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Krause Fund Research Spring 2018

Technology Recommendation: BUY

Analysts

Sirui Li Sirui-li@uiowa.edu

Yu Ling Yu-ling@uiowa.edu

COMPANY OVERVIEW Oracle Corporation (ORCL) is one of the leading companies in the software industry. Oracle provides productions and services in application, platform and infrastructure of information technology environment. Oracle’s revenues consist of three segments: software and cloud, hardware, and services. Additionally, Oracle generates revenue mainly from software licenses and cloud systems, such as SaaS, PaaS and IaaS, which accounted for 80% of revenue in FY 2017. Oracle is devoted to developing and innovating in the cloud segments and improving product performance. Stock Performance Highlights 52 week High $53.48 52 week Low $43.60 Beta Value 1.163 Average Daily Volume 17.13 m Share Highlights Market Capitalization $190.481 B Shares Outstanding 4.137 B EPS (TTM) $0.86 P/E Ratio 64.52 Dividend Yield 1.51% Dividend Payout Ratio 1.28% Company Performance Highlights ROA 7.93% ROE 17.33% Sales $37.728 b Financial Ratios Current Ratio 3.08 Debt to Equity 0.93

Oracle Corporation (NASDAQ: ORCL)

April 17, 2018

Current Price $45.44

Target Price Range $53.00-57.00

Oracle Exhibits Potential Strength

Constant growth prospects: large investment in research and development expenses enables Oracle to constantly develop and innovate its product lines, which can enlarge the customer bases. Under this strategy, Oracle will boost the revenue from the cloud system. And cloud system will be the key drive to boost Oracle’s revenue Wrong strategy to generate revenue: We estimated that Oracle will have the decreased ROIC, which indicates the managers do not have good strategy to invest the capital. As Oracle decides to be very active in the acquisition market, it is not an effective way to boost revenue. Even though it is still above the 50%, if Oracle cannot come up with some new market strategies, investors will be disappointed about the lower and lower payback Underestimated stock prices: From the DCF and EP models, the target prices will increase at most $10 more. Oracle has the potential to attract more buyers, while they realize that Oracle has high correction with technology market and the technology sector increases significantly.

Potential politics threat and high competitive environment: Considering the effect to technology sector by the recent trade war with China and the high competitive environment for Oracle, Oracle faces losing large revenue because of the losing overseas customers and local customers in science licenses, which is Oracle’s primary revenue resources One-Year Stock Performance

Source: Yahoo! Finance [1]

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EXECUTIVE SUMMARY Oracle Corporation is one of the leading companies in the software industry, with a variety of products: Software and Cloud, Hardware, and Service. Even though the primary revenue generated product is the software license, Oracle is gradually shifting and developing its attention to the cloud system markets because of the customer demand increment. In our valuation, our group forecasted Oracle’s intrinsic stock price over 5 projected years, based on heavy financial assumptions. Due to the stagnant growth rate of revenue in the historical performance, we forecasted the total revenue growth rate will increase based on the optimistic growth of cloud system revenue. However, Oracle faces very competitive environment in cloud market with relatively small market shares, comparing with its competitors. From our DCF and EP valuation models, Oracle’s target price would be $53.00-57.00 per share. Since the current trading stock price is lower than the intrinsic value we estimated that Oracle is currently undervalued. Considering both potential problem and advantages, our group recommends a BUY rating for Oracle.

ECONOMIC OUTLOOK U.S Real Gross Domestic Product Real Gross Domestic Product (GDP) measures a market’s total economic output during a period after adjusting for inflation. Real GDP growth is the main gauge of economic health which makes it a crucial economic indicator. A positive GDP growth represents an increase for a nation’s whole economy. In this situation, more goods and services, including software products, are purchased by consumers. Consumers also tend to be more willing to pay for software services which will lead to an increase of company’s revenue. The chart below shows the real GDP growth from previous quarters. In the chart, real GDP increased at an annual rate of 2.9 percent in the fourth quarter of 2017. The reason that caused positive real GDP growth is the increase of personal consumption expenditure (PCE) and private inventory investment, which indicates a higher willingness of consumer spending.

Source: Mataloni L. and Aversa J. [2]

Although historical real GDP appears to increase quarterly, we believe that a profound negative effect will impact GDP growth rate because of the recent trading war that Present Trump announced to increase the China’s tariff aiming to steel, aluminum, and some technological products. Therefore, we estimate GDP will grow 1.8% for the next six months and an average of 2% for the next 5 years. For the next six months, since the trading war is ongoing, the tariff on the goods will cause severe consequence on export and import. This is going to lower the GDP growth rate. However, we expect GDP to keep increasing because PMI index still reflects a fairly high consumer confidence. Consumer Spending Even though GDP growth partially indicates that consumers may be more willing to spend, Consumer Price Index (CPI) is essentially a measure of individuals’ cost of living changes and provides a gauge of the inflation rate related to purchasing those goods and services. Furthermore, since CPI is released monthly and generally ahead of GDP, people tend to pay more attention to it. The first graph below shows the increase in disposable personal income from 2013-2017. Compared to 2013, it has increased nearly 20% which is a total of $2.5 billion. With the huge amount of extra income, the consumer spending over the last 5 years has increased as showed in the second graph below. Specifically, Information Technology performed extremely well, with spending up 155% in the 5-year period.

Source: FRED[3]

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Source: Fidelity [4]

As a result, there is a strong correlation in consumer disposable income and the tech industries market growth and performance. Our group believes that with increase in consumer spending, the technology sector will continue to see growth, as it is the fastest growing sector in the economy. Employment Current Employment Statistics (CES) provides comprehensive data on national employment, unemployment and wages and earnings data across all non-agricultural industries. Our group consider it as one of the most important indicators because it’s not only the earliest indicator of economic trends released each month, but also a sign of economic health through the change of wages and unemployment rate. In the health economy, unemployment rate generally continues to decrease.

Source: BLS[5]

The graph above shows a general trend of the unemployment rate from Dec 1997 to Dec 2017. Based on the changes in unemployment rate over the 20 years, the rate appears to fluctuate with the health of the economy. During the financial depression, the rate increased dramatically. When the economy got better and better, the rate became lower and lower and reached nearly 4% ultimately. Therefore, we expect the unemployment rate to continue to be around 4% in the next six month. For the next 5 years, we believe the rate will be 3.5% because of Trump’s policies. S&P500 The Standard & Poor’s 500 is a market value-weighted index of 500 public stocks that are combined into one equity basket. It has become the industry standard and benchmark for the overall performance of the U.S. equity market. Growth of the S&P 500 can translate into growth of business investment. It can also indicate a higher future

consumer spending. A declining index can signal a tightening of belts for both businesses and consumers.

Source: us.spindices.com [6]

The table above shows S&P 500 sector breakdown as of December 29th, 2017. As it shows, IT makes up nearly a quarter of the whole index at 23.8%, up from 20.4 during mid-2017. We believe the heavy weighting of technology as well as the massive growth the sector has been experiencing is due to the ever-increasing demand for technology in everyday lives and this growth will continue to drive the S&P 500 going forward. Market Outlook Overall, we believe this is a good time to invest in IT, as it is the fastest and largest growing sector in the economy that has outperformed the markets over the past 10 years. Our faith is supported by the increase of real GDP, consumer confidence, consumer spending and low unemployment rate under the current U.S. economy. To sum up, as stated above, growth over the last 5 years has averaged to about 19.3%, with the low being roughly 5.6% in 2013, when half of the other sectors experienced losses. (Bloomberg). Disposable income increased $2.5 billion and will drive the tech sector continues to increase in the market value. Unemployment rate continues to decline at a steady-going pace for the IT sector, which indicates healthy economy growth. In addition, with technology becoming more advanced and more in demand every year, we believe this sector will continue to outperform as it has been doing. Especially, software boosted U.S. GDP by $1.14 trillion dollars and grew the economy in all 50 states, while supporting 10.5 million jobs. We believe the software industry has one of the highest potentials in this sector, as software is continually becoming more common than physical drives and hardware.

INDUSTRY ANALYSIS Industry Overview Oracle belongs to the application software industry under the technology sector. This industry consists of the development and marketing of application software. Some of the applications are operating systems, word processors, spreadsheet applications, and database engines. Oracle, as

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the second largest software company in U.S, has many competitors such as Adobe Systems, IBM, and Microsoft. Firms like those typically invest a large portion of their cash flow into research and development so that they can create better software applications for individual or corporate users in order to satisfy their daily operations. In addition, firms will provide further services related to the software to provide better user experience so that customers will maintain their yearly subscription. We expect a prosperous future in this industry because the ever-increasing demand towards more convenient software products and the large growth in cloud subscribers. Industry Trends We discover the industry trends in two parts. Currently, markets are tapping into private cloud as data breach, which is costly. In 2016, 11.5 million leaked financial/legal documents of more than 214,000 companies because of various data. The graph below shows the percentage of companies that are using the private cloud or are going to.

Source: Finances Online [7]

In addition, “blockchain” has become a well-known topic and the technology behind this will be valuable in the near future. With the invention of cryptocurrencies such as Bitcoin, Litecoin, and Etherum, the storage and protection of these currencies has exploded within the last two years. With these two major drivers, our group believes the use of private cloud and software toward anytime data storage or security will gather more attention from the market. Business Segments The software industry has three product lines, including systems software for basic computing systems, application software, and software related services. These product lines serve almost all industries. To be more specific, one important business segment in application software is Cloud system and service application. It consists of three main segments: Software as a service (SaaS), Platform as a service (PaaS) and Infrastructure as a service (IaaS). Especially, SaaS comprises most of the market spending as the chart shows below and is expected to continue to increase.

Source: Statista [8]

SaaS has been the most popular segment because of its convenience. Consumers do not need to pay any subscription fee and they can accomplish their work by choosing a specific software tools for a specific time period with a small amount of charge. Besides SaaS, spending on PaaS and IaaS market also has experienced a significant increase. These are the reasons that our group believes application software companies will benefit from these segments. Markets and Competition The current climate for the software industry is extremely competitive with many large and small companies. Although the software industry has a high-level threshold for new entries, it is growing rapidly with many powerful competitors. The major players in this industry are Microsoft, Oracle, SAP, Adobe Systems, Salesforce.com, VMware, Intuit, Fiserv, Symantec, and HCL Technologies. Among these companies, Microsoft, Oracle, SAP, Adobe Systems, and Salesforce.com are the top 5 with significant market size and market share. We believe firms in the software industry must have prominent market shares to outstand other competitors. In addition, companies with product differentiation will be better survived under this competition. Porter's Five Forces Threats of New Entry: High Although software industry forbids many companies from surviving, the threshold for new players to enter this industry this relatively low. One can easily start business by bringing a new product and compete with other existing firms. Threats of New Substitute: Low Substitution in this industry is relatively low. Part of the reason is because customers are very preference based. There are many different companies for each sector but people generally gravitate towards what they’re already comfortable with. More importantly, like we mentioned above, most of the companies have their niche market. They survive because of their unique software system and services. Bargaining Power of Customers: Moderate

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Companies having extremely large numbers of customers with significant demand, is growing everyday due to technological advancements and more people owning technology devices that require software. Price sensitivity is generally low for customers because they require the product to help perform their day-to-day operations. However, customers may pressure the company to update their products. Bargaining Power of Suppliers: High Software companies typically have a high bargaining power towards their suppliers since a majority of the revenue relies on their software subscription rather than physical goods. However, a lot of companies do have a small portion of their sales are from physical goods. For example, Oracle currently has nearly 10% of their revenue comes from selling of hardware which has a low bargaining power towards certain suppliers. Competitive Rivalry: High There is a large number of competitors in the overall market. Companies try to make an edge on the competitors in order to maintain a large market share.

COMPANY ANALYSIS General Information Overview and Business Description: Oracle Corporation is a multinational computer company that provides products and services in applications, platform and infrastructure of information technology environments. After incorporating on October 9, 2005, Oracle specializes in database software technology, cloud systems and other types of software products, including Oracle Application Oracle Database, Oracle Fusion Middleware and Java. Oracle started to enter the hardware products and services market by offering Oracle Engineered Systems, when finishing the acquisition of Sun Microsystem in January 2010. Oracle is a mature company in the software company and now is shifting to the cloud-based service company. Therefore, both the software and hardware businesses of Oracle have their products and services based on cloud environment. Except for focusing on developing the software products and cloud systems, Oracle is also devoted to enhancing customer relations management, as well as supply chain management. Oracle’s corporate strategy is similar to many current software companies, and that is to continue to invest more to develop the cloud systems. The new cloud developments, legacy customer care environment and compound implementations make the way customers deal with data easier and faster, which helps to enlarge business growth. The other corporate strategy of Oracle is to active in M&A market. In order to enlarge Oracle’s products lines to get

more customer bases, Oracle prefers to acquire some companies that have already had specific products in cloud markets, showing as the picture below. In addition, Oracle believes that acquisitions help to motivate and accelerate innovation, which can boost the revenue and earnings. Based on the two purposes, Oracle will continue acquisition activities in the future.

Source: Oracle.com [9]

Oracle faces a strong competitive environment in the market because of frequent entrances of new products and companies, as well as the capricious change of the industry trend. This high competitive circumstance requires Oracle to develop their current products or introduce new product lines to generate more customers. Oracle is the second largest software company behind Microsoft, in terms of revenue. As the chart below shows, though Oracle has rapidly increased revenue since incorporating from 11.8% to 35.62%, Oracle’s revenue over the last 5 fiscal years (2012-2017) has been relatively stagnant, maintained around 37%. Therefore, Oracle, like Microsoft and Google, would be considered as a mature company with aspects of growth, due to high revenues and large research & development expenses (R&D expenses) to continue developing new products that can fuel future growth.

Source: Statista.com [10]

Product Lines and New Products Oracle’s product lines can be divided into three segments: Software and Cloud, Hardware, and Service. The software and cloud is the primary business of Oracle, which consists of two main streams, on-premise software licenses and integrated stack of Oracle Cloud SaaS, PaaS and IaaS

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offerings. Hardware and services are the other two parts of Oracle to maximize company’s potential profits.

Source: Oracle 2017 10-K [11]

Software Software stream make profits from Software Licenses by renewal fees that existing customers pay in order to use the same software products. New Software License, aiming to new or existing customers to purchase a new Oracle platform that they did not have, is another significant segment to earn profit. Successfully offering customers comprehensive deployment, Oracle attracts large customer bases on the software stream, especially from the products. Software Licenses, the traditional business, is the primary area for Oracle to generate profits and maintain the company’s stagnant revenue. Therefore, as the pie chart above indicates, the Software and Cloud generates 80% revenue of Oracle in FY 2017, which increased by 2% comparing to FY 2016. Additionally, software licenses and new software licenses, contribute 50.9% and 16.9% of the revenue, respectively Cloud The other critical stream is Oracle’s Cloud system and service application, platform and infrastructure, which contains the Oracle Cloud Software as a Service (SaaS), Platform as a service (PaaS) and Infrastructure as a Service (IaaS). With the high demand of the cloud-based and on-premise models in the recent years, Oracle has invested more in development cloud and market sales. Oracle began its business in cloud market in 2014. From 2014 to 2016, Oracle was in the introduction business cycle in the cloud market. Since 2017, Oracle boost its revenue in Cloud products and then enter the growth business cycle. The critical advantage for Oracle to attract customers is providing a variety of products for customers and high reliable and secure application, platform and infrastructure based on the industry standards. Therefore, Oracle had higher growth rate of Cloud revenue by obtaining customer preferences in FY 2017. And we predict that Oracle will keep the optimistic growth rate in the next few years. SaaS, as the critical part of Oracle Cloud Application, offers the customers a bunch of modular cloud software application, such as Human Capital Management (HCM), Enterprise Resource Planning (ERP) and Supply Chain Management (SCM). These three typical software applications offer advantages in specific areas of company management. HCM is an all-in-one software program that simplifies and streamlines HR processes within companies. ERP is often applied in back office processes, including Financial write up, risk management and inventory management. SCM is a software application that analyzes

the enterprise performance management. Based on the specific clouds, customers allow to innovate process to outstand their companies and organizations. Thus, the revenue generated by SaaS in FY2017 increased to 8.9%. Moreover, since Oracle offers the application in a solid quality and broad industries use range, the customer bases have been increasing over years. We believe that the trend will continue, due to Oracle’s stable innovation speed and customer satisfaction. PaaS, that is the combination of Oracle and open source technologies which enables users to build, store, integrate, secure and manage on, has low cost of ownership-subscription based payments and flexible, practicable and detachable models to maintain Oracle customers’ benefits. Oracle’s IaaS allows to assist firms with their application portfolio, such as assistance in how to run load-bearing application and allows firms to move existing applications to Oracle’s IaaS. Even though Cloud PaaS and IaaS do not take a large portion of Oracle’s revenue pie chart, combining PaaS and IaaS together is the opportunity to expand the cloud business to potential customers gradually by Oracle Database, Oracle Fusion Middleware and Java. Therefore, Oracle will increase its revenue growth. Hardware After acquisition with Sun Microsystem, Oracle started into hardware segment. Oracle has provided many different hardware products to maximize the company potential. The primary hardware product is the Oracle Engineered Systems, whose three types of engineered servers allow to integrate a variety of components to work together and provide improved and efficiency, performance, and security. However, Oracle had fluctuated amount of its inventory sold each year. The revenue of hardware segment in FY 2017 was 11%, which had 2% negative growth in FY 2016. The reason to interpret the situation is that Oracle entered hardware market at the late growth stage and has less firm customer base, compared to the leading peers in the hardware segments, such as Dell and Microsoft. Oracle is losing customers in hardware market. Service Oracle works to maximize the customers experience performance of the Oracle software and hardware that they invested by offering services solutions. The services can be regarded as the complement products for Software and Cloud, it keeps a stable revenue portion as 8.9%. Production and Distribution Oracle relied heavily on suppliers to design, manufacture and deliver the necessary components for the hardware products, because some components only available from a single vendor. The third-party partner manufacturing increased the risks of inventory shortcut. Besides, Oracle markets and sells its offerings through indirect channels to extend its customer coverage, which shares the profit with distributors. The majority of Oracle’s sales are purchased by business of many sizes in different industries, government agencies and education institution. Therefore, cybersecurity

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and high performance become the most significant consideration of customers, so that it is better to decrease more parties’ interference between Oracle and the specific customer organization. Based on this consideration, Oracle acquired several manufacturing companies, such as NetSuite in 2017 and MICROS Systems in 2015, to take control over the supply chain and optimize the day-to-day flow of products. From the acquisition, Oracle optimized the production and distribution process and plans, which helps Oracle to generate more profit in the future. Competition Oracle faces high intense in all aspect of the business with both technology involvement and customers demand pressure. Because of low barrier to entry Oracle’s market segments, new technic competitors emerge to challenge the Oracle’s offering. Even though Oracle has stable large portion of customer bases in software market, it faces obstacle to appear on more customer and to increase its market shares. The main peer competitors of Oracle are large capital companies, which take large proportion of market shares. If Oracle decides to entry new market segment, it faces competition with existing competitors, even the firms as partner previously. In the cloud infrastructure segment market share, Oracle has increased 3% market shares from 2017 to 2018 by providing more cloud services. As the graph below shows, Oracle faces competitive environment with the leading companies: International Business Machines Corporation (IBM), Microsoft Azure, Google Cloud and Amazon Web Services (AWS). And AWS is the leading company in the cloud market. Oracle has relatively low public usage of databases running which is narrow, while AWS, Google Cloud and Microsoft offer more features and options for customers and more open to public.

Source: 1redDrop [3]

In addition, many strong competitors allow their customers to use the software and intellectual property for free, so that they will obtain more sales opportunities in the market. The intensive competition in cloud market forces Oracle to decrease the product sales prices. This will reduce the Oracles’ profit margin or net income, because Oracle generates the revenue primary from software license. In other words, free software in other platform potentially diminish revenue. However, Oracle has been increasing fast at SaaS and PaaS, because its workloads run faster than

AWS. Additionally, AWS and Microsoft Azure offer services that allow customers to quickly apply Oracle databases to their clouds, which expands Oracle’s extra channel to attract customers. Considering the distribution of Oracle, the fast running can satisfy the customer high demand, which imposes the future revenue growth. However, since Amazon recently decided to cutoff the prices of cloud products to attract more customers, we believe that this strategy will depress the optimistic cloud revenue growth rate from 2019 to 2022. Therefore, Oracle faces two methods to maintain the customer base by cutting prices or provide more innovative products to the customers. Since software and cloud improvement relies heavily on high qualified and skilled employees, such as software engineers, losing employees means losing competition ability with large companies. The picture below presents the bell curve of software engineers’ salaries in 2018, where average salary is $109,442. Oracle’s software engineers have annual salary s $113,198. Even though Oracle has beyond the average line, comparing with Google’s base salary, $164,683 and 75th percentile salary, Oracle does not have strong competitive ability to appear on skilled employees. Thus, Oracle may be confronted with failing to recruit new employees or retain existing employees due to higher and higher cost of hiring employees. Therefore, Oracle may increase employees’ salaries or lose employees, both of which will draw back company’s growth.

Source: Paysa.com [2]

Other Topics Research and Development Research and development expenses were $6.159 billion and $5.787 billion for 2017, 2016 respectively, increased 6.43% between years. Due to high change in technology market, Oracle’s increasing investment on products development and existing products improvement allow the company to maintain the power over product design and the competitive position. The rise R&D expense was led by increasing the headcount and stock-based compensation, which will benefit for the software engineers. Additionally, Oracle bought many patent overseas and domestic, as well as acquisition products from other companies. Oracle can generate more profits, while the products bought from other companies enable Oracle to extend customer reach method.

VALUATION ANALYSIS

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According to the economic outlook, industry trend and company specific factors analysis, we forecasted the future 5-year revenues and expenses based on various metrics assumptions by Oracle’s historical financial performance. We recommend a BUY rating for Oracle due to the prediction of intrinsic price range by valuation models and the potential revenue growth. Our group used the Discounted Cash Flow Model, Economic Profit Model, Dividend Discount Model, and a relative valuation. Revenue Decomposition Oracle’s revenue growth comes from their three product lines: software and cloud, hardware, and service. In these lines, software and cloud has been the mainstream of total revenue. For this line, we separated the revenue from cloud and the revenue from software. As to cloud revenue stream, it contains Cloud Software as a Service (SaaS), Platform as a Service (PaaS), and Infrastructure as a Service (IaaS). Cloud is a relatively new product line for Oracle, but it has generated great vitality suggesting more and more significant revenue composition for Oracle. Therefore, we believe it will has a 5% annual growth. As the Cloud line has been growing prosperously, the software line gains a decent growth as well. First, Software decomposes into two lines: New software licenses & cloud software subscription and Software license updates & product support. These two lines have contributed to the majority of revenue for Oracle. After analyzing historical data, we decided to give new software licenses & cloud software subscription a decline rate of 3% since it has been affected by the growth of the cloud line. However, software license updates & product support gets a growth rate of 2.32% which offsets the decrease of new software licenses & cloud software subscription. Additionally, we expect hardware revenue to have a 1% decrease since the sales of hardware has been decreasing through these years, while services revenue will increase 1% annually because of the ever-increasing software business. Cost of Goods Sold Cost of goods sold depends heavily on the sales. It also has three types of expenses that related to each revenue stream. First, we expect the cost of cloud will correlate to its revenue growth. Therefore, we also decide the growth of cost to be 5% yearly. Second, since Oracle has a declining trend in new software licenses & cloud software subscription, the historical cost for software has also been decreasing. Thus, we expect it to continue to decrease about 4.27% every year. This is a similar situation to that of hardware, so we expect a 10.26% decline annually in the cost. Finally, the cost for services expenses have been declining as well. An explanation of this is the improvement of working efficiency. Therefore, we expect it to keep decreasing 4.61% yearly. Selling and Administrative Expenses Although as the firm grows the percentage of selling and administrative expenses to total revenue will decrease,

Oracle has an increasing percentage for the last decade. Therefore, we decide to fix their selling and administrative expenses at 25% of their revenue. Research and Development Expenses Our group decided to increase R&D by the market inflation rate since the increase of historical value is about 2%. We believe the inflation rate will be a reasonable assumption for research and development expenses. Weighted Average Cost of Capital We estimated the weighted average cost of capital of 7.46% by using the cost of equity and cost of debt. Additionally, we used the market capitalization and debt values in FY 2017, showing as notes payable in the balance sheet, to calculate the equity value. We also used the marginal tax rate of 21% and 30-year Treasury bond as the risk-free rate in our assumptions. Cost of Equity To estimate Oracle’s cost of equity, we used the capital asset pricing model (CAPM). In addition to using the 30-year Treasury bond as the risk-free rate, our group determined an equity risk premium of 4.96%, given by Aswath Damodaran’s implicit risk premium. We obtained Oracle’s equity beta, which is 1.163, from Bloomberg. Using the CAPM with the three factors, the cost of equity we estimated is 8.80% Cost of Debt As for estimating the cost of debt, we determined pre-tax cost of debt as 4.14% by finding the 28-year bonds outstanding, which will mature in 2046, from Finra. Then, we calculated the after-tax cost of debt by using the pre-tax cost of debt to reduce the tax shield. Therefore, we calculated the after-tax cost of debt to be 3.27%. CV Growth Assumptions Our group determines the CV growth for NOPLAT and EPS to be 2%, which matches expected long-term GDP in the macroeconomic outlook. We think that Oracle will be profitable in the next 5 years, but with a relatively slow revenue growth rate based on its 3-year performance as 1.3%. We believe that Oracle will boost slightly by its cloud product lines satisfying the market customer’s demand, but with the decline of hardware segments. Therefore, Oracle will not grow faster than the economy and the CV growth for NOPLAT will be very close to the market. From the estimation, we predicted CV o ROIC as 61.40%, gained from NOPLAT divided by Invested Capital. The continuing value of ROIC includes a back sliding of ROIC on our assessment. It indicates that Oracle managers have some wrong strategies, especially too much M&A activities investing Oracle’s capital to generate profits. And investors may face the risks that they will not get the expected payback in the long-term expectation. Additionally, we forecasted the CV of ROE as 17.25% by the function of net income divided by stockholders’ equity.

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The ROE ratios calculated from FY2015 to estimated FY2022 indicate a decreased trend. Share Repurchases According to Oracle’s 10-Q ended February 28, 2018, Oracle declared a repurchase of the common stock totaling $24 billion. $6.5 billion has already been spent by Oracle in the first 9 months of the FY2018. Therefore, we predicted that during the FY 2019, Oracle will slow its common stock repurchase due to the trading war. The new trading policies between China and U.S. will hit the technology industries, and the companies need to adjust their strategies instead of increasing stock repurchasing. Discounted Cash Flow and Economic Profit Models We think that the discounted cash flow and economic profit models can help to estimate more accurate intrinsic stock price for Oracle. Based on the assumption metrics, the adjusted stock price as of April 31, 2018, is $57.30 per share. Comparing the trading stock price $46.78 per share as of April 17, 2018, we think that Oracle is undervalued because of the recent change of trading policies. Therefore, when the technology sector rebounces, Oracle’s stock price will increase aligning with the sector. Dividend Discount Model Our team does not think this model will come out with a satisfying value in the first place since technology companies typically don’t have dividends. The management team is more willing to use it for development of their companies. However, Oracle does have a certain number of dividends every year, but the result of the model has an unreasonable low intrinsic value of Oracle. Therefore, we didn’t want to use this model to predict the current price. Relative P/E Valuation In the valuation model, we use the average 2018 and 2019 P/E of the 10 biggest companies within the same industry to compare with Oracle’s 2018 and 2019 P/E so as to get an idea about how the general market values differ from our model. We chose the pure players based on their growth, market size and industry. As a result, Oracle’s stock price under the implied relative value model is $82.64 for P/E (EPS18) and $68.11 for P/E (EPS19) which are not the same as what we predicted in our DCF model. Therefore, we don’t think this method is appropriate for estimating our stock price. SENSITIVITY ANALYSIS Risk Premium and Beta We analyze our stock price based on risk premium and beta because these two factors are important when calculating cost of capital such as cost of equity and WACC. We believe by estimating these metrics, we will get a clear change between stock price and discount factors. The result shows that with a low risk premium and low beta, we get a low stock price of $56.63, with a high-risk premium and high beta, we get a high stock price of $58.06.

Marginal Tax Rate and Risk-Free Rate We analyze these two factors because we think they connect to each other closely and they also have a great impact on the discount factors. Therefore, with a high marginal tax rate and low risk-free rate, we get the lowest stock price at $54.61, while with a low marginal tax rate and a high risk-free rate, we get the highest stock price at $60.01 in the table. CV Growth of NOPLAT and Cost of Debt We tested these two factors because they are the key inputs to determine the terminal value. We wish to observe a clear relationship between them. Thus, with a low CV growth of NOPLAT and a low cost of debt, we get the lowest stock price at $55.76 in the table. With a high CV growth of NOPLAT and a high cost of debt, we get a high stock price of $58.96. Capex Inflation Rate and Inflation Rate Additionally, since capex directly related to ROIC, we want to test if there is a certain correlation between Capex inflation rate and market inflation rate. After running the table, we get $56.88 as our lowest stock price with a high capex inflation rate and high market inflation rate. We get $57.72 as our highest stock price with a low capex inflation rate and low market inflation rate. WACC and Risk Free Rate For these two factors, our group primarily want to analyze any change of these discount factors. The result shows that with a low wacc and high risk free rate, we get the highest stock price at $61.93. With a high wacc and low risk free rate, we get the lowest stock price at $53.30. This indicates that higher risk free rate and low wacc will give company higher value. Marginal Tax Rate and Beta Comparing these two factors, stock price change greatly depends on the change of marginal tax rate. Not surprisingly, with high marginal tax rate and low beta, we get the lowest stock price at $54.24. With low marginal tax rate and high beta, we get the highest price at $60.41.

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REFERENCES [1] ORCL one-year stock performance. (2018) Retrieved April 18th from: https://finance.yahoo.com [2] Paysa.com (2018). The average Salary for Software Engineers is $109,442. Paysa.com. Retrieved April 17, 2018, from: https://www.paysa.com/salaries/software-engineer--t?gclid=CjwKCAjwk9HWBRApEiwA6mKWab-Knt6p8QGYcmsYjPhsiPrigMcnqa0pj8GALjGFsMDFTo-iQZAxxxoCMdAQAvD_BwE [3] reddrop. (2017). Microsoft azure and amazon web services aws 2. 1reddrop. Retrieved April 17, 2018, from: https://1reddrop.com/2017/02/18/amazon-aws-microsoft-azure-cloud-computing-iaas-duopoly/microsoft-azure-and-amazon-web-services-aws-2/ [4] Bureau of Economic Analysis. National Income and Product Accounts Gross Domestic Product: Fourth Quarter and Annual 2017 (Third Estimate) Corporate Profits: Fourth Quarter and Annual 2017. Retrieved April 17th from: https://www.bea.gov/newsreleases/national/gdp/gdpnewsrelease.htm [5] Fidelity, Information Technology Outperform S&P 500, 2017. [6] BLS. (2018 April 12). Labor Force Statistics. Retrieved from https://data.bls.gov/timeseries/LNS14000000 [7] BLS. (2018 April 12). Civilian Unemployment Rate, 2017. Retrieved April 17th from: https://www.bls.gov/bls/newsrels.htm#OEUS

[8] GICS Sector. Industry Chart, 2017. Retrieved April 17th from: https://us.spindices.com [9] “2016 SaaS Industry Market Report: Key Global Trends & Growth Forecasts.” Retrieved April 17th, 2017 from http://financesonline.com/2016-saas-industry-market-report-key-global-trends-growth-forecasts/ [10] Spending on public IT cloud services worldwide, by segment, in 2014 and 2018 (in billion U.S. dollars). Retrieved April 17th from: https://www.statista.com/statistics/370305/global-public-it-cloud-services-spending-by-segment/ [11] Oracle 10-K ended by May 31, 2017. [12] Oracle 10-Q ended by February 28, 2018.

12

Important Disclaimer This report was created by students enrolled in the Applied Equity Valuation class at the University of Iowa. The report was originally created to offer an internal investment recommendation for the University of Iowa Krause Fund and its advisory board. The report also provides potential employers and other interested parties an example of the students’ skills, knowledge and abilities. Members of the Krause Fund are not registered investment advisors, brokers or officially licensed financial professionals. The investment advice contained in this report does not represent an offer or solicitation to buy or sell any of the securities mentioned. Unless otherwise noted, facts and figures included in this report are from publicly available sources. This report is not a complete compilation of data, and its accuracy is not guaranteed. From time to time, the University of Iowa, its faculty, staff, students, or the Krause Fund may hold a financial interest in the companies mentioned in this report.

Oracle CorporationKey Assumptions of Valuation Model

Ticker Symbol ORCLCurrent Share Price $45.44Current Model Date 4/17/2018FY End (month/day) May. 31

Pre‐Tax Cost of Debt 4.14% (Finra maturity 2046)

Beta 1.163 (Bloomberg Raw Beta)

Risk‐Free Rate 3.03% (Finra 30‐yr bond)Equity Risk Premium 4.96% (Damodaran)CV Growth of NOPLAT 2.00% (same as expected GDP)CV Growth of EPS 2.00%Current Dividend Yield 1.51% (Yahoo! Finance)Marginal Tax Rate 21% (Q3, 10‐Q 2018, p7)Effective Tax Rate 18.90% (2017, 10‐K 2017)WACC 7.50%

CV ROIC 58.77%Operating Marginal Rate 36%

Oracle CorporationRevenue Decomposition

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022ECloud platform as a service & infrastructure as a serv $608 $646 $1,360 $1,428 $1,499 $1,574 $1,653 $1,736Cloud software as a service & platform as a service $1,485 $2,207 $3,211 $4,174 $5,009 $5,761 $6,337 $6,653New software licenses & cloud software subscription $8,535 $7,276 $6,418 $6,225 $6,039 $5,858 $5,682 $5,511Software license updates & product support $18,847 $18,861 $19,229 $19,676 $20,133 $20,601 $21,080 $21,570

Total cloud & on-premise software revenues $29,475 $28,990 $30,218 $31,504 $32,681 $33,794 $34,752 $35,471Total hardware revenues $5,205 $4,668 $4,152 $4,110 $4,069 $4,029 $3,988 $3,949Total services revenues $3,546 $3,389 $3,358 $3,392 $3,425 $3,460 $3,494 $3,529

Total revenues $38,226 $37,047 $37,728 $39,006 $40,175 $41,282 $42,234 $42,948

Total Operating Expenses $24,355 $24,443 $25,018 $24,964 $25,712 $26,421 $27,030 $27,487Total Operating Margin $13,871 $12,604 $12,710 $14,042 $14,463 $14,862 $15,204 $15,461

Total Revenues by Geography:Americas $21,107 $20,466 $21,038 $21,453 $22,096 $22,705 $23,229 $23,622EMEA $11,380 $10,881 $10,630 $11,702 $12,053 $12,385 $12,670 $12,885Asia Pacific $5,739 $5,700 $6,060 $5,851 $6,026 $6,192 $6,335 $6,442Total Revenues $38,226 $37,047 $37,728 $39,006 $40,175 $41,282 $42,234 $42,948

% Revenues by GeographyAmericas 55% 55% 56% 55% 55% 55% 55% 55%EMEA 30% 29% 28% 30% 30% 30% 30% 30%Asia Pacific 15% 16% 16% 15% 15% 15% 15% 15%

Total Revenues by BusinessCloud and on‐premise software $29,475 $28,990 $30,218 $31,504 $32,681 $33,794 $34,752 $35,471Hardware $5,205 $4,668 $4,152 $4,110 $4,069 $4,029 $3,988 $3,949Services $3,546 $3,389 $3,358 $3,392 $3,425 $3,460 $3,494 $3,529Total Revenues $38,226 $37,047 $37,728 $39,006 $40,175 $41,282 $42,234 $42,948

% Revenues by BusinessCloud and on‐premise software 77% 78% 80% 81% 81% 82% 82% 83%Hardware 14% 13% 11% 11% 10% 10% 9% 9%Services 9% 9% 9% 9% 9% 8% 8% 8%

Oracle CorporationIncome Statement

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EMay‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18

Cloud platform as a service & infrastructure as a service $608 $646 $1,360 $1,428 $1,499 $1,574 $1,653 $1,736Cloud software as a service $1,485 $2,207 $3,211 $4,174 $5,009 $5,761 $6,337 $6,653New software licenses & cloud software subscriptions $8,535 $7,276 $6,418 $6,225 $6,039 $5,858 $5,682 $5,511Software license updates & product support $18,847 $18,861 $19,229 $19,676 $20,133 $20,601 $21,080 $21,570

Total cloud & on-premise software revenues $29,475 $28,990 $30,218 $31,504 $32,681 $33,794 $34,752 $35,471Total hardware revenues $5,205 $4,668 $4,152 $4,110 $4,069 $4,029 $3,988 $3,949Total services revenues $3,546 $3,389 $3,358 $3,392 $3,425 $3,460 $3,494 $3,529

Total revenues $38,226 $37,047 $37,728 $39,006 $40,175 $41,282 $42,234 $42,948

Cloud platform as a service & infrastructure as a service $344 $366 $678 $712 $747 $785 $824 $865Cloud software as a service & platform as a service expen $773 $1,152 $1,285 $1,799 $2,339 $2,806 $3,087 $3,241Software license updates & product support expenses $1,199 $1,146 $1,052 $1,007 $964 $923 $884 $846Hardware expenses $2,287 $2,064 $1,653 $1,483 $1,331 $1,195 $1,072 $962Services expenses $2,929 $2,751 $2,801 $2,672 $2,549 $2,431 $2,319 $2,212Cost of Good Sold $6,820 $6,608 $6,469 $6,381 $6,579 $6,676 $6,554 $6,271Depreciation $712 $871 $1,000 1292 1351 1464 1632 1856Amortization of intangible assets $2,149 $1,638 $1,451 1291 1149 1023 910 810Research & development expenses $5,524 $5,787 $6,159 $6,405 $6,662 $6,928 $7,205 $7,493SG&A $8,732 $9,039 $9,373 $9,751 $10,044 $10,321 $10,559 $10,737Restructuring expenses $207 $458 $463 $350 $350 $350 $350 $350Acquisition related & other operating expenses $211 $42 $103 $150 $150 $150 $150 $150Total operating expenses $24,356 $24,444 $25,019 25621 26285 26912 27360 27668Operating income $13,871 $12,604 $12,710 $13,384 $13,890 $14,371 $14,874 $15,281Interest expense -$1,143 -$1,467 -$1,798 ‐1886 ‐1975 ‐2073 ‐2179 ‐2295Non-operating income (expense), net $106 $305 $605 622 640 658 677 697Income (loss) before provision for income taxes $12,834 $11,442 $11,517 $12,120 $12,556 $12,956 $13,372 $13,682Provision for (benefit from) income taxes $2,896 $2,541 $2,182 $2,545 $2,637 $2,721 $2,808 $2,873Net income (loss) $9,938 $8,901 $9,335 $9,575 $9,919 $10,236 $10,564 $10,809Earning Per Share - basic $2.26 $2.11 $2.27 $2.39 $2.51 $2.63 $2.79 $2.94Year end shares outstanding $4,343 $4,131 $4,137 $4,007 $3,959 $3,889 $3,782 $3,675Dividends declared per common share $0.51 $0.60 $0.64 $0.67 $0.70 $0.74 $0.78 $0.82

Oracle CorporationBalance Sheet (Millions)

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EAssets: May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18Current Assets:

Cash & cash equivalents 21,716 20,152 21,784              17,913          21,439          23,473          23,013          21,881 Marketable securities 32,652 35,973 44,294              48,010          52,038          56,404          61,137          66,266 Trade receivables, net 5,618 5,385 5,300                5,549            5,635            5,708            5,755            5,767 

Deferred tax assets (current) 663 - -                       ‐                     ‐                     ‐                     ‐                     ‐ Other receivables - - - ‐                    ‐              ‐              ‐              ‐             Inventories 314 212 300 285                   289              293              295              296             Prepaid expenses & other current assets 2,220 2,591 2,837 2,933                3,021          3,104          3,176          3,230         

Total current assets 63,183 64,313 74,515 74,690             82,423        88,982        93,376        97,439       Non-current Assets:

Property, plant & equipment, net 3,686 4,000 5,315 5,557                6,023          6,713          7,633          8,801         Intangible assets, net 6,406 4,943 7,679 7,115                7,328          7,530          7,704          7,834         Goodwill, net 34,087 34,590 43,045 43,045 43,045 43,045 43,045 43,045

Deferred tax assets (non current) 795 1,291 1,143 1,171                1,200          1,230          1,261          1,292         Other assets 2,746 3,043 3,294 3,502                3,723          3,958          4,207          4,473         

Total non-current assets 47,720 47,867 60,476 60,389             61,319        62,475        63,849        65,445       Total assets 110,903 112,180 134,991 135,079           143,742     151,457     157,226     162,884    

Liabilities and Stockholders' EquityCurrent Liabilities:

Notes payable, current 1,999$ 3,750$ 9,797$ 6,035                6,483          6,964          7,480          8,032         Accounts payable 806 504 599 585                   603              619              634              644             Accrued compensation & related benefits 1,839 1,966 1,966 2,032                2,093          2,151          2,200          2,238         Deferred revenues 7,245 7,655 8,233 8,234                8,734          9,235          9,714          10,148       Income taxes payable 532 - - ‐                    ‐              ‐              ‐              ‐             Accrued restructuring - - - ‐                    ‐              ‐              ‐              ‐             Other current liabilities 2,870 3,333 3,583 3,695                3,811          3,931          4,055          4,182         

Total current liabilities 15,291 17,208 24,178 20,582             21,724        22,899        24,082        25,244       Non-current Liabilties:

Notes payable, non-current 39,959 40,105 48,112 51,120             53,361        55,840        58,557        61,520       Income taxes payable 4,386 4,908 5,681 5,133 5,317 5,487 5,663 5,794

Accrued restructuring - - - ‐                    ‐              ‐              ‐              ‐             Deferred tax liabilities 0 0 0 ‐                    ‐              ‐              ‐              ‐             Deferred revenues - - - ‐                    ‐              ‐              ‐              ‐             Other non-current liabilities 2,169 2,169 2,774 3,221                3,741          4,345          5,045          5,859         

Total non-current liabilities 46,514 47,182 56,567 59,474             62,419        65,671        69,265        73,173       Commitments and contingencies

Stockholders' equity:Common stock, $0.01 per value and additional paid in capital--auth 23,156 24,217 27,065              27,442          27,820          28,197          28,574          28,876 Retained earnings 26,503 23,888 27,598              27,992          32,134          35,003          35,610          35,892 Accumulated other comprehensive income (loss) (996) (816) (803)                  (803)             (803)             (803)             (803)             (803)

Total Oracle Corporation stockholders' equity 48,663 47,289 53,860              54,631          59,150          62,397          63,381          63,965 Noncontrolling interests 435 501 386 392                   449              490              498              502             

Total equity 49,098 47,790 54,246 55,023             59,600        62,887        63,879        64,467       Total liabilities and stockholders' equity 110,903 112,180 134,991 135,079           143,742     151,457     157,226     162,884    

Oracle CorporationCommon Size Balance Sheet% of Sales

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EAssets: May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18Current Assets:

Cash & cash equivalents 56.81% 54.40% 57.74% 45.92% 53.36% 56.86% 54.49% 50.95%Marketable securities 85.42% 97.10% 117.40% 123.09% 129.53% 136.63% 144.76% 154.29%

Trade receivables, net 14.70% 14.54% 14.05% 14.23% 14.03% 13.83% 13.63% 13.43%Deferred tax assets (current) 1.73% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other receivables 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Inventories 0.82% 0.57% 0.80% 0.73% 0.72% 0.71% 0.70% 0.69%Prepaid expenses & other current assets 5.81% 6.99% 7.52% 7.52% 7.52% 7.52% 7.52% 7.52%

Total current assets 165.29% 173.60% 197.51% 191.48% 205.16% 215.55% 221.09% 226.87%Non-current Assets:

Property, plant & equipment, net 9.64% 10.80% 14.09% 14.25% 14.99% 16.26% 18.07% 20.49%Intangible assets, net 16.76% 13.34% 20.35% 18.24% 18.24% 18.24% 18.24% 18.24%Goodwill, net 89.17% 93.37% 114.09% 110.36% 107.14% 104.27% 101.92% 100.22%Deferred tax assets (non current) 2.08% 3.48% 3.03% 3.00% 2.99% 2.98% 2.98% 3.01%Other assets 7.18% 8.21% 8.73% 8.98% 9.27% 9.59% 9.96% 10.41%

Total non-current assets 124.84% 129.21% 160.29% 154.82% 152.63% 151.34% 151.18% 152.38%Total assets 290.12% 302.80% 357.80% 346.31% 357.79% 366.88% 372.27% 379.26%

Liabilities and Stockholders' EquityCurrent Liabilities:

Notes payable, current 5.23% 10.12% 25.97% 15.47% 16.14% 16.87% 17.71% 18.70%Accounts payable 2.11% 1.36% 1.59% 1.50% 1.50% 1.50% 1.50% 1.50%Accrued compensation & related benefits 4.81% 5.31% 5.21% 5.21% 5.21% 5.21% 5.21% 5.21%Deferred revenues 18.95% 20.66% 21.82% 21.11% 21.74% 22.37% 23.00% 23.63%Income taxes payable 1.39% 0.00% 0.00%Accrued restructuring 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other current liabilities 7.51% 9.00% 9.50% 9.47% 9.49% 9.52% 9.60% 9.74%

Total current liabilities 40.00% 46.45% 64.09% 52.77% 54.07% 55.47% 57.02% 58.78%Non-current Liabilties:

Notes payable, non-current 104.53% 108.25% 127.52% 131.06% 132.82% 135.26% 138.65% 143.24%Income taxes payable 11.47% 13.25% 15.06%Accrued restructuring 0.00% 0.00% 0.00% 21.11% 21.74% 22.37% 23.00% 23.63%Deferred tax liabilities 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Deferred revenues 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%Other non-current liabilities 5.67% 5.85% 7.35% 8.26% 9.31% 10.52% 11.95% 13.64%

Total non-current liabilities 121.68% 127.36% 149.93% 152.47% 155.37% 159.08% 164.00% 170.37%Commitments and contingencies

Stockholders' equity:Common stock 60.58% 65.37% 71.74% 70.35% 69.25% 68.30% 67.66% 67.23%Retained earnings 69.33% 64.48% 73.15% 71.76% 79.98% 84.79% 84.31% 83.57%Accumulated other comprehensive income (loss) ‐2.61% ‐2.20% ‐2.13% ‐2.06% ‐2.00% ‐1.95% ‐1.90% ‐1.87%

Total Oracle Corporation stockholders' equity 127.30% 127.65% 142.76% 140.06% 147.23% 151.15% 150.07% 148.93%Noncontrolling interests 1.14% 1.35% 1.02% 1.00% 1.12% 1.19% 1.18% 1.17%

Total equity 128.44% 129.00% 143.78% 141.06% 148.35% 152.33% 151.25% 150.10%

Total liabilities and stockholders' equity 290.12% 302.80% 357.80% 346.30% 357.79% 366.88% 372.27% 379.25%

Oracle CorporationIncome Statement

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022EMay‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18 May‐18

Cloud platform as a service & infrastructure as a service 1.59% 1.74% 3.60% 3.66% 3.73% 3.81% 3.91% 4.04%

Cloud software as a service & platform as a service 3.88% 5.96% 8.51% 10.70% 12.47% 13.95% 15.00% 15.49%

New software licenses & cloud software subscriptions 22.33% 19.64% 17.01% 16.30% 15.60% 14.93% 14.28% 13.64%

Software license updates & product support 49.30% 50.91% 50.97% 51.50% 52.02% 52.50% 52.96% 53.40%

Total cloud & on-premise software revenues 77.11% 78.25% 80.09% 80.36% 80.64% 80.92% 81.20% 81.49%

Total hardware revenues 13.62% 12.60% 11.01% 10.76% 10.51% 10.27% 10.02% 9.78%

Total services revenues 9.28% 9.15% 8.90% 8.88% 8.85% 8.82% 8.78% 8.74%

Total revenues 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cloud platform as a service & infrastructure as a service 0.90% 0.99% 1.80% 1.83% 1.86% 1.90% 1.95% 2.01%

Cloud software as a service & platform as a service expen 2.02% 3.11% 3.41% 4.61% 5.82% 6.80% 7.31% 7.55%

Software license updates & product support expenses 3.14% 3.09% 2.79% 2.64% 2.49% 2.35% 2.22% 2.09%

Hardware expenses 5.98% 5.57% 4.38% 3.88% 3.44% 3.04% 2.69% 2.38%

Services expenses 7.66% 7.43% 7.42% 6.99% 6.58% 6.20% 5.83% 5.48%

Cost of Good Sold 17.84% 17.84% 17.15% 15.53% 14.62% 13.65% 12.64% 11.56%

Depreciation 1.86% 2.35% 2.65% 3.38% 3.49% 3.73% 4.10% 4.59%

Amortization of intangible assets 5.62% 4.42% 3.85% 3.38% 2.97% 2.61% 2.29% 2.01%

Research & development expenses 14.45% 15.62% 16.32% 16.44% 16.55% 16.66% 16.75% 16.83%

SG&A 22.84% 24.40% 24.84% 25.00% 25.00% 25.00% 25.00% 25.00%

Restructuring expenses 0.54% 1.24% 1.23% 0.92% 0.90% 0.89% 0.88% 0.87%

Acquisition related & other operating expenses 0.55% 0.11% 0.27% 0.39% 0.39% 0.38% 0.38% 0.37%

Total operating expenses 63.72% 65.98% 66.31% 65.04% 63.92% 62.92% 62.03% 61.23%

Operating income 36.29% 34.02% 33.69% 34.96% 36.08% 37.08% 37.97% 38.77%

Interest expense -2.99% -3.96% -4.77% -4.92% -5.08% -5.25% -5.44% -5.64%

Non-operating income (expense), net 0.28% 0.82% 1.60% 1.63% 1.65% 1.68% 1.70% 1.72%

Income (loss) before provision for income taxes 33.57% 30.89% 30.53% 31.66% 32.65% 33.51% 34.24% 34.85%

Provision for (benefit from) income taxes 7.58% 6.86% 5.78% 6.65% 6.86% 7.04% 7.19% 7.32%

Net income (loss) 26.00% 24.03% 24.74% 25.01% 25.80% 26.47% 27.05% 27.53%

Earning Per Share - basic 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01% 0.01%

Year end shares outstanding 11.36% 11.15% 10.97% 10.50% 10.24% 9.93% 9.53% 9.13%

Dividends declared per common share 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Oracle CorporationCash Flow Statement (Millions)

Fiscal Years Ending May. 31 2015 2016 2017Cash flows from operating activities:

Net income (loss) 9,938$ 8,901$ 9,335$

Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation 712$ 871$ 1,000$

Amortization of intangible assets 2,149$ 1,638$ 1,451$

Allowances for doubtful accounts receivable 56$ 130$ 129$

Deferred income taxes (548)$ (105)$ (486)$

Stock-based compensation 933$ 1,037$ 1,350$

Tax benefits on the exercise of stock options & vesting of restricted stock-based award 396$ 311$ -

Excess tax benefits on the exercise of stock options & vesting of restricted stock-bas (244)$ (124)$ -

Other adjustments, net 327$ 143$ 123$

In-process research & development - - -

Net investment losses (gains) related to equity securities - - -

Changes in operating assets and liabiliites, net of effects from acquisitions:

Decrease in trade receivables,net 208$ 96$ 18$

(Increase) Decrease in Inventories (96)$ 88$ (88)$

Decrease (Increase) in prepaid expenses & other assets (387)$ (90)$ 64$

(Decrease) Increasein accounts payable & other liabilities 247$ (13)$ (37)$

Increase in income taxes payable (10)$ 2$ 732$

Increase in deferred revenues 655$ 676$ 535$

Net cash flows provided by operating activities 14,336$ 13,561$ 14,126$

Cash flows from investing activities:Purchases of marketable securities - - -

Purchase of equity & other investments - - -

Purchases of marketable securities & other investments (31,421)$ (24,562)$ (25,867)$

Proceeds from maturities & sales of marketable securities & other investments 20,004$ 21,247$ 17,615$

Acquisitions, net of cash acquired (6,239)$ (650)$ (11,221)$

Proceeds from sale of property - - -

Capital expenditures (1,391)$ (1,189)$ (2,021)$

Net cash flows used for investing activities (19,047)$ (5,154)$ (21,494)$

Cash flows from financing activities:Payments for repurchases of common stock (8,087)$ (10,440)$ (3,561)$

Proceeds from issuances of common stock 1,802$ 1,425$ 2,181$

Shares repurchased for tax withholdings upon vesting of restricted stock-based award - (89)$ (283)$

Payments of dividends to stockholders (2,255)$ (2,541)$ (2,631)$

Proceeds from borrowings, net of issuance costs 19,842$ 3,750$ 17,732$

Repayments of borrowings (1,500)$ (2,000)$ (4,094)$

ess tax benefits on the exercise of stock options & vesting of restricted stock-based aw 244$ 124$ -

Minority interests in income - - -

Distributions to noncontrolling interests (196)$ (85)$ (258)$

Other financing activities, net - - -

Net cash flows from financing activities 9,850$ (9,856)$ 9,086$

Effect of exchange rate changes on cash & cash equivalents (1,192)$ (115)$ (86)$

Net increase (decrease) in cash & cash equivalents 3,947$ (1,564)$ 1,632$

Cash & cash equivalents at beginning of period 17,769$ 21,716$ 20,152$

Cash & cash equivalents at end of period 21,716$ 20,152$ 21,784$

change rate in capital expediture (811)$          202$           (832)$         

capitalization of intangible assets 118              (1,974)         2,549         

Oracle CorporationCash Flow Statement (Millions)

Fiscal Years Ending May. 31 2018E 2019E 2020E 2021E 2022E

Cashfrom operating activitiesNet income 9575 9919 10236 10564 10809

Adjustments to reconcile net income to cash from operating acctivities:

Add: Depreciation 1292 1351 1464 1632 1856

Change in deferred taxes 28 29 30 31 31 Changes (increases or decreases) in working

Changes in receivables 249 86 73 47 11 Changes in inventories (15) 5 4 3 1

Change in prepaid expenses and other current 96 88 83 72 54 Change in accounts payable (14) 18 17 14 11

Change in accrued compensation and other 66 61 58 50 37 Change in income taxes payable (548) 184 170 176 131

Change in deferred revenue 1 500 501 479 435 Changes in other operating assets and liabilities:

changes in other non-current liabilities 112 116 120 123 127 changes in other assets 208 221 235 250 265

Net cash provided by operating activities 10,843 12,356 12,754 13,190 13,503

Cash from investing activities(increase) decrease in short-term investments (3,716) (4,028) (4,366) (4,732) (5,129)

Capital Expenditures (1,534) (1,817) (2,154) (2,552) (3,024) Capitalization of intangible assets (724) 71 75 61 30

Business acquisitions - - - - - Net cash used for investing activities (5,974) (5,774) (6,444) (7,223) (8,123)

Cash from financing activitiesProceeds from issuance of notes payable and S-T (3,762) 447 481 516 552

Proceeds from issuance of long-term debt 3,008 2,241 2,479 2,717 2,963 Payment of dividends (2,681) (2,777) (2,866) (2,958) (3,027)

Porceeds from issuance of common stock (ESOP 377 377 377 377 302 Repurchases of common stock (6,500) (3,000) (4,500) (7,000) (7,500)

Changes in accumulated other comprehensive - - - - - Net cash provided by financing activities (9,558) (2,712) (4,029) (6,348) (6,710)

Net increase (decrease) in cash (3,283) 1,513 397 437 313 Cash & cash equivalent at the beginning of period 14,126$ 10,843 12,356 12,754 13,190 Cash & cash equivalent at the end of period 10,843 12,356 12,754 13,190 13,503

Oracle CorporationValue Driver Estimation

Fiscal Years Ending May. 31 2015 2016 2017 2018E 2019E 2020E 2021E 2022ENOPLAT

EBITA CalculationOperating Revenue           38,226            37,047            37,728  $39,006 $40,175 $41,282 $42,234 $42,948Less Cost of Revenues             6,820              6,608              6,469  $6,381 $6,579 $6,676 $6,554 $6,271Less Depreciation                712                 871              1,000  1292 1351 1464 1632 1856Less Research and Development Expenses             5,524              5,787              6,159  $6,405 $6,662 $6,928 $7,205 $7,493Less Selling, General and Administrative Expenses             8,732              9,039              9,373  $9,751 $10,044 $10,321 $10,559 $10,737Add Implied Interest on Operating Leases 51.30 45.77 44.75 61.24 81.38 85.08 92.22 102.77EBITA 16,489          14,788          14,772          15,237          15,621          15,979          16,377          16,694         

Adjusted TaxesIncome Tax Provision 2,896             2,541             2,182             2545 2637 2721 2808 2873Add Tax Shield on Interest Expense 240                308                378                396 415 435 458 482Add Tax Shield on Amortized Goodwill 0 0 0 0 0 0 0 0Less Tax Non‐operating Income (22)                 (64)                 (127)               (131) (134) (138) (142) (146)Add Tax Shield on Non‐Operating Losses 0 0 0 0 0 0 0 0Less Operating Lease Interest ‐$11 ‐$10 ‐$9 ‐$13 ‐$17 ‐$18 ‐$19 ‐$22Total Adjusted Taxes 3,103             2,775             2,423             2,798             2,900             3,000             3,104              3,187             

NOPLAT CalculationEBITA 16,489          14,788          14,772          15,237          15,621          15,979          16,377          16,694         Less Adjusted Taxes (3,103)           (2,775)           (2,423)           (2,798)           (2,900)           (3,000)           (3,104)           (3,187)          Add Change in Deferred Taxes 293                167                148                (28)                 (29)                 (30)                 (31)                  (31)                 NOPLAT 13,679          12,179          12,497          12,411          12,692          12,949          13,242           13,475          

Operating Current Assets:Normal Cash (10% of sales) 3,823             3,705             3,773             3,901             4,018             4,128             4,223              4,295             Accounts (Trade) Receivable, Net 5,618             5,385             5,300             5,549             5,635             5,708             5,755              5,767             Inventory 314                212                300                285                 289                 293                 295                 296                Prepaid expenses &Other current operating assets 2,220             2,591             2,837             2,933             3,021             3,104             3,176              3,230             

Total Operating CA 11,975          11,893          12,210          12,668          12,963          13,233          13,450           13,587          

Operating Current Liabilities:Accounts Payable 806                504                599                585                 603                 619                 634                 644                Accrued expenses 1,839             1,966             1,966             2,032             2,093             2,151             2,200              2,238             Deferred Revenue 7,245             7,655             8,233             8,234             8,734             9,235             9,714              10,148          Income Taxes payable 532                ‐                 ‐                 ‐                 ‐                 ‐                 ‐                  ‐                 

Total Operating CL           10,422            10,125            10,798            10,851            11,430            12,005            12,548            13,030 Net Operating Working Capital              1,553              1,768              1,412              1,816              1,533              1,229                 902                 557 

Plus: Net PPE             3,686              4,000              5,315              5,557              6,023              6,713              7,633              8,801 

Plus: Other LT Operating Assets: PV of Operating Leases 1,106             1,082             1,480             1,967             2,056             2,229             2,484              2,825             Net Intangible Assets (non‐goodwill) 6,406             4,943             7,679             7,115             7,328             7,530             7,704              7,834             other assets 2,746             3,043             3,294             3,502             3,723             3,958             4,207              4,473             

Total Other LT CA 10,258          9,068             12,453          12,584          13,107          13,717          14,395           15,132          

Less: Other LT operating Liabilities: ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐

Invested Capital 15,497          14,835          19,180          19,957          20,664          21,658          22,930          24,490         

NOPLAT 13,679          12,179          12,497          12,411          12,692          12,949          13,242           13,475          Less: change in IC 404                (662)               4,345             776                 707                 994                 1,272              1,559             FCF 13,276$        12,841$        8,152$          11,634$        11,985$        11,955$        11,970$        11,916$       

NOPLAT 13,679          12,179          12,497          12,411          12,692          12,949          13,242           13,475          Beginning IC 15,093          15,497          14,835          19,180          19,957          20,664          21,658           22,930          ROIC 90.63% 78.59% 84.23% 64.71% 63.60% 62.66% 61.14% 58.77%

Beginning IC 15,093          15,497          14,835          19,180          19,957          20,664          21,658           22,930          Multiplied by: (ROIC‐WACC) 82.63% 70.59% 76.23% 57.21% 56.10% 55.16% 53.64% 51.27%EP 12,471.82$  10,939.60$  11,309.78$  10,972.23$   11,195.47$   11,399.04$   11,617.80$   11,756.44$  

Oracle CorporationWeighted Average Cost of Capital (WACC) Estimation

3.03%4.96%1.163

Cost of Equity 8.80%

Pre tax Cost of Debt 4.14%Marginal Tax Rate 21%After Tax Cost of Debt 3.27%

Total Shares Outstanding 4,137Share Price $45.44Value of Equity $187,985

short‐term debt 9,797                                  Long‐term Debt 48,112                               PV of operating leases 1,480                                  Value of Debt 59,389                               

Total Value of Capital $247,375

Weight of Equity  75.99%Weight of Debt 24.01%

Weighted Cost of Equity 6.69%Weighted Cost of Debt 0.78%

Weighted Average Cost of Capital (WACC) 7.50%

Weight of Capital 

Cost of CapitalRisk free rate

Equity Risk PremiumBeta

Cost of Debt

Oracle CorporationDiscounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:     CV Growth 2.00%     CV ROIC 58.77%     WACC 7.50%     Cost of Equity 8.80%

Fiscal Years Ending May. 31 2018E 2019E 2020E 2021E 2022EFor Discounting:Number of Periods 1 2 3 4 5DCF ModelNOPLAT         12,411          12,692          12,949          13,242          13,475 Less: Capital Expenditures              776               707               994            1,272            1,559 Free Cash Flows         11,634          11,985          11,955          11,970          11,916 Continuing Value(CV)       236,666 Discount Factor 1.08             1.16             1.24             1.34             1.34            Present Value of FCF 10,823        10,371        9,623          8,963          177,216     Total PV 216,995     

Plus: Value of Non‐Operating AssetsExcess Cash 18,011       Marketabke Securities 44,294       Value of Non‐operating Assets 62,305       

Less: Value of Non‐Operating LiabilitiesDebt 57,909       ESOP 2,181         Noncontrolling interests 386             PV of Operating Leases 1,480         Value of Non‐Operating Liabilities 61,956       

Value of Equity 217,344     Shares Outstandinbg 4,137         Intrinsic Value 52.54         Partial Year Adjustment Value 56.04

EP ModelEconomic Profit to Discount 10,972        11,195        11,399        11,618        11,756       Continuing Value(CV) 213,749     Discount Factor 1.08             1.16             1.24             1.34             1.34            PV of FCF Discounted by WACC 10,207        9,688          9,176          8,699          160,056     Total PV 197,825     Plus: Beginning Invested Capital 19,180       Value of Operating Assets 217,005     

Plus: Value of Non‐operating AssetsExcess Cash 18,011       Marketable Securities 44,294       Value of Non‐Operating Assets 62,305       

Less: Value of Non‐Operating Liabilities:Long‐Term Debt 57,909       ESOP 2,181         Noncontrolling interest 386             PV of Operating Leases 1,480         Value of Non‐Operating Liabilities 61,956       

Value of Equity 217,354     Shares Outstaniding 4,137         Intrinsic Value 52.54$       Partial Year Adjusted value 56.04

Oracle CorporationRelative Valuation Models

EPS EPS Est. 5yr BV Tangible TangibleTicker Company Price 2018E 2019E P/E 18 P/E 19 EPS gr. PEG 18 PEG 19 Equity BV Equity P/B P/BMSFT Microsoft $88.00 $3.67  $3.93  23.98       22.39       2.9 8.16         7.62         10.17 4.41 8.65         19.95      ADBE Adobe Systems $209.40 $6.46  $7.32  32.40       28.60       25.5 1.27         1.12         17.52 4.94 11.95       42.39      CRM Salesforce.com, Inc $113.98 $2.05  $2.60  55.74       43.77       35.1 1.59         1.25         12.86 1.51 8.86         75.48      SAP SAP SE $102.72 $4.48  $4.89  22.94       21.01       5.7 4.00         3.66         26.29 1.30 3.91         78.77      IBM IBM  $149.00 $13.84  $14.15  10.76       10.53       ‐3.9 (2.75)        (2.69)        19.08 ‐24.87 7.81         (5.99)       DDD 3D Systems Corp $11.09 $0.15  $0.28  74.93       39.05       ‐38.2 (1.96)        (1.02)        5.39 2.52 2.06         4.40        ATVI Activision Blizzard, Inc $64.37 $2.62  $2.99  24.58       21.53       8.1 3.02         2.64         12.49 ‐1.97 5.15         (32.68)     ANSS ANSYS, Inc $153.09 $4.82  $5.27  31.77       29.07       7.3 4.35         3.98         26.68 8.43 5.74         18.16      

Average 34.64       26.99       2.21         2.07         6.77         25.06      

ORCL Oracle Corporation $45.44 $2.39  $2.51  19.0         18.1             4.2434  4.5           4.3           11.68 ‐0.39 3.89         (116.51)   

Implied Relative Value:   P/E (EPS18)  $   82.77    P/E (EPS19) 67.63$       PEG (EPS18) 22.40$       PEG (EPS19) 22.00$       P/B 79.04$       P/Tangible BV (9.77)$     

Notes for using this worksheet:1. Not all ratios will be relevant to each company. Relative valuation metrics tend to be industry specific. 2. Choose those ratios which make the most sense for the target company.3. Hide or delete the ratios and metrics which do not apply.4. Remove cells that are outliers from the "Average"5. Add or delte rows as necessary to fit the number of comparable firms.

Oracle CorporationDividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending  2018E 2019E 2020E 2021E 2022E

EPS 2.39$           2.51$       2.63$       2.79$       2.94$      

Key Assumptions

   CV growth 2.00%   CV ROE 16.90%   Cost of Equity 8.80%

Future Cash Flows

     P/E Multiple (CV Year) 12.97     EPS (CV Year) 2.94$           Future Stock Price $38.15     Dividends Per Share $0.67 $0.70 $0.74 $0.78 $0.82     Future Cash Flows $0.67 $0.70 $0.74 $0.78 $12.11

     Discounted Cash Flows $0.61 $0.59 $0.57 $0.56 $8.65

Intrinsic Value 10.98$        Partial Year Adjusted value 11.72$        

For Discounting:Number of Periods 1 2 3 4 5

Model Date 4/17/2018Next FYE 12/31/2017Last FYE 12/31/2016Days in FY 365             Days to FYE 472             Elapsed Fraction 1.293

Effects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  312,000,000Average Time to Maturity (years): 4.80Expected Annual Number of Options Exercised: 65,000,000

Current Average Strike Price: 29.02$               Cost of Equity: 8.80%Current Stock Price: $45.44

2018E 2019E 2020E 2021E 2022EIncrease in Shares Outstanding: 13,000,000 13,000,000 13,000,000 13,000,000 10,400,000Average Strike Price: 29.02$                29.02$                29.02$             29.02$                29.02$               Increase in Common Stock Account: 377,260,000      377,260,000      377,260,000   377,260,000      301,808,000     

Change in Treasury Stock 6,500,000,000 3,000,000,000 4,500,000,000 7,000,000,000 7,500,000,000Expected Price of Repurchased Shares: 45.44$                49.44$                53.79$             58.52$                63.67$               Number of Shares Repurchased: 143,045,775      60,682,030        83,662,056     119,616,539      117,796,294     

Shares Outstanding (beginning of the year) 4,137,000,000 4,006,954,225 3,959,272,195 3,888,610,139 3,781,993,599Plus: Shares Issued Through ESOP 13,000,000 13,000,000 13,000,000 13,000,000 10,400,000Less: Shares Repurchased in Treasury 143,045,775      60,682,030         83,662,056     119,616,539      117,796,294     Shares Outstanding (end of the year) 4,006,954,225 3,959,272,195 3,888,610,139 3,781,993,599 3,674,597,305

Oracle CorporationKey Management Ratios

Fiscal Years Ending  2015 2016 2017 2018E 2019E 2020E 2021E 2022E

Liquidity Ratios

Current Ratio CA/CL 4.13 3.74 3.08 3.63 3.79 3.89 3.88 3.86Quick Ratio (CA‐inventory)/CL 4.11 3.73 3.07 3.62 3.78 3.87 3.87 3.85Cash Ratio (Cash +Market Securities)/CL 1.42 1.17 0.90 0.87 0.99 1.03 0.96 0.87

Activity or Asset‐Management Ratios

Receivables Turnover Revenue/AR 6.53 6.73 7.06 7.19 7.18 7.28 7.37 7.46Asset Turnoever Revenue/Average TA 0.42 0.33 0.34 0.29 0.30 0.29 0.28 0.27

Financial Leverage Ratios

Debt Ratio TL/TA 0.27 0.38 0.39 0.43 0.42 0.42 0.41 0.42Debt to Equity Ratio TL/SE 0.52 0.86 0.93 1.08 1.05 1.01 1.01 1.04Long‐term debt to capitilization

Profitability Ratios

ROA NI/Average TA 12.13% 8.96% 7.93% 6.92% 7.09% 6.90% 6.76% 6.72%ROE Ni/Average SE 20.42% 18.82% 17.33% 17.53% 16.77% 16.40% 16.67% 16.90%Gross profit margin 38.56% 36.28% 34.02% 33.69% 34.31% 34.57% 34.81% 35.22%

Payout Policy Ratios

Divident payout Dividends PS/EPS 1.06% 1.12% 1.32% 1.41% 1.47% 1.54% 1.62% 1.72%Total payout ratio Divdends/Price 19.83% 22.57% 28.44% 28.19% 28.00% 28.00% 28.00% 28.00%

VALUATION OF OPTIONS GRANTED IN ESOP

Ticker Symbol ORCLCurrent Stock Price $45.44Risk Free Rate 3.03%Current Dividend Yield 1.51%Annualized St. Dev. of Stock Returns 19.93%

Average Average B‐S ValueRange of Number Exercise Remaining Option of OptionsOutstanding Options of Shares Price Life (yrs) Price GrantedRange 1 312,000,000 29.02 4.80 17.97$         5,605,172,508$    Total 312,000,000 29.02$         4.80 20.89$         5,605,172,508$    

Present Value of Operating Lease Obligations (2017) Present Value of Operating Lease Obligations (2016) Present Value of Operating Lease Obligations (2015) Present Value of Operating Lease Obligations (2014) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2012)

Operating Operating Operating Operating Operating OperatingFiscal Years Ending May. 31 Leases Fiscal Years Ending May. 31 Leases #REF! Leases #REF! Leases Fiscal Years Ending  Leases Fiscal Years Ending 56.0366563981861 Leases2018 389 2017 328 2016 330 2015 373 2014 358 2013 4062019 330 2018 273 2017 270 2016 304 2015 293 2014 3072020 260 2019 211 2018 209 2017 230 2016 230 2015 2272021 203 2020 152 2019 156 2018 168 2017 170 2016 1722022 146 2021 110 2020 107 2019 120 2018 117 2017 129Thereafter 393 Thereafter 164 Thereafter 175 Thereafter 203 Thereafter 238 Thereafter 294Total Minimum Payments 1721 Total Minimum Payments 1238 Total Minimum Payments 1247 Total Minimum Payments 1398 Total Minimum Payments 1406 Total Minimum Payments 1535Less: Interest 241 Less: Interest 156 Less: Interest 141 Less: Interest 158 Less: Interest 166 Less: Interest 185PV of Minimum Payments 1480 PV of Minimum Payments 1082 PV of Minimum Payments 1106 PV of Minimum Payments 1240 PV of Minimum Payments 1240 PV of Minimum Payments 1350

Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases Capitalization of Operating Leases

Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14% Pre‐Tax Cost of Debt 4.14%Number Years Implied by Year 6 Payment 1.9 Number Years Implied by Year 6 Payment 1.1 Number Years Implied by Year 6 Payment 1.6 Number Years Implied by Year 6 Payment 1.7 Number Years Implied by Year 6 Payment 2.0 Number Years Implied by Year 6 Payment 2.3

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease Lease PV LeaseYear Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment1 146 140.2 1 110 105.6 1 330 316.9 1 373 358.2 1 358 343.8 1 406 389.92 389 358.7 2 328 302.5 2 270 249.0 2 304 280.3 2 293 270.2 2 307 283.13 330 292.2 3 273 241.7 3 209 185.1 3 230 203.7 3 230 203.7 3 227 201.04 260 221.1 4 211 179.4 4 156 132.6 4 168 142.9 4 170 144.6 4 172 146.35 203 165.8 5 152 124.1 5 107 87.4 5 120 98.0 5 117 95.5 5 129 105.36 & beyond 203 302.4 6 & beyond 152 128.4 6 & beyond 107 135.5 6 & beyond 120 157.0 6 & beyond 117 182.8 6 & beyond 129 224.7PV of Minimum Payments 1480.4 PV of Minimum Payments 1081.7 PV of Minimum Payments 1106.4 PV of Minimum Payments 1240.0 PV of Minimum Payments 1240.5 PV of Minimum Payments 1350.2

$56.04 4.56% 4.76% 4.96% 5.16% 5.36% $56.04 1.80% 1.90% 2.00% 2.10% 2.20%0.963 55.38 55.47 55.56 55.65 55.75 3.74% 54.54 55.25 55.99 56.75 57.541.063 55.60 55.70 55.80 55.90 56.00 3.94% 54.56 55.27 56.01 56.78 57.571.163 55.81 55.92 56.04 56.15 56.26 4.14% 54.59 55.30 56.04 56.80 57.591.263 56.03 56.15 56.27 56.39 56.52 4.34% 54.61 55.32 56.06 56.83 57.621.363 56.25 56.38 56.51 56.64 56.77 4.54% 54.64 55.35 56.09 56.85 57.64

56.04 17.00% 19.00% 21.00% 23.00% 25.00% $56.04 17.50% 18.00% 18.50% 19.00% 19.50%2.83% 58.48 57.21 55.94 54.67 53.40 3.00% 57.11 57.10 57.09 57.08 57.072.93% 58.53 57.26 55.99 54.72 53.45 3.50% 56.59 56.58 56.57 56.56 56.553.03% 58.58 57.31 56.04 54.77 53.49 4.00% 56.06 56.05 56.04 56.03 56.023.13% 58.63 57.36 56.08 54.81 53.54 4.50% 55.51 55.50 55.49 55.48 55.473.23% 58.68 57.41 56.13 54.86 53.59 5.00% 54.96 54.95 54.94 54.93 54.92

56.04 7.10% 7.30% 7.50% 7.70% 7.90% $56.04 17.00% 19.00% 21.00% 23.00% 25.00%2.83% 60.35 58.06 55.94 53.97 52.13 0.963 58.08 56.82 55.56 54.30 53.042.93% 60.40 58.11 55.99 54.01 52.17 1.063 58.33 57.06 55.80 54.53 53.273.03% 60.45 58.16 56.04 54.06 52.22 1.163 58.58 57.31 56.04 54.77 53.493.13% 60.50 58.21 56.08 54.11 52.26 1.263 58.83 57.55 56.27 55.00 53.723.23% 60.56 58.26 56.13 54.15 52.31 1.363 59.07 57.79 56.51 55.23 53.95

Risk Premium CV Growth of NOPLAT

Beta

Cost of Debt

Risk Free Rate

Beta

Marginal Tax Rate Capex Inflation Rate

Risk Free Rate

R&D Grow

th Rate

WACC Marginal Tax Rate