitalization - Mean = 46,445.5 - SD = 34,830.7 Comparing the capitalization and the level of debt of Viacom with the market average, we can easily notice that the analyzed company makes an extensive use of the financial leverage, presenting debt levels significantly higher than the average of the market: VIACOM: LTM Net Debt = 11,420 Market Mean (LTM Net Debt) = 7,888.2 VIACOM: Debt to Equity Ratio = 75.755% Market Mean: Debt to Equity Ratio = 36.085% This preliminary analysis should be summed up in two conclusions: a. The analysis must take into consideration the great level of heterogeneity in the size and in the financing choice of the firms.

b. More attention must be shifted towards the “levered” ratios, influenced by the different level of financial leverage of the firms. Multiple Analysis In the multiples analysis, the most recent fiscal year (LTM) values were analyzed, as these are likely to be the most related to Viacom and its closest comparable current trading levels. At first glance, taking into consideration the seven selected firms, we can easily notice that the level of debt of these companies is extremely heterogeneous. As the differences in debt level directly impact the level of growth, this thus affects the P/E ratio (higher growth firms have normally higher P/E ratios). For this reason, it is not recommended to use this multiple, or better to rely exclusively on the P/E (and in general on the Levered or Equity multiples). In this case Enterprise Variants (that are defined as unlevered multiples) should be a better solution. !"#

Consequently, we have selected two Enterprise indicators, excluding since it !$% '()(*+(, does not consider costs at all. To have a better indication of the company’s peer based valuation we chose two very similar multiples: a.

!"#

: Seizes the ability of the firm to create margins. It is really useful in the media entertainment industry as almost the 55% of costs are charged to costs of good sold, and this multiple is less sensitive to depreciation and amortization. !"# b. : Similar to the multiple used above; however, better assesses the "-.! 1%2 profit-making ability of the companies. "-.!/0

As shown in the Exhibit 16 (1), the price results to be $46.45, higher than the current price ($37.98). This first conclusion could suggest and underestimation of the current price, with respect to the intrinsic value emerged from the comparable analysis. In a second more specific analysis, we have reduced the number of comparable, trying to include also levered ratios, considering EV/EBITDA and P/E, since these two metrics allow us to compare and contrast between the enterprise value and market capitalization of Viacom and its selected comparable companies. More specifically, a.

3456(

: Allows us to analyze each companies’ market capitalization relative to its net income. This measure provides a proxy for whether each company’s share price is relatively rich or cheap relative to its other comparable. "37

The Exhibit 16 (2) shows, even if we have changed the list of comparable and the multiples used to evaluate our company, the current valuation of the market results to be once again underestimated, with respect to the intrinsic value of the share ($42.40).

Sensitivity Analysis Gross Margin Sensitivity Discount Rate 4.88%

Gross Margin

5.88%

6.88%

7.88%

8.88%

45.00%

65,305

44,102

30,420

20,853

13,786

46.00%

73,961

50,894

36,010

25,604

17,917

47.00%

85,423

59,845

43,341

31,806

23,286

48.00%

91,272

64,478

47,190

35,106

26,180

49.00%

99,927

71,270

52,780

39,857

30,311

Revenue Sensitivity Discount Rate 4.88%

Revenue Growth

5.88%

6.88%

7.88%

8.88%

-0.75%

58,172

44,218

33,933

26,040

19,794

0.25%

68,895

50,671

37,947

28,558

21,346

1.25%

85,423

59,845

43,341

31,806

23,286

2.25%

114,374

73,980

51,007

36,170

25,788

3.25%

178,652

102,280

62,817

42,369

29,147

Terminal Growth Rate Sensitivity Discount Rate 4.88%

Terminal Growth Rate

5.88%

6.88%

7.88%

8.88%

-0.75%

64,293

47,534

35,628

26,734

19,837

0.25%

72,574

52,595

38,903

28,937

21,362

1.25%

85,423

59,845

43,341

31,806

23,286

2.25%

108,061

71,093

49,699

35,695

25,791

3.25%

158,552

90,911

59,564

41,265

29,187

For the sensitivity analysis, we looked how changes in sales growth, gross margin and in the terminal growth rate would affect the share price of Viacom, in addition to different discount rates applied. We used the sales growth and the gross margin, as we believed that these two might be the values which Viacom has the most power to influence and might be subject to substantial changes, if Viacom can make use of the industry trends which have emerged in the last couple of years and adopt its business model in the appropriate direction. The terminal growth rate is always a very important part of any valuation model and is equally hard to forecast, so it is very beneficial to look how changes in this affect our forecasted share price. This analysis shows us that changes in sales growth and changes in the gross margin have a much higher impact in an environment

of low discount rates, as expected. Furthermore, we see that a rising sales growth figure has much more impact overall on the growth of the share price, at discount rate levels under 7%. The increase is much steeper which leads to the conclusion that Viacom should put more emphasize on increasing its sales growth rather than its gross margin growth, at least in times of low interest rates. Even though the gross margin is related to the sales figure, this implies that they focus on generating revenue rather than cutting down cost of sales. An important and logical insight that ownership and the board of directors have continuously disagreed upon over the last year. Another analysis can be drawn from this analysis is the fact that the used discount rate has an enormous impact on the outcome of the valuation of Viacomâ&#x20AC;&#x2122;s shares. Therefore, much attention must be paid to the process of determining the right discount factor, hence the right WACC and factors that can change the WACC such as likelihood of the Fed to increase interest rates in the coming years. With regards to the terminal growth w its variety is magnified at small discount rates and does not have a big impact in an environment of high discount rates. However, looking at the present discount rate, the impact of the terminal growth rate on the forecasted share price is not significant as other factors, given that a change in 1 results in a difference of approximately 10% from the current stock price. We are quite confident that the terminal growth rate of 1.25 will not considerably as it is just shy of the long-term growth rate.

Investment Recommendation

With a calculated target price of $43.45, we are suggesting a buy recommendation for VIAB. This means that the intrinsic value of the stock is 14.4% higher than the market value of the same stock. The intrinsic price has been derived from the weighted average of four different valuation models including discounted cash flow (DCF), abnormal operating income (AOI), abnormal operating income growth (AOIG), and comparable company analysis. A total of 90% weighting has been given to the values obtained using intrinsic valuation methods (30% to each since the three valuation methods do not converge to the same final price), with 10% given to value returned by the comparable company analysis. Our Buy recommendation for VIAB is supported principally by the fact that the current price reflects the bad performance of the company over the last three years. During this period, Viacom has lost more than half of its value, plunging from $80 to $37. The main reason for this substantial drop has been the unpredictable and unique impact that technology has had on the entire media and entertainment industry, causing a shift in the sector that has been so rapid that the adaptation for traditional service providers has been reasonably difficult. More specifically, the traditional cable industry has faced the disruptive introduction of OTT services like Netflix or YouTube that basically have changed the rules of the game. Obviously, the operating profitability during the last three years has fallen, but, as we can see from the industry trend, the profitability of this industry remains strong, and in the future, the traditional operators are expected to maintain a good level of profitability. Matching this industry forecast with the most recent operating results of Viacom, we can say that the business model with which the traditional media and entertainment service provider used to operate must be adapted, but not changed at all. The obvious adaptations will guarantee the survival of the company maintaining an adequate level of profitability. On the other hand, a possible merger with CBS should generate substantial synergies that would increase the intrinsic value of the company.

Exhibits

Exhibit 1 â&#x20AC;&#x201C; Reformulation of Balance Sheet

Exhibit 2 â&#x20AC;&#x201C; Operating Lease Capitalization and Pension

Exhibit 3 â&#x20AC;&#x201C; Reformulation of Income Statement

Exhibit 4 â&#x20AC;&#x201C; Common Size Income Statement & Balance Sheet Common Size - Income Statement For the Fiscal Period Ending Operating Revenue Cost of sales Gross Margin Operating expenses Selling, general & administrative Depreciation & Amort. Restructuring charges less: financial component of pension less: minimum rent for this year Depreciation of capitalized leases Total operating expenses Core operating income (before tax) Tax on operating income Tax as reported Tax benefit/(expense) from other operatingincome Tax benefit/(expense) from financing expense Total tax on operating income Core operating income (after tax) Other operating income Currency exchange gains (losses) Income/(Loss) from Affiliates Unusual income Restructuring charge and other Impairment of Goodwill Legal settlement Gain (loss) on sale of investment Asset writedown Total other operating & unusual income (expense) Tax on other operating & unusual income Other operating & unusual income after tax Total operating income after tax

Financial (income) expense: Interest expense Financial component of the pension Add: financial component of capital leases Other financial (income) expense Tax Net interest expense after tax

Net Income to company Minority interest in earnings Net Income Income before discontinued operations Earnings Discontinued operations Comprehensive Income

2011 100.00% 52.76% 47.24% 0.00% 19.59% 1.82% -0.97% 0.13% 1.36% 0.88% 23.78% 23.47% 0.00% 7.12% -1.28% 0.49% 6.34% 17.13% 0.00% -0.03% 0.27% 0.00% -0.97% 0.00% 0.00% 0.00% 0.00% -1.31% -0.49% -0.82% 16.32%

2012 100.00% 50.36% 49.64% 0.00% 19.85% 1.70% 0.00% 0.21% 1.45% 0.71% 23.92% 25.73% 0.00% 7.81% -1.46% 0.05% 6.40% 19.33% 0.00% -0.06% 0.09% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% -0.12% -0.05% -0.08% 19.25%

2013 100.00% 49.20% 50.80% 0.00% 20.51% 1.72% -0.72% 0.06% 1.49% 0.86% 24.63% 26.17% 0.00% 7.76% -1.46% -0.06% 6.24% 19.93% 0.00% 0.00% 0.30% 0.00% -0.72% 0.00% 0.00% 0.64% -0.05% 0.17% 0.06% 0.10% 20.04%

2014 100.00% 47.46% 52.54% 0.00% 21.03% 1.57% 0.00% -0.01% 1.65% 0.95% 25.19% 27.35% 0.00% 7.62% -1.93% -0.04% 5.65% 21.70% 0.00% 0.00% 0.50% 0.00% 0.00% 0.00% 0.00% 0.00% -0.31% 0.11% 0.04% 0.07% 21.76%

2015 100.00% 47.41% 52.59% 0.00% 21.56% 1.67% -5.91% 0.22% 2.02% 1.22% 26.69% 25.90% 0.00% 3.78% -2.30% 1.94% 3.42% 22.48% 0.00% 0.00% 0.77% 0.00% -5.91% 0.00% 0.00% 0.00% 0.00% -5.28% -1.94% -3.33% 19.14%

2016 100.00% 53.52% 46.48% 0.00% 22.83% 1.77% 8.00% 0.02% 2.13% 1.35% 28.09% 18.38% 0.00% 4.16% -2.10% 0.35% 2.40% 15.98% 0.00% 0.00% 0.70% 0.00% -1.65% 0.00% 0.00% 0.00% 0.00% -0.95% -0.35% -0.60% 15.38%

0.00%

2.76% 0.13%

3.00% 0.21%

3.36% 0.06%

4.46% -0.01%

4.95% 0.22%

4.93% 0.02%

0.48%

0.74%

0.62%

0.70%

0.80%

0.78%

3.39% -1.28% 2.12% 14.20%

3.93% -1.46% 2.47% 16.79%

3.92% -1.46% 2.46% 17.58%

5.22% -1.93% 3.30% 18.47%

6.24% -2.30% 3.94% 15.20%

5.73% -2.10% 3.63% 11.75%

-0.25%

-0.29%

-0.30%

-0.52%

-0.60%

-0.28%

13.95% 13.95%

16.50% 16.50%

17.27% 17.27%

17.95% 17.95%

14.60% 14.60%

11.47% 11.47%

-0.07% 13.88%

-2.62% 13.88%

-0.09% 17.19%

-0.01% 17.94%

0.00% 14.60%

0.02% 11.48%

Exhibit 4 â&#x20AC;&#x201C; Common Size Income Statement & Balance Sheet (contâ&#x20AC;&#x2122;d) Common Size - Balance Sheet For the Fiscal Period Ending

2013

2014

2015

2016

0.31% 11.26% 0.00%

0.29% 10.41% 1.55%

0.27% 11.58% 1.49%

0.28% 12.25% 1.95%

0.28% 11.58% 2.41%

0.26% 11.03% 2.26%

3.47% 2.68% 0.17% 0.00%

3.47% 2.03% 0.28% 0.00%

3.02% 1.64% 0.23% 0.18%

3.41% 0.91% 0.03% 0.42%

3.29% 1.58% 0.00% 0.21%

3.49% 1.96% 0.00% 0.18%

4.44% 46.43% 4.53%

4.45% 46.03% 7.42%

4.08% 43.43% 6.72%

4.10% 46.55% 7.11%

3.96% 47.89% 7.58%

3.85% 47.15% 7.09%

0.00% 20.52% 1.64% 95.45%

0.00% 18.51% 1.37% 95.81%

0.00% 16.78% 1.09% 90.50%

0.00% 17.18% 1.61% 95.81%

0.00% 17.53% 1.42% 97.74%

0.00% 19.64% 1.30% 98.22%

1.62% 5.01%

1.06% 3.93%

1.24% 4.21%

1.92% 3.91%

2.12% 3.13%

1.87% 3.20%

0.78% 0.00% 9.03% 9.10%

0.96% 0.00% 9.94% 8.76%

0.90% 0.00% 8.44% 7.36%

1.41% 0.13% 8.44% 7.26%

2.01% 0.00% 8.78% 6.74%

1.73% 0.00% 8.31% 6.26%

0.52% 0.10% 0.00% 26.15%

0.02% 0.08% 0.00% 24.75%

2.54% 0.07% 0.00% 24.76%

1.07% 0.07% 0.00% 24.21%

0.63% 0.08% 0.00% 23.47%

1.58% 0.07% 0.23% 23.25%

Net operating assets (NOA)

69.30%

71.06%

65.74%

71.60%

74.27%

74.97%

3.97% 0.00% 0.57% 4.55%

3.24% 0.35% 0.60% 4.19%

9.15% 0.35% 0.00% 9.50%

3.76% 0.43% 0.00% 4.19%

1.84% 0.42% 0.00% 2.26%

1.31% 0.47% 0.00% 1.78%

Pension & Other Post-Retire. Benefits Long-Term Debt Capitalized operating leases Total Financial Liabilities

1.85% 30.81% 4.53% 37.19%

2.35% 33.89% 7.42% 43.65%

1.00% 46.52% 6.72% 54.24%

1.63% 51.18% 7.11% 59.92%

1.86% 51.28% 7.58% 60.72%

2.08% 48.97% 7.09% 58.15%

NFO (NFA)

32.64%

39.46%

44.74%

55.73%

58.47%

56.37%

Common Shareholders' Equity

36.66%

31.60%

21.00%

15.87%

15.81%

18.60%

100%

Total Assets Total Liabilities and CSE

2012

Operating liabilities: Accounts payable Accrued expenses Deferred revenue Deferred tax liability, current Other current liabilities Other non-current liabilities Deferred tax liability, non-current Capital Leases, current Capital Leases, non-current Total operating liabilities

NFO (NFA): Non-operating cash Short-term investments LT investments Total Financial Assets

2011

Exhibit 5 â&#x20AC;&#x201C; Trend Analysis Income Statement & Balance Sheet Trend Analysis - Income Statement For the Fiscal Period Ending Operating Revenue Cost of sales Gross Margin Operating expenses Selling, general & administrative Depreciation & Amort. Restructuring charges less: financial component of pension less: minimum rent for this year Depreciation of capitalized leases Total operating expenses Core operating income (before tax) Tax on operating income Tax as reported Tax benefit/(expense) from other operatingincome Tax benefit/(expense) from financing expense Total tax on operating income Core operating income (after tax) Other operating income Currency exchange gains (losses) Income/(Loss) from Affiliates Unusual income Restructuring charge and other Impairment of Goodwill Legal settlement Gain (loss) on sale of investment Asset writedown Total other operating & unusual income (expense) Tax on other operating & unusual income Other operating & unusual income after tax Total operating income after tax

Financial (income) expense: Interest expense Financial component of the pension Add: financial component of capital leases Other financial (income) expense Tax Net interest expense after tax

Net Income to company Minority interest in earnings Net Income Income before discontinued operations Earnings Discontinued operations Comprehensive Income

2011 100.00% 100.00% 100.00%

2012 93.11% 88.88% 97.84%

100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

94.39% 87.08%

2013 92.49% 86.25% 99.46%

145.00% 99.01% 75.01% 93.66% 102.08%

96.85% 87.45% 68.75% 40.00% 100.99% 90.79% 95.82% 103.14%

100.00% 100.00% 100.00% 100.00% 100.00%

102.17% 106.70% 8.63% 94.00% 105.07%

100.75% 105.59% -11.67% 91.06% 107.62%

100.00% 100.00%

200.00% 30.00%

102.50%

100.00%

2015 88.96% 79.94% 99.03%

99.25% 80.07%

2016 83.73% 84.95% 82.37%

-10.00% 111.82% 100.03% 97.91% 107.68%

97.91% 81.92% 544.44% 145.00% 132.02% 124.13% 99.88% 98.18%

97.60% 81.55% 143.06% 10.00% 131.03% 128.72% 98.95% 65.58%

98.87% 139.63% -7.55% 82.41% 117.03%

47.18% 160.03% 351.34% 48.05% 116.73%

48.87% 137.99% 59.56% 31.75% 78.10%

2014 92.42% 83.15% 102.77%

172.50%

68.75%

255.00%

217.50%

544.44%

143.06% -

100.00% 100.00% 100.00% 100.00%

8.72% 8.63% 8.77% 109.88%

100.00% 100.00% -11.79% -11.67% -11.87% 113.59%

100.00% 100.00%

101.21% 145.00%

112.62% 40.00%

149.27% -10.00%

159.47% 145.00%

149.51% 10.00%

100.00%

142.59%

119.50%

133.23%

146.34%

135.24%

100.00% 100.00% 100.00% 100.00%

107.85% 106.70% 108.54% 110.08%

106.73% 105.59% 107.41% 114.51%

142.28% 139.63% 143.87% 120.20%

163.51% 160.03% 165.60% 95.25%

141.38% 137.99% 143.42% 69.29%

100.00%

108.11%

113.51%

194.59%

216.22%

94.59%

100.00% 100.00%

110.12% 110.12%

114.53% 114.53%

118.88% 118.88%

93.10% 93.10%

68.84% 68.84%

100.00% 100.00%

3640.00% 93.07%

120.00% 114.50%

10.00% 119.41%

93.55%

614.29% -7.69% -7.55% -7.78% 123.27%

358.97% 351.34% 363.58% 104.38%

61.03% 59.56% 61.91% 78.91%

-20.00% 69.26%

Exhibit 5 â&#x20AC;&#x201C; Trend Analysis Income Statement & Balance Sheet (contâ&#x20AC;&#x2122;d) Trend Analysis - Balance Sheet For the Fiscal Period Ending

Operating assets: Operating cash Accounts recievable Accounts recievable long term Inventories Prepaid expenses Current deferred tax assets LT deferred tax assets Property, plant and equipment, net Goodwill Capitalized operating leases Other current assets Other long-term assets Other Intangibles Total operating assets Operating liabilities: Accounts payable Accrued expenses Deferred revenue Deferred tax liability, current Other current liabilities Other non-current liabilities Deferred tax liability, non-current Capital Leases, current Capital Leases, non-current Total operating liabilities Net operating assets (NOA) NFO (NFA): Non-operating cash Short-term investments LT investments Total Financial Assets

2011

2012

2013

2014

2015

2016

100.00%

93.11%

92.49%

92.42%

88.96%

100.00%

93.07%

110.10%

113.16%

103.24%

99.44%

100.00%

100.00% 100.48%

101.88% 93.00%

129.57% 102.17%

155.11% 94.93%

147.04% 101.93%

100.00% 100.00%

76.37% 165.85%

65.57% 141.46%

35.21% 19.51%

59.31%

100.00%

233.33%

113.33%

95.56%

98.39% 100.14%

96.12% 104.26%

89.59% 103.54%

88.17% 103.04%

100.00% 100.00%

101.04% 99.83%

100.00%

164.96% -

158.88% -

74.02% -

163.17% -

83.73%

168.09% -

158.95% -

100.00%

90.82%

87.55%

87.08%

85.77%

97.12%

100.00% 100.00%

83.67% 101.06%

71.17% 101.49%

101.79% 104.36%

86.73% 102.78%

80.36% 104.40%

100.00%

66.06%

81.87%

123.06%

131.09%

117.36%

100.00% 100.00%

79.04% 122.99%

90.03% 122.99%

81.22% 187.17%

62.70% 257.22%

64.79% 224.06%

100.00% 97.07%

97.54%

110.73%

100.00%

97.00%

86.62%

82.93%

74.31%

69.83%

100.00% 100.00%

4.07% 78.26%

527.64% 78.26%

216.26% 78.26%

121.95% 78.26%

309.76% 73.91%

99.95%

100.00%

95.27%

101.35%

96.25%

90.07%

100.00% 90.20%

100.00%

103.24%

101.55%

107.42%

107.58%

109.76%

100.00%

93.36%

82.26%

246.61%

98.38%

46.45%

33.45%

100.00%

105.95%

127.38%

119.05%

135.71%

100.00% 100.00%

104.38% 92.81%

223.64%

Pension & Other Post-Retire. Benefits Long-Term Debt Capitalized operating leases Total Financial Liabilities

100.00%

127.66%

100.00%

110.75%

100.00% 100.00%

164.96% 118.19%

NFO (NFA)

100.00%

Common Shareholders' Equity

100.00%

95.81%

49.81%

39.74%

57.82%

91.61%

100.68%

114.29%

161.63%

172.72%

167.08%

161.28%

158.88% 156.13%

163.17% 167.52%

168.09% 163.90%

158.95% 158.66%

121.72%

146.73%

177.51%

179.79%

175.22%

86.79%

61.32%

45.02%

43.28%

51.48%

Growth Rate in Operating Income (y/y) Growth Rate in NOA (y/y) Growth Rate in CSE (y/y)

OLLEV OLSPREAD PM Core PM Unusual PM ATO Growth Rate in Sales (y/y)

Implicit Interest (After Tax) Short-term Borrowing Rate (After Tax)

ROOA

Financial Leverage Net Borrowing Cost Spread

FLEV NBC SPREAD

NFO/CSE NFE/Average NFO RNOA - NBC (Operating Income + Implicit Return on Operating Assets Interest After Tax)/Operating Short-term Borrowing Rate (After Implicit Interest on Operating Liabilities Tax) * Operating Liabilities Assumed Assumed Average Operating Operating Liability Leverage Liabilities/Average Net Operating Operating Liability Spread ROOA - Short-term Borrowing Total Profit Margin Total Operating Income After Core Profit Margin Core Operating Income After Unusual Items Profit Margin Unusual Operating Income After Asset Turnover Sales/Net Operating Assets (Sales t=n/Sales t=n-1) - 1 (Operating Income After Tax t=n/Operating Income After Tax (NOA t=n/NOA t=n-1) - 1 (CSE t=n/CSE t=n-1) - 1

Return on Net Operating Assets

RNOA

Financial Statement Analysis (3-Level ROCE Breakdown) Ratio Definition ROCE Return on Common Equity Formula (NOA/CSE*RNOA) Operating Income After Tax/Average Net Operating

Exhibit 6 â&#x20AC;&#x201C; Financial Statement Analysis

10% 3% -13%

0.81 -7%

0.36 11% 19% 19%

59.38 1%

12%

1.25 13% 2%

16%

2012 20%

3% -2% -29%

0.82 -1%

0.36 11% 20% 20%

63.17 1%

12%

2.13 11% 5%

16%

2013 28%

9% 6% -27%

0.78 0%

0.36 12% 22% 22%

59.99 1%

13%

3.51 12% 4%

17%

2014 37%

-15% 0% -4%

0.33 10% 19% 22% -3% 0.75 -4%

56.14 1%

11%

3.70 13% 1%

14%

2015 18%

-24% 2% 19%

0.31 7% 15% 16% -1% 0.69 -6%

56.22 1%

3.03 12% -1%

11%

2016 7%

Exhibit 7 â&#x20AC;&#x201C; Profitability & Growth Analysis Profitability Analysis 2012 20%

2013 28%

2014 37%

2015 18%

2016 7%

16% 1.25 2%

16% 2.13 5%

17% 3.51 4%

14% 3.70 1%

11% 3.03 -1%

Secon Level Breakdown - ROCE RNOA = PM*ATO PM ATO RNOA

20%

28%

37%

18%

19% 0.81 16%

20% 0.82 16%

22% 0.78 17%

19% 0.75 14%

15% 0.69 11%

Breakdown of RNOA RNOA = ROOA + (OLLEV*OLSPREAD) ROOA OLLEV OLSPREAD

16%

17%

14%

11%

12% 0.36 11%

13% 0.36 12%

11% 0.33 10%

8% 0.31 7%

First Level Breakdown - ROCE RNOA + FLEV*(RNOA-NBC) RNOA FLEV SPREAD

Growth Analysis 2012 $ 16,782.49 $ 8,623.49 $ 8,159.00 $ 13,887 $ 2,674 $ 16,560.84 $ 1,231.33 20% 16% 13% 19% 19% 0.81 1.25 2%

Average NOA Average NFO Average CSE Sales Operating Income Comprehensive Income Net Financial Expense ROCE RNOA NBC PM Core Sales PM ATO FLEV SPREAD

2013 $ 16,910.34 $ 10,440.84 $ 6,469.50 $ 13,794 $ 2,764 $ 16,558.10 $ 1,218.60 28% 16% 11% 20% 20% 0.82 2.13 5%

2014 $ 17,255.41 $ 12,610.41 $ 4,645.00 $ 13,783 $ 3,000 $ 16,782.76 $ 1,628.77 37% 17% 12% 22% 22% 0.78 3.51 4%

2015 $ 17,753.32 $ 13,896.32 $ 3,857.00 $ 13,268 $ 2,540 $ 15,808.04 $ 1,873.49 18% 14% 13% 19% 22% 0.75 3.70 1%

2016 $ 17,946.34 $ 13,807.34 $ 4,139.00 $ 12,488 $ 1,920 $ 14,408.10 $ 1,628.34 7% 11% 12% 15% 16% 0.69 3.03 -1%

Exhibit 7 â&#x20AC;&#x201C; Profitability & Growth Analysis (continued) Analysis of Change in ROCE 2011

2013

2014

16.35% 16.40% 0.09% 16.48% 2012-2013

17.38% 16.86% 0.05% 16.91% 2013-2014

14.31% 16.79% -2.49% 14.30% 2014-2015

10.70% 11.01% -0.42% 10.59% 2015-2016

0.41% 0.49% 0.16% -0.24% 0.41%

1.04% 1.45% -0.99% 0.58% 1.04%

-3.08% 0.61% -0.68% -3.01% -3.08%

-3.61% -4.85% -0.92% 2.17% -3.61%

Change in Financing Change in SPREAD Change in Financial Leverage

3.02% 0.88

-0.21% 1.38

-3.64% 0.19

-1.92% (0.67)

Change in Overall Profitability Change in ROCE Change in RNOA + Change due to Change in Spread at Previous FLEV + Change due to Change in Financial Leverage = Change in ROCE

8.83% 0.41% 0.52% 7.90% 8.83%

8.58% 1.04% -1.49% 9.03% 8.58%

-19.33% -3.08% -0.58% -15.67% -19.33%

-10.76% -3.61% -1.03% -6.12% -10.76%

Change in Core Operating Income RNOA Core OI / NOA + Other OI&UI / NOA = RNOA

14.73% 15.47% -0.74% 14.73%

Change in Operating Profitability Change in RNOA Change in Core Sales PM at Previous ATO + Change due to Change in ATO + Change due to Change in Other Core Income and Unusual Items = Change in RNOA

2015

2016

Analysis of the Change in CSE Change in Ending CSE Change in NOA - Change in NFO = Change in Ending CSE

(2,225.00) 65.14 1,944.92 (1,879.78)

(1,424.00) 240.64 2,394.22 (2,153.58)

(152.00) (7.86) 177.60 (185.46)

716.00 (987.01) (355.55) (631.46)

Change in Average CSE Change due to Change in Sales at Previous ATO + Change due to Change in ATO - Change in Financial Leverage = Change in Average CSE

(1,689.50) (1,884.42) 265.32 70.40 (1,689.50)

(1,824.50) (1,725.56) 16.59 115.53 (1,824.50)

(788.00) (983.65) 700.34 504.69 (788.00)

282.00 33.50 859.03 610.53 282.00

2012 15.93% 15.74% -0.06% 15.68%

Exhibit 8 â&#x20AC;&#x201C; Credit Analysis Credit Analysis Liquidity Stock Measures Current Ratio Quick Ratio Cash Ratio Liquidity Flow Measures Cash Flow Ratio Defensive Interval Cash Flow to CapEx Solvency Stock Measures Debt to Assets Debt to Equity LT Debt Ratio Solvency Flow Measures Interest Coverage (times interest earned) Interest Coverage (cash basis) Fixed Charge Coverage Fixed Charge Coverage (cash basis) CFO to Debt FCF vs. Debt Commitments Free Cash Flow Less: Dividends Debt Repayment Interest Payments Cash Shortage/Refinancing Needs Refinancing Needs Cash Available for Debt Service Debt Service Requirement Bankruptcy Prediction 1.2 x (working capital/total assets) 1.4 x (retained earnings/total assets) 3.3 x (EBIT/total assets) 0.6 x (market value of equity/book value of liabilities) 1.0 x (sales/total assets) z-score

2011

2012

2013

2014

2015

2016

1.33 0.95 0.26

1.27 0.90 0.24

1.77 1.45 0.66

1.33 1.06 0.28

1.19 0.89 0.16

1.23 0.87 0.13

0.67 8837.71 17.06

0.65 8212.50 16.22

0.81 12498.97 19.27

0.66 12383.29 21.11

0.60 8772.85 16.29

0.37 6801.31 7.97

0.32 0.85 0.46

0.37 1.09 0.52

0.50 2.29 0.70

0.55 3.41 0.77

0.55 3.47 0.78

0.53 2.77 0.73

9.35 7.07 4.24 3.56 0.40

9.35 6.64 3.25 2.68 0.34

8.50 7.29 9.50 8.64 0.29

6.71 4.87 4.40 3.64 0.24

5.93 4.17 2.89 2.44 0.22

4.44 2.88 3.78 3.02 0.15

-417.00 -776.00 -419.00 -1612.00

2246.79 -554.00 -1315.00 -417.00 -39.21

-312.75 1188.00

1831.29 1732.00

0.07 0.52 0.56 0.00 0.65 1.80

0.06 0.62 0.58 0.00 0.62 1.88

2900.80 -555.00 -464.00 1881.80

1968.06 -541.00 -600.00 -615.00 212.06

1813.90 -564.00 -1400.00 -657.00 -807.10

1814.90 -635.00 -368.00 -616.00 195.90

2484.55 464.00

1562.31 1215.00

1390.90 2057.00

1338.65 984.00

0.15 0.68 0.55 0.00 0.58 1.96

0.07 0.82 0.59 0.00 0.60 2.08

0.04 0.93 0.58 0.00 0.60 2.15

0.05 0.97 0.40 0.00 0.55 1.97

Exhibit 9 â&#x20AC;&#x201C; Pro forma Consolidated Financial Statements & Revenue Forecast

Exhibit 10 â&#x20AC;&#x201C; Key Income statement and Turnover Forecast

Exhibit 11 â&#x20AC;&#x201C; Pro forma Consolidated Financial Statements

Exhibit 12 â&#x20AC;&#x201C; DCF Model

Exhibit 13 – AOI Model AOI Model 2017 9.96% 552.68

RNOA Abnormal OI Growth in Abnormal Earnings PV of AOI

517.12

Terminal value PV of TV Total PV NOA as of 2016 Value of operations NFO

9582.73996 12927.48 17902.36 30829.83 12800

Value of net assets of discontinued operations Option overhang Minority Interest Value of common equity Number of shares outstanding Value of Common Equity per share

-176.4304741 -264 17589.21 396.812557 44.33

2018 10.42% 632.79 14.495% 553.99 80.11

2019 10.88% 721.86 14.076% 591.31 89.07

2020 11.09% 767.03 6.257% 587.89 45.17

2021 11.13% 783.66 2.168% 562.00 16.63

2022 11.13% 793.45 1.250% 532.42 9.80 14280.98

43.34134251

Exhibit 14 – AOI Growth Model

Exhibit 15 â&#x20AC;&#x201C; Option Overhang and WACC calculation Option Overhang Calculation

Number of Options outstanding

19596.2 From 10-K

Estimated option value

9.2292

Total estimated value

180.8575893 in millions

Tax benefit of exercise

4.427115254

After tax cost of option exercise

176.4304741 total option overhang

Underlying Price Exercise Price

37.98 35.24

Historical Volatility Risk Free Rate

36.10% 1.50%

Dividened Yield

4.10%

Time to Expiration

5.40

0.3413

-0.4975

Call Option

9.2292

Discount rates Denoted as

Cost of capital for equity

Cost of capital for debt

Cost of operations

VIACOM

risk free rate (T-bill rate) Beta Market risk premium (rm-rf) kE After-tax k D Share price Shares outstanding Market value of equity NFO (NFA) Mark to Market Adjustment (Footnotes) Market value of debt Market value of the firm kF

Formula

rf + beta*(rm-rf) NBC k E *VE /V F + k

*VD /V F

Source

2.98% 1.32 5.50%

30-year treasury yield Historical Beta

survey of investors, managers and academics

10.24% 3.25% $37.98 396.81 ######

###### (605.36) ###### ######

6.88%

Exhibit 16 â&#x20AC;&#x201C; Comparable Company Analysis