This excerpt taken from the CVS 8-K filed Feb 13, 2007.
Caremark Discounted Cash Flow Analysis
Lehman Brothers estimated, after taking into account selected comparable pharmacy benefit managers enterprise values to the last twelve months EBITDA multiples, a range of terminal values in 2011 calculated based on selected last twelve months EBITDA multiples of 10.0x to 12.0x. Lehman Brothers discounted the unlevered free cash flow streams and the estimated terminal value to a present value at a range of discount rates from 8.5% to 10.5% . The discount rates utilized in this analysis were chosen by Lehman Brothers based on its expertise and experience with the pharmacy benefit management industry and also on an analysis of the weighted average cost of capital of Caremark and other comparable companies. Lehman Brothers calculated per share equity values by first determining a range of enterprise values of Caremark by adding the present values of the after-tax unlevered free cash flows and terminal values for each EBITDA terminal multiple and discount rate scenario, and then subtracting from the enterprise values the adjusted net debt of Caremark, taking into account the payment of the Caremark special cash dividend and dividing those amounts by the number of fully diluted shares of Caremark.
Based on the projections and assumptions set forth above, the discounted cash flow analysis of Caremark yielded an implied valuation range of Caremark common stock of $53.18 to $67.27 per share. After taking into account the Estimated Synergies, the discounted cash flow analysis of Caremark yielded an implied valuation range of Caremark common stock of $62.91 to $79.50 per share. Lehman Brothers noted that after reducing the Caremark common stock price $6.00 to reflect the payment of the Caremark special cash dividend, the price of Caremark common stock as of February 9, 2007 was $55.32 per share, which was (i) 4.0% higher than the low of the per share equity valuation range implied by the foregoing analysis and (ii) 17.8% lower than the high of the per share equity valuation range implied by the foregoing analysis, (iii) 12.1% lower than the low of the per share equity valuation range after taking into account pro forma synergies, and (iv) 30.4% lower than the high of the per share equity valuation range after taking into account pro forma synergies.