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Krause Fund Research

Basic Materials | Fall 2015

Recommendation: HOLD

Analysts

Yichao Mao Poh Yee Lai

yichao-mao@uiowa.edu pohyee-lai@uiowa.edu

Hao Lin Aun Xian Lim

hao-lin@uiowa.edu aunxian-lim@uiowa.edu

Company Overview

Eastman Chemical Company (NYSE: EMN) is a

specialty chemical company headquartered in

Kingsport, Tennessee with a global presence via

joint ventures and supplying products to customers

all over the world. EMN was incorporated in

Delaware on December 31 1993 independent from

Eastman Kodak which was established by George

Eastman in 1920.1 The company success is

contributed by the core values of quality, innovation

and teamwork. Due to its specialty commoditized

operations, EMN operates business to business. At

Eastman, safety, sustainability and innovation are the

key factors to creating quality products and by

partnering with North Carolina State University, the

Eastman Innovation Center collaborates expertise

with skills and knowledge to promote innovation

initiative with the goal to protect people and the

environment.

Stock Performance Highlights

52 week High $88.93

52 week Low $62.84

Beta Value 1.38

Average Daily Volume 1.34M

Share Highlights

Market Capitalization $10.19B

Shares Outstanding 148.61M

EPS $4.94

P/E Ratio 13.90

Dividend Yield 2.36%

Dividend Payout Ratio 33.48%

Eastman Chemical Company

(NYSE: EMN)

November 16, 2015

Current Price: $68.60

Target Price: $75-80

EMN able to compensate despite

some downfalls

Eastman is targeting emerging markets, building

facilities abroad and potentially increases its sales

revenue in the Asia region. Specialty Fluids and Intermediates segment (SFI)

has been the major contributor for revenues.

Ethylene and propylene prices drop result in an

estimate of 50% profit decline within Q3. With the

decrease in intermediary prices, we expect to see a

decrease of ~5% of total y/y sales within the

segment. Eastman has been aggressive with acquisitions

and we would expect them to hold onto future

acquisition until debt level lowers. Eastman is currently having a high-debt from

recent acquisition. They are in the process of paying

off debt which caused lesser profit margins. Constant dividend payouts indicates an effective

internal management and a steady long term growth

Company Performance Highlights

ROA 7.75%

ROE 18.80%

Profit Margin 7.75%

Financial Ratios

Current Ratio 1.77

Debt to Equity 184.88 Source: Yahoo Finance, November 13, 2015

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One Year Stock Performance

Source: Yahoo Finance, November 13, 2015

This report was commissioned to examine the rating

of the company, whether to buy, hold or sell.

Ultimately we have given Eastman Chemical a

HOLD rating as we saw a sharp decline growth in the

materials sector in the short run. However, an

increase of shareholder return within the time span of

12 month period has given us the confidence of

continuous growth in the long term. Based on past

years, Eastman has proven to shareholders of their

capability of paying dividends with the excessive

cash on hand. Despite the dividend payout, Eastman

successfully outpaced in growth most of its peer

competitors within the Materials-Chemicals

industry. The opportunities that Eastman will be

endless, and would likely to sustain fairly long-term

in this particular industry as most of its end-market

users are for transportation, and Building &

constructions, Wellness & Health. With that reason,

EMN being able to compensate the recent stock price

plummets with foreseeable long-term growth, we

recommend HOLD.

This is an outline of key variables that we believe are

important to the activities of the basic materials

sector. We have determine that these variables are

production price index (PPI), real gross domestic

product (GDP), oil and energy prices, government

regulations and policies, supply and demand and

interest rate.

Production Price Index (PPI)

Given that the heat has been increasing within the

FED for an increase with the Fed Fund Rates for this

coming December.2 We would assume that the

historical low inflation rate would have a slightly

upward tilt for FY16 to FY18 and approximately 2%

in the 10 years. Overall, EMN would be facing

headwinds of decreasing in purchasing power and

the margin spread when inflation takes place, but we

expect that the long term growth of the company

would outperform the benchmark by approximately

8% based on historical data and also recent strong y/y

earnings report.

Real Gross Domestic Product (GDP)

Real Gross Domestic Product (GDP) is a measure

that accounts for monetary changes between a

nation’s produced finished goods and services and

the value of the goods and services used up in

production. In year 2015, the real GDP growth for

the first quarter was 0.6% and it grew tremendously

to 3.6% in the second quarter. In the third quarter, the

real GDP increased at an annual rate of 1.5%.3

Source: Bureau of Economic Analysis

The graph indicates the quarter-to-quarter growth in

real GDP for the past four years to be increase with

only one quarter to decrease. After analyzing the past

data, we are predicting real GDP to grow between

1.5-3.5% per quarter in the short term for the next

five years. As for the long term rate, we are

predicting real GDP to grow annually at a rate near

3% since historical data suggested that the average

growth has never been higher than 3%. Since the

U.S. economy is not in a recession now, GDP figure

is not expected to jump up to a level of 6-8% range.

Oil and Energy Prices

Oil and energy price is one of the most important

drivers of the chemical industry because oil and its

derivatives are heavily used in production. Some

chemicals are produced through highly energy-

intense manufacturing process and have a strong link

Executive Summary

Economic Outlook

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to oil prices. So changes in oil price can have a direct

impact on cost structure of chemical industry. For

commodity chemicals, production costs are the main

cost driver to determine market price. The decline of

oil price can affect manufacturers’ production

economics as well as market price. Sudden dramatic

change of the oil prices can change individual

consumers’ views on their disposable incomes. If oil

prices keep staying low, investment in durables and

fixed assets will increase a lot, as well as the

spending on chemicals used to make the durables and

fixed assets.4

Source: MacroTrends

The graph indicated crude oil price decline since

mid-2014. As of November 13, 2015, the crude oil

price was $40.74. We predict in the short term within

the next 12 months that the crude oil price will be

between $40 and $50. In the long run within the next

three years, we predict that crude oil price to grow

until the range of $60 to $80. This oil shock have

significant impact in cost and margin of materials

sector producers. Companies should take advantage

of this attractive opportunity to grow in revenue and

profits.

Government Regulations and Policies Federal government regulations has significant

impact on the basic materials sector because

companies of this sector often uses hazardous

materials. Materials sector companies have large

amount of toxic waste and they require proper

disposal technique to prevent negative

environmental effect such as water pollution and air

pollution. Failure to comply would result in penalty

and possibly interrupting assembly line which will

cost the company to a substantial loss from being

shut down.

With regulations, companies are expected to absorb

cost and results in the shrinking of profit margin. We

predict there will be more regulations in regards to

this sector because of government effort to protect

human and environmental health.

Supply and demand

Supply and demand plays an important role in the

economy. This variable affects many factors from

stock price, productivity and profitability. If the

demand for materials goes down, many firms will

have a hard time surviving it. Developing market is

the drive of the future growth of the chemicals

industry.

We believe that supply and demand is highly

influence by natural and artificial resources.

Resources depletion is significant to a company

because companies need to be able to anticipate for

the lack of resources in the future to supply the

market demand. When inflation decrease along price

level then supply would increase when consumer can

increase purchasing power for consumer product that

are manufacture with derivative that are produced by

companies in the materials sector.

Interest Rate

Interest rates play an important role in stock price

and the allocation of debt and equity capital. With fed

fund rate being at a low of 0.25 % since 2009,

companies are more willing to take on debt because

it is cheaper to borrow money.5 With the low fed

fund rate, banks lend money at a lower interest rate.

High expenditure due to expensive resources and

high research and development costs are some of the

reason companies would take on debt.

Source: Trading Economics

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Material sector has underperformed and ranked at the

bottom 3rd in terms of YTD growth. Through

November 16 the S&P material index fell a total of

7.4% and EMN did worse by having YTD decrease

of 8.4%. We expect the materials sector to remain at

the bottom for the remaining quarter and possibly

through 2017 as consensus have a 0.2% decline in

2016 GDP estimates compared to 2015.

Source: Thumbcharts

Industry Overview

The Chemical industry is a sub-industry of Basic

Material sector. In the S&P Global Industry

Classification System (GICS), there are five

industries under the Basic Material sector, which are

chemicals, construction materials, containers

packaging, metals& mining, and paper& forest

products. As of June 5, 2015, the chemicals industry

comprises 69% of the basic material sector.

Source: S&P Capital IQ

Judged from the profitability perspective, the

chemical industry is the most profitable one since

year-end 2011 because it yields the highest net

income margin.

Source: S&P Capital IQ

Sub-Industry

There are total five sub-industries under the chemical

industry, which are commodity chemicals,

diversified chemicals, fertilizers& agricultural

chemicals, industrial gases and specialty chemicals.

Celanese Corporation falls under the Chemical-

major diversified industry. Some of the leading

chemical companies are also in this sub-industry, for

example, Dow Chemical, DuPont USA and Eastman

are all under the chemical-major diversified industry.

The following are some basic statistics about the

chemical-major diversified industry.

Market Capitalization 10,218B

P/E 14.0

P/B 11.0

Net Profit Margin 8.0%

Price to Free Cash Flow -490.8

ROE 20.9%

Total Debt/Equity 62.3

Dividend Yield 3.3% Source: Yahoo Finance

Recent Developments and Industry Trends6

1. Restructuring Business Model

Restructuring “go – to-market” approach is to

strategizing the competitiveness of the market at the

specific region/location. Strategy on manufacturing,

focused more on flexibility and customizable

products for the market needs.

2. Emerging Markets

Offshoring to a developing country gains typically

ranges from 6-10% more and a lower cost. Lower

cost based on developing markets, and have a greater

Capital Markets Outlook

Industry Analysis

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flexibility and agility to decision making. While

competition is increasing domestically. Most

Chemical industry companies, are avoiding “one size

fits all”, companies are investing in capabilities

which are tailored to the varied characteristics of the

specified market strategy on manufacturing. Instead

they are focusing more on flexibility and

customizable products.

3. Embracing digital transformation

Chemical companies use automation and

information technology like internet to increase

reliability, reduce costs, and create greater

operational efficiencies in production and supply

chain management. It’s helpful for customer

interface. Digital technology can integrate the

massive flows of data. Customer can learn product

easily with the digital technology.

Markets and Competition

Chemical industry manufactures a variety of product

that are used by regular household on a day-to-day

basis. As the economy grows each year the total

revenue of the global chemical industry grew as well.

In year 2009, there is a drop in total revenue due to

the recession. Raw materials and resources price and

availability has a huge impact to the growth of the

company and that is why sustainability is important

for the firm and the industry. After the recession,

total revenue increased again and the growth within

the immediate years following the recession is a lot

higher during the periods of normal growth. Within

a decade period, the total revenue grew almost 3.5

trillion U.S. dollars.

Source: Statista

As the year goes by, companies continuously grow

by conduct more research and development,

expanding sales market and increase in production

line. In the next two years, all industry is expected to

increase and then decrease to a steady state for two

years. Among the different industries, specialty

chemical is forecasted as the top performing

industry.

Source: Statista

Porter’s 5-Forces Analysis7

1. Threat of new entrant

Moderate; Industry leaders are large global firms

that have heavy capital due to the high cost of

research and development and human capital. Due

to globalization, it is not easy to compete with large

firms with strong presence. Government

regulations, policies and patents related to the

industry can easily become obstacle to new entrants.

2. Threat of substitute products or services

Weak; Chemicals are important for firms in this

industry because they are the inputs for the output.

Since they are chemicals, they generally have

specific composition and hard to be substitute by

alternative. If there is an alternative, they are usually

produced by the same industry players because of the

heavy research and development nature.

3. Bargaining power of buyers

Moderate; medium to large firms that manufacture

consumer products such as household cleaning

supplies have relatively strong buying power due to

the market players. Due to the nature of chemicals

being commoditized, buyer power increases due to

the undifferentiated product which is affected by

firm’s unique purity, composition and branding for

the quality. Another factor that affect the bargain

power of customers is the switching cost when better

deals are offered during the contractual period. If

firm decides to break a contract, there will be

additional cost incur and that affects the buyer

power.

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4. Bargaining power of suppliers

Moderate; as an industry dependent on raw

materials such as oil and natural gas, oil prices affects

the supplier power. When there is a drop in price,

supplier power is likely to decrease. Suppliers are

limited and supplies for many other industries but

because of the high capital and resources nature of

the industry, supplier power is strong. This applies to

other chemicals that are derived from natural

resources as inputs.

5. Intensity of competitive rivalry

Moderately strong; in the chemicals market, large

multinational corporations tend to be the market

leader and there are only a handful of them actively

operates. The manufacturing of chemical products

are commoditized which makes it undifferentiated

thus companies will offer competitive incentives in

contracts to increase rivalry. Due to the complexity

of the chemical manufacturing process, there are

high exit costs, high fixed cost and high storage cost.

High volume manufacturing helps firm to adapt to

high demand when necessary, therefore, rivalry is

strong.

Corporate Strategy

Eastman seeks to excel as a specialty chemical

company with consistent earnings growth and strong

cash flow by the sale of differentiated products into

diverse market across the globe. In creating value to

customers, Eastman meet their need through existing

and innovative products while leveraging the

products mix and advantaged cost positions. Growth

internally and externally via acquisitions and joint

venture is crucial for the company to improve

earnings.

Global Presence8

As Eastman recognized emerging markets outside

the United States, the company expanded operations

in 33 other countries in the different continents. As

of December 31, 2014, EMN operated via the 51

manufacturing facilities and the four manufacturing

joint ventures in over 15 countries. Each

manufacturing sites contributes to one or more

segments of the revenue stream according to the

supply of the raw materials. In the Asia region, the

manufacturing locations are either at least 50% joint

venture or lease under operating agreement. As

customer service become more important, Eastman

has technical service centers and customer service

centers outside of the United States assisting

customers despite the distance and time difference.

To achieve the presence outside the United States,

Eastman would participate in joint venture with other

companies in the different region. This helps with

Eastman’s sales without a high cost. In addition,

acquisitions are very common for Eastman in

venturing into familiar product manufacturing at a

low cost with existing resources.

Source: Eastman 2014 Annual Report

This graph shows the significant revenue growth in

those emerging markets outside the United States for

the past five years. Although the percentage of sales

revenue is decreasing for the United States, the

percentage of sales revenue outside of the United

States has become a very prominent part of the

company’s revenue.

Mergers and Acquisitions8

A major activity that influenced the finances of

Eastman is the acquisition of Taminco on December

5, 2014. It was acquired along $2.8 billion which

consist of $1.1 billion in debt repayment and $1.7

billion net of cash. This acquisition expanded the

AFP and SFI segment with Taminco’s specialty

amines and crop protection businesses.

In December 11, 2014, the Advanced Materials

segment was accounted along the business from

0

2000

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8000

10000

12000

Rev

enu

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olla

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Sales Revenue by Region

Latin America

Europe, MiddleEast and Africa

Asia Pacific

United Statesand Canada

Company Analysis

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Commonwealth Laminating and Coating, Inc. The

purchase price was $438 million.

For the SFI segment, Eastman acquired BP plc’s

global aviation turbine engine oil business on June 2,

2014 for cash price of $283 million. In August,

Knowlton Technologies, LLC was purchase with a

total of $43 million cash price. This acquisition is

developing the microfiber technology platform.

At the end of period 2014, the net cash was $214

million. Cash flow from operating activities were

$1408 million, investing activities were -$4091 due

to active acquisitions and $2664 from financing

activities. To improve company growth, Eastman

decided to do acquisitions and remove competitors

instead of investing in research and development.

Business Segment & Product Lines8

At Eastman there are five main business segment

which includes additives and functional product,

adhesives and plasticizers, advanced materials, fibers

and specialty fluids and intermediaries. The product

from the different segments are used in many end-

user market

Source: Eastman Valuation Model

Additives & Functional Products Segment (AFP)

The main focus of AFP is manufacturing chemicals

for products in the coatings and tires industries in

transportation. In 2014, the sales revenue for this

segment was $1.8 billion, which allocate up to 19%

of Eastman Chemical's total sales. The growth of the

AFP segment has been increasing over the years

from 2012 to 2014, of $1.3 billion, $1.7 billion,

$1.8billion. The end product from AFP

consumables, tires, coatings and feed additives

which are typically driven by end users, by that we

could typically see the same pattern from of where

this segment will move towards with reference of the

general economic outlook.

We estimate the 2015E growth rate to be ~3.4%.

There is a potential growth in the AFP segment,

because in December 2014, the company acquired

Taminco specialty amines and crop protection. This

acquisition is expect to grow in attractive niche

markets. The company will also have a 40,000 metric

ton expansion of the Crystex insoluble sulfur rubber

additives in Kuantan, Malaysia, by mid-2017.

Adhesives & Plasticizers Segment (A&P)

The main focus of A&P is producing intermediate

chemicals for manufacturing customers, mainly sold

into consumables, building construction, health

wellness, and industrial chemical and processing,

and durable goods. A&P segment contributes 15% of

the total sales revenue, $1.4 billion. Since the

emerging country's economic growth tends to be

higher, the A&P segment main target markets are

emerging markets such as China, Europe, and Latin

America. Expanded Eastman 168 non-phthalate

plasticizers manufacturing in Texas City and a joint

project to build a 50,000 metric ton hydrocarbons

resin plant in Nanjing, China would give Eastman a

potential of huge growth initiatives.

We estimate the 2015E growth rate to be ~5.3%

because of the competitive adhesives resins products

end-market demand that increases sales volume.

Advanced Materials Segment (AM)

Produces specialty copolyesters, cellulose esters,

interlayers, and aftermarket window film products

mainly for end users in transportation, building

construction, durable goods. This segment

contributed a total of 25%, $2.4 billion of Eastman's

total revenue. Sales revenue increased slightly

compared to previous years due to higher premium

product sales volume. The acquisition of

Commonwealth expands the potential of the AM

segment by enabling further efficiencies such as

manufacturing in after-market automotive and

protective film markets.

AFP. 19%. 19%

AP. 14%. 14%

AM. 25%. 25%

F. 15%. 15%

SFI. 26%. 27%

2014 Revenue by Business Segment

AFP

AP

AM

F

SFI

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We estimated the 2015E growth to be ~5.45% due to

the company’s acquisition of Commonwealth

Laminating and Coating, Inc. This acquisition

increases the sales revenue by the addition of

window film product as well as its existing business.

Fibers Segment

As one of the two largest suppliers for acetate tow,

Eastman manufactures Estron acetate tow and

Estrobond triacetin plasticizers primarily for the use

of cigarette filters by regional cigarette producers.

Eastman is also the world largest producer of acetate

yarn, and the segment had sales revenue of $1.5

billion in 2014 which makes up to 15% of Eastman's

total sales. 55% of 2014 revenues from the fibers

segment are from Asia Pacific. The fiber segment is

expected to continue to be one of the stable cash flow

and earnings because of the few competition and by

having a reputation of high-quality products. Sales

increase due to higher selling prices and volume in

2014.

We estimate the 2015E growth rate to be ~2.0%

because we estimate the growth to be similar to

previous years.

Specialty Fluids & Intermediate Segment (SFI)

SFI manufactures diversified products that are sold

externally from the acetyl, olefins, and alkylamine

stream. Sales revenue $2.5 billion, 26% of total sales.

Despite a decrease of revenue for 2014, it was

relatively small due to the acquiring of turbine oil

business and Taminco which functional amines

products sales volume in 2014 and higher selling

prices offset by overall lower 2014 sales volume. The

lower sales volume was due to manufacturing

capacity shutdowns, increase internal use of

intermediates in the manufacture of higher-value

downstream derivatives in other Eastman business

segments and weakness in the heat transfer fluids

market.

We estimate the 2015E growth rate to be 3.7%

because of the completion of the aviation turbine oil

business acquisition. This enables Eastman to

expand SFI segment in growing revenue from the

global aviation industry.

Product Market8

Source: Thomson One

The chart above shows the breakdown of Eastman’s

end markets. Major markets are transportation,

building & constructions, consumables, and tobacco.

All of the major markets consists of products of

either one or combination of the business segments.

Marketing Strategy8

Eastman markets and sells through global marketing

and sales organization in the United States and 39

other countries which emerge into 135 countries.

Eastman targets industries where their products and

services cultivate differentiated value in business

solution. Since the products of Eastman are inputs to

the companies in the targeted market, the company

uses indirect channels such as distributors and

contract representatives. For customers outside the

United States, the company relies on distributors and

contract representatives to bring sales due to the

barrier of time difference and distance. Eastman also

uses direct channel to generate sales online via the

Customer Center website dedicated to serve

customers regardless of time and location.

Earnings Analysis8

2014 Compared with 2013

In the United States, sales revenue increase generated

by sales of AFP and SFI product lines and the

revenue from Taminco product lines acquisition in

December 2014. For Asia Pacific, there is a slight

decrease due to decrease SFI segment product lines

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which was balanced by AM segment of specialty

plastic products. Sales revenue in the Europe, Middle

East and Africa region increase slightly due to higher

AFP sales. The Taminco acquisition too affect the

sales revenue along the higher fibers segment sales.

In the Latin America region, there is an increase from

fibers and AM segments while decreased A&P

segment sales.

Between year 2013 till present, there is minimal

growth percentage as compared to the substantial

growth during 2010-2013. In Asia, there is a 2%

decline in sales revenue compared to 2% increase in

United States and Canada and Latin America and 6%

increase in the Europe, Middle East and Africa

region.

Derivatives

As a company that operates globally, Eastman is

exposed to market risks such as foreign currency

exchange rates, commodity prices and interest rates.

Since the company manufactures and sells in

different countries, there are foreign currency

exchange rate risk which Eastman manage by natural

offsets and currency options. Eastman principally

have Euro and Japanese Yen cash flow hedges

contract because these currencies are significant in

Europe and Asia Pacific region.

As Eastman is highly dependant of certain raw

material and energy sources, commodity hedging are

important to manage the volatility of price caused by

various reasons such as weather, supply and demand,

economic variables and any unpredictable factors.

The fluctuation in market prices allow Eastman

enters into various option and forward contracts.

Eastman manages interest expense using a mix of

fixed and variable rate debt. This is manage by

entering into interest rate swaps at a fair value.

Raw Materials8

Raw materials and energy are core inputs to the

company which make it a heavily invested part of the

business. To create unique and differentiated

products, Eastman integrates and optimizes across

their business streams. Availability of raw materials

and cost is highly dependent on world market

conditions, government regulation changes and other

factors. In 2012, 2013 and 2014, the cost of raw

materials and energy amount to 55%, 60% and 55%

respectively of total cost of operations.

Competitors

CompanyMarket Cap

(In Billions)

Market

Share

Profit

MarginsP/E ROE

DOW 50.7 6.7% 8.2% 12.4 19.1%

PX 30.0 1.4% 12.9% 20.4 24.7%

EMN 10.4 1.2% 7.1% 15.1 18.8%

CE 9.4 0.8% 9.8% 10.0 16.0%

AVERAGE 25.1 2.5% 9.5% 14.5 19.6% Source: Yahoo Finance

Figure above depicts firms who are registered in US

stock exchange that are comparable with Eastman

chemical company within the diversified chemical

sub industry of the materials sector. The range of

market capitalization within Eastman’s competitor

are wide.

Market capitalizations differ due to the maturity of

business and also the types of products offered to

diverse end user. The end targeted market of those

companies listed are for transportation, construction

& building.

Compared to a company like Dow Chemical

Company (DOW), the profit margin of Eastman is

better than of DOW. Although the profit margin is

not the highest among the competitors, the low profit

margin of Eastman is contributed by the unrealized

loss from derivatives and hedging. Provision for

income taxes from continuing operations is more

than 50% decrease from 2013.

The Price/Equity ratio for Eastman appears to be

ranked above average its competitors. Investors are

much willing to pay more for each dollar the

company generates. This translates to market’s

optimism towards Eastman’s growth prospect

compared to its competitors.

Even though Eastman’s ROE isn’t a leader among its

competitor, but it met the requirement based on one

of Warren Buffets value of investing strategy which

is having a 15% ROE. The lower ROE was caused

by several acquisitions in the past few years. We

expect that Eastman’s ROE will gradually rise over

the long run.

Research and Development

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Research and development is crucial for Eastman

and all related costs are incurred as expense.

Research and development at Eastman focuses on

improving production process and product while

reducing costs and increasing sales. Eastman

continuously invest in R&D initiatives to match

macro trends such as sustainability, consumerism

and reduce environmental impact.8

Research and development expenses are inevitable

being a chemical industry. Eastman spent $198

million in 2012 and $193 million in 2013 and in

2014, the company spent $227 million. This upward

trend is definitely to support the segments of the

recently acquired companies such as Taminco and

Commonwealth. Between year 2012 to 2014,

research and development has been 2% of total sales.

The average R&D spending is 4% of sales which is

close to Eastman’s R&D allocation. 9

Source: Chemical and Engineering News

Government Regulations8

As a chemical manufacturing company, Eastman has

to comply with regulations for transportation,

materials storage and waste disposal. Products has to

meet the standards set by government agencies for

the safety of end-users. Since operations are across

the globe, Eastman have to regulate using policies

and law according to the location of its

manufacturing plants. Any regulations related to the

environment as a whole affects company’s strategy

and costs allocation. As a whole, Eastman uphold

integrity by abiding the Code of Business Conduct.

Key Investment Positives

1. Company consistently innovates new world

class customized engineered products.

2. Focuses on eco-friendly Environment Company,

with achieving award from the Environmental

Protection Agency.

3. Competitive by having businesses and factories

globally.

4. Recent acquisition showed positive response on

sales volume and also producing a lower cost.

5. A consistent growth which outperform the

market.

6. Capacity expansion in Kuantan, Malaysia.

7. Generated free cash flow of $815 million,

strongest compared to its industry peer group.

8. Recognized by the Ethisphere Institute as a

2014 World’s Most Ethical Company for the

efforts to continually raise bar on leadership and

corporate behavior.

9. Dividend payout was consistent for previous

years.

10. Cheaper energy cost as oil price tumble.

Key Investment Negative

1. Eastman have a relatively high debt-to-equity

ratio.

2. Main products earnings and volumes are

correlated with the general economic growth.

3. Higher costs to comply with stricter

environmental emission regulation in the future.

4. Main stream of revenue are from the North

America.

5. Strengthening of US dollars will cause negative

impact on the Company’s financial results.

6. Market prices for commodity products, raw

material and energy costs will continue to be

volatile due to shortages or supply and demand.

7. Exposure of risks and uncertainties of future

acquisitions.

]

Valuation Summary

Upon extensive research on EMN, we have issued a

HOLD recommendation with the belief that the

stock price is lower than what we believe it should

be. We determined the intrinsic stock price using

the discounted (DCF) model, economic profit (EP)

model, dividend discount (DDM) model, relative

valuation P/E and the relative valuation growth P/E.

Our model estimate the intrinsic value as of

November 16, 2015.

Discounted Cash Flow (DCF) / Economic Profit

(EP) Method

Valuation Analysis

11 | P a g e

The DCF and EP valuation methods are effective

ways to predict the intrinsic value and price target. In

the model, we discounted the cash flow each year

anticipated free cash flow by the WACC. After

making other adjustments, we could derive a price of

$75. We also adjusted the stock price as of today by

making adjustments for the partial year that has

elapsed to be $80. Similarly, we had the same target

price of $75-80 by using the economic profit method.

Discounted Dividend Model (DDM) Eastman has been consistently paying out dividends

over 10 years and we anticipated a continuing

tradition in the near future. Therefore, we find the

DDM model to be somewhat reliable and we

discounted each dividend to calculate the intrinsic

value. This method resulted and showed a target

price to be $40.

Relative Valuation P/E Ratios The relative valuation model gave us an intrinsic

stock price of $47 signaling that the stock is currently

overvalued.

The relative valuation growth P/E model gave us a

intrinsic price of $75, signaling that the stock is

currently undervalued.

These models used our models EPS numbers and

compare EMN to other companies that they compete

against. Relative to their competitors, we have found

that EMN is undervalued.

In conclusion, we found that the DCF method to be

most reliable among these three models.

Used all of the assumptions we made throughout the

project, we projected their respective target price to

be $75-80.

We used various variables in our valuation model to

test for sensitivity. The variables used are value

drivers and important assumptions that are used in

intrinsic stock value in the various models.

Risk-Free Rate

The risk-free rate for the model was derived from

the 30-year treasury bond yield of 2.99% from

Yahoo Finance. 30-year treasury bond is one of the

longest risk-free rate available in the United States

which is important as we are not expecting Eastman

to shut its operation in the next 30 years. The

sensitivity analysis will depict the rate’s fluctuation

and how it affects the intrinsic stock price. With a

0.2% increments, the stock price decrease

approximately by four dollar. The increase of risk-

free rate will negatively affect the stock price.

Beta

Raw beta value used in the model is from

Bloomberg Terminal. After running various 5 year

returns for Eastman Chemical Company, we used

the average because the numbers for each time line

is very close. This indicated that Eastman operates

as the market grows. The beta used throughout the

model is 1.557. When risk free-rate is kept constant,

every increment of 0.10 in beta decreases the stock

price.

WACC vs CV Growth

We conducted the second sensitivity analysis in

relation between the growth of continuing value and

the weighted-average cost of capital. The result we

have gotten from the analysis is to measure the effect

between its stock prices. The outcome we acquire

from the analysis was given that is any possible 10

basis point decrease in continuing value growth stock

price would increase approximately one dollar while

weighted-average cost remained constant. Vice-

versa, while the continuing value growth remained

constant the price would increase approximately

$14.00 when weighted-average cost of capital

decreases by every 50 basis point.

This report was created by students enrolled in the

Applied Equity Valuation (FIN:4250) 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

Important Disclaimer

Sensitivity Analysis

12 | P a g e

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.

1 "History." Eastman Chemical Company, n.d. Web.

21 Sept. 2015

2 “What is the relationship between inflation and

interest rate.” Investopedia, n.d. Web. 13 November

2015

3 "News Release: Gross Domestic Product.” U.S.

Department of Commerce Bureau of Economic

Analysis, 29 October 2015. Web. 13 November

2015

4 ”Oil-price shocks and the chemical industry:

Preparing for a volatile environment.” McKinsey &

Company, May 2015. Web. 6 Aug. 2015

5 "United States Fed Funds Rate.” Trading

Economics, 17 November 2015. Web. 17

November 2015.

6 “2015 Chemicals Trends.”

PricewaterhouseCoopers, n.d. Web. 14 September

2015

7 “Teaching Note Archer Daniels Midland

Company” American Chemical Society, n.d. Web.

14 September 2015

8“2014 Annual Report” EDGAR, 27 February 2015.

Web. 14 September 2015

9 “Chemical Makers Will Boost R&D But Slice

Capital Spending In 2015” Chemical and

Engineering News, 13 April 2015. Web. 14

November 2015

References

Eastman Chemical Company

Key Assumptions of Valuation Model

Ticker Symbol EMN

Current Share Price $68.60

Current Model Date 11/13/2015

Fiscal Year End Dec. 31

Cost of Equity 10.18%

Cost of Debt 5.08%

Beta 1.557

Risk‐Free Rate 2.99%

Equity Risk Premium 4.62%

Current Dividend Yield 1.70%

Marginal Tax Rate 35%

Normal Cash (% of sales) 3%

Expected Inflation 1.48%

WACC 7.32%

CV of ROIC 9.86%

CV Growth 5.0%

Eastman Chemical Company

Key Assumptions of Valuation Model

Beta

$74.91 1.20 1.30 1.40 1.50 1.60 1.70 1.80 1.90 2.00

2.20% 232.16 173.30 136.40 111.05 92.52 78.35 67.15 58.05 50.49

2.40% 202.86 155.44 124.36 102.36 85.94 73.19 62.98 54.61 47.60

2.60% 179.57 140.53 113.97 94.70 80.05 68.50 59.16 51.42 44.90

2.80% 160.61 127.88 104.92 87.89 74.72 64.22 55.63 48.46 42.38

Risk‐Free Rate 3.00% 144.87 117.02 96.97 81.80 69.90 60.30 52.37 45.71 40.01

3.20% 131.58 107.59 89.91 76.31 65.50 56.68 49.35 43.13 37.79

3.40% 120.21 99.32 83.60 71.33 61.47 53.34 46.53 40.72 35.70

3.60% 110.37 92.00 77.94 66.81 57.76 50.25 43.90 38.45 33.72

3.80% 101.76 85.47 72.81 62.67 54.34 47.37 41.44 36.32 31.86

WACC

$74.91 6.90% 7.00% 7.10% 7.20% 7.30% 7.40% 7.50% 7.60% 7.70%

4.60% 82.41 78.76 75.40 72.30 69.42 66.76 64.27 61.96 59.79

4.70% 84.65 80.74 77.16 73.86 70.82 68.00 65.39 62.95 60.68

4.80% 87.11 82.91 79.08 75.56 72.33 69.35 66.58 64.02 61.63

4.90% 89.81 85.28 81.17 77.41 73.97 70.80 67.87 65.16 62.65

CV Growth 5.00% 92.80 87.89 83.46 79.43 75.74 72.37 69.26 66.40 63.74

5.10% 96.11 90.78 85.98 81.63 77.68 74.08 70.77 67.73 64.92

5.20% 99.82 93.98 88.76 84.06 79.81 75.94 72.41 69.18 66.20

5.30% 103.99 97.57 91.85 86.74 82.14 77.98 74.20 70.74 67.58

5.40% 108.72 101.60 95.31 89.73 84.73 80.23 76.16 72.46 69.08

MRP

$74.91 4.20% 4.30% 4.40% 4.50% 4.60% 4.70% 4.80% 4.90% 5.00%

9.50% 90.81 85.65 80.92 76.57 72.55 68.83 65.37 62.15 59.14

9.60% 91.91 86.69 81.91 77.51 73.45 69.69 66.19 62.94 59.89

9.70% 92.99 87.72 82.88 78.44 74.33 70.53 67.00 63.71 60.63

9.80% 94.05 88.72 83.84 79.34 75.20 71.36 67.79 64.46 61.36

CV of ROIC 9.90% 95.09 89.70 84.77 80.23 76.04 72.16 68.56 65.20 62.06

10.00% 96.10 90.66 85.68 81.10 76.87 72.95 69.32 65.93 62.76

10.10% 97.10 91.61 86.58 81.95 77.68 73.73 70.06 66.64 63.44

10.20% 98.07 92.53 87.46 82.79 78.48 74.49 70.78 67.33 64.11

10.30% 99.03 93.44 88.32 83.61 79.26 75.24 71.50 68.01 64.76

Marginal Tax Rate

$74.91 31.00% 32.00% 33.00% 34.00% 35.00% 36.00% 37.00% 38.00% 39.00%

3.10% 77.81 76.94 76.05 75.16 74.25 73.34 72.41 71.47 70.51

3.60% 77.99 77.12 76.23 75.34 74.43 73.52 72.59 71.64 70.69

4.10% 78.16 77.29 76.41 75.51 74.60 73.68 72.75 71.81 70.85

4.60% 78.33 77.45 76.57 75.67 74.76 73.84 72.91 71.97 71.01

Cost of Debt 5.10% 78.48 77.61 76.72 75.82 74.92 74.00 73.06 72.12 71.16

5.60% 78.63 77.75 76.87 75.97 75.06 74.14 73.21 72.26 71.30

6.10% 78.77 77.89 77.01 76.11 75.20 74.28 73.34 72.40 71.44

6.60% 78.90 78.03 77.14 76.24 75.33 74.41 73.47 72.53 71.57

7.10% 79.03 78.15 77.26 76.36 75.45 74.53 73.60 72.65 71.69

Eastman Chemical Company

Revenue Decomposition

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CV

Sales

Specialty Fluids & Intermediates 2,318 2,497 2,490 2,583  2,627  2,699  2,758  2,827  2,893  2,963  3,033  3,106  3,180 

Advanced Materials 1,694 2,349 2,378 2,508  2,880  3,022  3,166  3,314  3,546  3,681  4,149  4,556  4,871 

Additives & Functional Products 1,332 1,719 1,821 1,882  1,983  2,081  2,190  2,305  2,484  2,624  2,741  2,952  3,117 

Fibers 1,315 1,441 1,457 1,486  1,516  1,546  1,577  1,609  1,641  1,674  1,707  1,741  1,776 

Adhesives & Plasticizers 1,432 1,326 1,363 1,435  1,489  1,548  1,574  1,599  1,688  1,696  1,641  1,665  1,704 

Other 11 18 18 18  18  18  18  18  18  18  18  18  18 

Total 8,102 9,350 9,527 9,912 10,513 10,914 11,284 11,671 12,270 12,655 13,289 14,038 14,665

Percent of Total (%)

Specialty Fluids & Intermediates 28.61% 26.71% 26.14% 26.06% 24.99% 24.73% 24.45% 24.22% 23.58% 23.41% 22.82% 22.12% 21.68%

Advanced Materials 20.91% 25.12% 24.96% 25.30% 27.39% 27.69% 28.06% 28.39% 28.90% 29.09% 31.22% 32.45% 33.22%

Additives & Functional Products 16.44% 18.40% 19.11% 18.99% 18.86% 19.07% 19.41% 19.75% 20.24% 20.73% 20.63% 21.03% 21.25%

Fibers 16.23% 15.41% 15.29% 14.99% 14.42% 14.17% 13.98% 13.78% 13.37% 13.23% 12.85% 12.40% 12.11%

Adhesives & Plasticizers 17.68% 14.18% 14.31% 14.48% 14.17% 14.18% 13.95% 13.70% 13.76% 13.40% 12.35% 11.86% 11.62%

Other 0.14% 0.19% 0.19% 0.18% 0.17% 0.16% 0.16% 0.15% 0.15% 0.14% 0.14% 0.13% 0.12%

Total 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%

Growth (%)

Specialty Fluids & Intermediates ‐‐ 7.72% ‐0.28% 3.72% 1.72% 2.72% 2.22% 2.47% 2.35% 2.41% 2.38% 2.39% 2.38%

Advanced Materials 41.76% 38.67% 1.23% 5.45% 14.85% 4.94% 4.77% 4.66% 7.02% 3.79% 12.71% 9.81% 6.92%

Additives & Functional Products ‐27.77% 29.05% 5.93% 3.37% 5.35% 4.94% 5.23% 5.24% 7.78% 5.63% 4.48% 7.70% 5.57%

Fibers 2.81% 9.58% 1.11% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00% 2.00%

Adhesives & Plasticizers ‐49.93% ‐7.40% 2.79% 5.31% 3.76% 3.94% 1.71% 1.57% 5.57% 0.46% ‐3.22% 1.45% 2.33%

Other ‐‐ 63.64% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total 12.87% 15.40% 1.89% 4.04% 6.06% 3.81% 3.39% 3.43% 5.14% 3.13% 5.02% 5.63% 4.47%

Eastman Chemical Company

Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CV

Sales 8102.00 9350.00 9527.00 9860.45  10205.56  10562.76  10932.45  11315.09  11654.54  12004.18  12364.30  12735.23  13117.29 

Cost of sales (5980.00) (6141.00) (6856.00) (7198.12) (7450.06) (7710.81) (7980.69) (8260.01) (8507.81) (8763.05) (9025.94) (9296.72) (9575.62)

Less: Depreciation (360.00) (433.00) (450.00) (463.50) (477.41) (491.73) (506.48) (521.67) (537.32) (553.44) (570.05) (587.15) (604.76)

Gross profit (loss) 1762.00 2776.00 2221.00 2198.82 2278.10 2360.22 2445.28 2533.40 2609.40 2687.68 2768.31 2851.36 2936.91

Selling, general and administrative expenses (644.00) (645.00) (755.00) (777.65) (800.98) (825.01) (849.76) (875.25) (901.51) (928.55) (956.41) (985.10) (1014.66)

Research and development expenses (198.00) (193.00) (227.00) (233.81) (240.82) (248.05) (255.49) (263.16) (271.05) (279.18) (287.56) (296.18) (305.07)

Asset impairments and restructuring charges / gains, net (120.00) (76.00) (77.00) (78.16) (79.33) (80.52) (81.72) (82.95) (84.20) (85.46) (86.74) (88.04) (89.36)

Operating earnings / loss 800.00 1862.00 1162.00 1109.21 1156.97 1206.64 1258.31 1312.04 1352.65 1394.49 1437.61 1482.04 1527.82

Net interest expense (143.00) (180.00) (187.00) (368.20) (360.83) (353.62) (346.55) (339.61) (332.82) (326.17) (319.64) (313.25) (306.98)

Other charges / income, net (8.00) (3.00) 15.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Earnings / loss from continuing operations before income taxes 649.00 1679.00 990.00 741.01 796.13 853.02 911.76 972.43 1019.83 1068.32 1117.96 1168.79 1220.83

Provision / benefit for income taxes from continuing operations (206.00) (507.00) (235.00) (259.35) (278.65) (298.56) (319.12) (340.35) (356.94) (373.91) (391.29) (409.08) (427.29)

Earnings / loss from continuing operations 443.00 1172.00 755.00 481.65 517.49 554.47 592.65 632.08 662.89 694.41 726.68 759.71 793.54

Gain / loss from disposal of discontinued operations, net of tax 1.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Earnings / loss from discontinued operations, net of tax 0.00 0.00 2.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net earnings / loss 444.00 1172.00 755.00 481.65 517.49 554.47 592.65 632.08 662.89 694.41 726.68 759.71 793.54

Net earnings attributable to noncontrolling interest (7.00) (7.00) (6.00) 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Net earnings / loss attributable to Eastman 437.00 1165.00 749.00 481.65 517.49 554.47 592.65 632.08 662.89 694.41 726.68 759.71 793.54

Earnings per share

Basic earnings per share attributable to Eastman 3.00 7.57 5.03 3.24 3.48 3.72 3.98 4.24 4.44 4.65 4.86 5.08 5.30

Dividends per share 1.08 1.25 1.45 1.45 1.46 1.46 1.47 1.47 1.56 1.64 1.73 1.79 1.83

Total shares outstanding (in millions) 145.50 152.46 148.60 148.70 148.81 148.91 149.01 149.14 149.28 149.41 149.55 149.69 149.83

Eastman Chemical CompanyBalance Sheet

Fiscal Years Ending Dec. 31 2,012  2,013  2,014  2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CVAssetsCurrent Assets    Cash and cash equivalents 249 237 214 413  207  1,546  897  1,213  2,049  1,672  2,489  1,726  2,181     Trade receivables, net 846 880 936 986  1,021  1,056  1,093  1,132  1,165  1,200  1,236  1,274  1,312     Miscellaneous receivables 151 208 264 247  255  264  273  283  291  300  309  318  328     Inventories 1,260 1,264 1,509 1,479 1,531 1,584 1,640 1,697 1,748 1,801 1,855 1,910 1,968    Other current assets 88 251 250 234 238 241 245 249 252 256 260 264 268    Current assets held for sale 0 0 0 0 0 0 0 0 0 0 0 0 0      Total current assets 2,594 2,840 3,173 3,359 3,252 4,692 4,148 4,573 5,506 5,229 6,149 5,492 6,056

Properties 1    Properties and equipment at cost 9,681 9,958 11,026 11,376 11,717 12,069 12,431 12,804 13,188 13,584 13,991 14,411 14,843    Less: Accumulated depreciation (5,500) (5,668) (5,939) (6,403) (6,880) (7,372) (7,878) (8,400) (8,937) (9,491) (10,061) (10,648) (11,253)    Properties and equipment held for sale, net 0 0 0 0 0 0 0 0 0 0 0 0 0      Net properties 4,181 4,290 5,087 4,974 4,837 4,697 4,553 4,404 4,251 4,093 3,930 3,763 3,591

Other AssetsGoodwill 2,644 2,637 4,486 4,486 4,486 4,486 4,486 4,486 4,486 4,486 4,486 4,486 4,486

Intangible assets, net of accumulated amortization 1,849 1,781 2,905 2,736 2,567 2,398 2,229 2,060 1,891 1,722 1,553 1,384 1,215Other noncurrent assets 351 297 421 427 434 440 446 453 460 467 474 481 488Noncurrent assets held for sale 0 0 0 0 0 0 0 0 0 0 0 0 0    Other assets 4,844 4,715 7,812 7,649 7,487 7,324 7,161 6,999 6,837 6,675 6,513 6,351 6,189

Total assets 11,619 11,845 16,072 15,982 15,575 16,713 15,863 15,976 16,594 15,997 16,592 15,605 15,835

Liabilities and Shareholder's EquityCurrent Liabilities    Payables and other current liabilities 1,360 1,470 1,721 1,773 1,826 1,881 1,937 1,995 2,055 2,117 2,180 2,246 2,313    Short‐term borrowings 4 0 301 250 0 998 169 250 798 250 903 0 298      Total current liabilities 1,364 1,470 2,022 2,023 1,826 2,879 2,106 2,245 2,853 2,367 3,083 2,246 2,611Long‐term borrowings 4,779 4,254 7,248 7,103 6,961 6,822 6,685 6,552 6,421 6,292 6,166 6,043 5,922Deferred income tax liabilities 91 496 946 978 807 910 898 872 894 888 884 889 887Post‐employment obligations 1,856 1,297 1,498 1,551 1,605 1,658 1,712 1,765 1,819 1,872 1,926 1,979 2,032Other long‐term liabilities 501 453 768 574 598 647 606 617 623 616 619 619 618Noncurrent liabilities related to assets held for sale 0 0 0 0 0 0 0 0 0 0 0 0 0Total liabilities 8,917 7,816 13,133 12,229 11,797 12,916 12,008 12,051 12,609 12,035 12,678 11,775 12,070

Shareholder's EquityCommon stock and additional paid‐in capital 1,711 1,780 1,819 1,824 1,829 1,833 1,838 1,844 1,850 1,856 1,863 1,869 1,876Retained earnings 3,038 4,012 4,545 4,810  5,111  5,448  5,822  6,234  6,664  7,113  7,581  8,073  8,592 Accumulated other comprehensive income / loss 123 171 (277) (133) (129) (140) (118) (89) (50) (71) (93) (122) (105)    Total stockholders' equity before treasury stock at cost 4,872 5,963 6,087 6,501 6,811 7,141 7,542 7,989 8,464 8,898 9,351 9,820 10,363Less: Treasury stock at cost (1,929) (2,167) (2,577) (2,835) (3,118) (3,430) (3,773) (4,150) (4,565) (5,022) (5,524) (6,076) (6,684)    Total Eastman stockholders' equity 2,943 3,796 3,510 3,666 3,693 3,711 3,769 3,839 3,899 3,876 3,827 3,744 3,679Noncontrolling interest 85 79 80 86  86  86  86  86  86  86  86  86  86 Total shareholder's equity 3,028 3,875 3,590 3,752 3,779 3,797 3,855 3,925 3,985 3,962 3,913 3,830 3,765

Total liabilities and stockholders' equity 11,945 11,691 16,723 15,982 15,575 16,713 15,863 15,976 16,594 15,997 16,592 15,605 15,835

Eastman Chemical Company

Common Size Income Statement

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Sales 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00%

Cost of sales ‐73.81% ‐65.68% ‐71.96% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00% ‐73.00%

Less: Depreciation ‐4.44% ‐4.63% ‐4.72% ‐4.70% ‐4.68% ‐4.66% ‐4.63% ‐4.61% ‐4.61% ‐4.61% ‐4.61% ‐4.61% ‐4.61%

Gross profit (loss) 21.75% 29.69% 23.31% 22.30% 22.32% 22.34% 22.37% 22.39% 22.39% 22.39% 22.39% 22.39% 22.39%

Selling, general and administrative expenses ‐7.95% ‐6.90% ‐7.92% ‐7.89% ‐7.85% ‐7.81% ‐7.77% ‐7.74% ‐7.74% ‐7.74% ‐7.74% ‐7.74% ‐7.74%

Research and development expenses ‐2.44% ‐2.06% ‐2.38% ‐2.37% ‐2.36% ‐2.35% ‐2.34% ‐2.33% ‐2.33% ‐2.33% ‐2.33% ‐2.33% ‐2.33%

Asset impairments and restructuring charges / gains, net ‐1.48% ‐0.81% ‐0.81% ‐0.79% ‐0.78% ‐0.76% ‐0.75% ‐0.73% ‐0.72% ‐0.71% ‐0.70% ‐0.69% ‐0.68%

Other operating income 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Operating earnings / loss 9.87% 19.91% 12.20% 11.25% 11.34% 11.42% 11.51% 11.60% 11.61% 11.62% 11.63% 11.64% 11.65%

Net interest expense ‐1.76% ‐1.93% ‐1.96% ‐3.73% ‐3.54% ‐3.35% ‐3.17% ‐3.00% ‐2.86% ‐2.72% ‐2.59% ‐2.46% ‐2.34%

Income from equity investment in Genencor 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Early debt extinguishment costs 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Other charges / income, net ‐0.10% ‐0.03% 0.16% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Earnings / loss from continuing operations before income taxes 8.01% 17.96% 10.39% 7.51% 7.80% 8.08% 8.34% 8.59% 8.75% 8.90% 9.04% 9.18% 9.31%

Provision / benefit for income taxes from continuing operations ‐2.54% ‐5.42% ‐2.47% ‐2.63% ‐2.73% ‐2.83% ‐2.92% ‐3.01% ‐3.06% ‐3.11% ‐3.16% ‐3.21% ‐3.26%

Earnings / loss from continuing operations 5.47% 12.53% 7.92% 4.88% 5.07% 5.25% 5.42% 5.59% 5.69% 5.78% 5.88% 5.97% 6.05%

Earnings / loss from discontinued operations, net of tax 0.00% 0.00% 0.02% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Gain / loss from disposal of discontinued operations, net of tax 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net earnings / loss 5.48% 12.53% 7.95% 4.88% 5.07% 5.25% 5.42% 5.59% 5.69% 5.78% 5.88% 5.97% 6.05%

Net earnings attributable to noncontrolling interest ‐0.09% ‐0.07% ‐0.06% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Net earnings / loss attributable to Eastman 5.39% 12.46% 7.88% 4.88% 5.07% 5.25% 5.42% 5.59% 5.69% 5.78% 5.88% 5.97% 6.05%

Eastman Chemical Company

Common Size Balance Sheet

Fiscal Years Ending Dec. 31 2012 2013 2014 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

Assets

Current Assets

    Cash and cash equivalents 3.07% 2.53% 2.25% 4.19% 2.03% 14.63% 8.20% 10.72% 17.58% 13.93% 20.13% 13.55% 16.63%

    Short‐term time deposits 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

    Trade receivables, net 13.10% 13.62% 14.49% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00% 10.00%

    Miscellaneous receivables 2.34% 3.22% 4.09% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50% 2.50%

     Inventories 19.50% 19.57% 23.36% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00% 15.00%

    Other current assets 1.36% 3.89% 3.87% 2.38% 2.33% 2.29% 2.24% 2.20% 2.16% 2.13% 2.10% 2.07% 2.04%

    Current assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

      Total current assets 39.37% 42.83% 48.05% 34.07% 31.86% 44.42% 37.94% 40.42% 47.24% 43.56% 49.73% 43.12% 46.17%

Properties

    Properties and equipment at cost 119.49% 106.50% 115.73% 132.98% 131.43% 131.52% 132.74% 131.65% 125.42% 124.42% 125.19% 125.76% 127.68%

    Less: Accumulated depreciation ‐67.88% ‐60.62% ‐62.34% ‐64.93% ‐67.41% ‐69.79% ‐72.06% ‐74.24% ‐76.68% ‐79.06% ‐81.37% ‐83.61% ‐85.78%

    Properties and equipment held for sale, 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

      Net properties 51.60% 45.88% 53.40% 68.05% 64.01% 61.73% 60.68% 57.41% 48.74% 45.36% 43.82% 42.15% 41.90%

Other Assets

Goodwill 32.63% 28.20% 47.09% 45.49% 43.96% 42.47% 41.03% 39.65% 38.49% 37.37% 36.28% 35.23% 34.20%

Intangible assets, net of accumulated amo 22.82% 19.05% 30.49% 27.75% 25.15% 22.70% 20.39% 18.21% 16.23% 14.35% 12.56% 10.87% 9.26%

Other noncurrent assets  4.33% 3.18% 4.42% 4.33% 4.25% 4.17% 4.08% 4.00% 3.95% 3.89% 3.83% 3.77% 3.72%

Noncurrent assets held for sale 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

    Other assets 59.79% 50.43% 82.00% 77.57% 73.36% 69.34% 65.51% 61.86% 58.66% 55.60% 52.67% 49.87% 47.18%

Total assets 150.77% 139.14% 183.45% 179.69% 169.23% 175.49% 164.13% 159.68% 154.64% 144.53% 146.22% 135.14% 135.25%

Liabilities and Shareholder's Equity

Current Liabilities

    Payables and other current liabilities 16.79% 15.72% 18.06% 17.98% 17.89% 17.80% 17.72% 17.63% 17.63% 17.63% 17.63% 17.63% 17.63%

    Short‐term borrowings 0.05% 0.00% 3.16% 2.54% 0.00% 9.45% 1.55% 2.21% 6.85% 2.08% 7.30% 0.00% 2.27%

      Total current liabilities 16.84% 15.72% 21.22% 20.51% 17.89% 27.25% 19.26% 19.84% 24.48% 19.71% 24.94% 17.63% 19.90%

Long‐term borrowings 58.99% 45.50% 76.08% 72.04% 68.21% 64.58% 61.15% 57.90% 55.09% 52.42% 49.87% 47.45% 45.15%

Deferred income tax liabilities 1.12% 5.30% 9.93% 9.92% 7.91% 8.62% 8.22% 7.71% 7.67% 7.40% 7.15% 6.98% 6.76%

Post‐employment obligations 22.91% 13.87% 15.72% 15.73% 15.73% 15.70% 15.66% 15.60% 15.60% 15.60% 15.57% 15.54% 15.49%

Other long‐term liabilities 6.18% 4.84% 8.06% 5.82% 5.86% 6.12% 5.55% 5.45% 5.35% 5.13% 5.00% 4.86% 4.71%

Noncurrent liabilities related to assets hel 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00% 0.00%

Total liabilities 106.04% 85.24% 131.02% 124.02% 115.59% 122.28% 109.84% 106.50% 108.19% 100.25% 102.54% 92.46% 92.02%

Shareholder's Equity

Common stock and additional paid‐in capi 21.12% 19.04% 19.09% 18.50% 17.92% 17.36% 16.81% 16.30% 15.88% 15.47% 15.07% 14.68% 14.30%

Retained earnings 37.50% 42.91% 47.71% 48.79% 50.08% 51.57% 53.25% 55.09% 57.18% 59.25% 61.32% 63.39% 65.50%

Accumulated other comprehensive incom 1.52% 1.83% ‐2.91% ‐1.35% ‐1.26% ‐1.32% ‐1.08% ‐0.78% ‐0.43% ‐0.59% ‐0.75% ‐0.96% ‐0.80%

    Total stockholders' equity before treasu 60.13% 63.78% 63.89% 65.93% 66.74% 67.61% 68.98% 70.61% 72.62% 74.12% 75.63% 77.11% 79.00%

Less: Treasury stock at cost ‐23.81% ‐23.18% ‐27.05% ‐28.75% ‐30.55% ‐32.47% ‐34.51% ‐36.68% ‐39.17% ‐41.83% ‐44.68% ‐47.71% ‐50.96%

    Total Eastman stockholders' equity 36.32% 40.60% 36.84% 37.18% 36.18% 35.13% 34.47% 33.93% 33.45% 32.29% 30.96% 29.40% 28.04%

Noncontrolling interest 1.05% 0.84% 0.84% 0.87% 0.84% 0.81% 0.79% 0.76% 0.74% 0.72% 0.70% 0.68% 0.66%

Total equity 37.37% 41.44% 37.68% 38.05% 37.03% 35.95% 35.26% 34.69% 34.19% 33.01% 31.65% 30.07% 28.70%

Total liabilities and stockholders' equity 143.41% 126.68% 168.70% 162.08% 152.62% 158.23% 145.10% 141.19% 142.38% 133.26% 134.19% 122.54% 120.72%

Eastman Chemical CompanyCash Flow Statement

Fiscal Years Ending Dec. 31 2,005  2,006  2,007  2,008  2,009  2,010  2,011  2,012  2,013  2,014 Cash flows from operating activities    Net earnings / loss 557 409 300 346 136 427 647 444 1,172 757Adjustments to reconcile net earnings to net cash provided by operating activities   Depreciation and amortization 304 308 327 267 274 280 273 360 433 450   Asset impairment charges 12 62 138 1 179 8 0 46 28 52   Gain on sale of assets 0 (74) (8) (14) 0 0 (70) 0 0 (5)   Income from equity investment in Genencor (173) ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐   Early debt extinguishment costs 46 ‐‐ ‐‐ 0 0 115 ‐‐ ‐‐ ‐‐ ‐‐   Provision / benefit for deferred income taxes 115 7 (9) (71) 185 47 (22) 48 331 99   Mark‐to‐market gain / loss on pension and other postretirement benefit / loss plans ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ 147 247 (383) 304Changes in operating assets and liabilities, net of effect of acquisitions and divestitures   Increase / decrease in trade receivables 60 (82) (28) 261 2 (358) (73) 48 (38) 19   Increase / decrease in inventories (110) (99) 66 (95) 100 (160) (156) 38 (6) (61)   Increase / decrease in trade payables 71 53 48 (211) 16 152 (51) 10 (2) (30)   Increase / decrease in liabilities for employee benefits and incentive pay (63) (44) (55) 7 (149) ‐‐ ‐‐ ‐‐ ‐‐ ‐‐   Pension and other postretirement contributions in excess of / less than expenses ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ 12 (103) (97) (149) (165)   Variable compensation in excess of / less than expenses ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ 37 15 26 82 27   Other items, net (50) 69 (47) 162 15 15 18 (42) (171) (39)

Net cash provided by / used in operating activities 769 609 732 653 758 575 625 1,128 1,297 1,408

Cash flows from investing activities   Additions to properties and equipment (343) (389) (518) (634) (310) (243) (457) (465) (483) (593)   Proceeds from redemption of short‐term time deposits ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ 0 0 200 0 0   Proceeds from sale of assets and investments 50 322 202 337 30 13 651 7 31 13   Proceeds from the sale of equity investment in Genencor, net 417 ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐ ‐‐   Acquisitions, net of cash acquired (125) 0 (40) (38) (68) (190) (156) (2,669) 0 (3,509)   Additions to short‐term time deposits ‐‐ ‐‐ ‐‐ ‐‐ 0 0 (200) ‐‐ ‐‐ ‐‐   Additions to capitalized software (11) (16) (11) (10) (8) (7) (9) (5) (5) (3)  Other items, net (6) (11) 32 (31) (13) (15) 29 (30) 0 1Net cash used in / provided by investing activities (18) (94) (335) (376) (369) (442) (142) (2,962) (457) (4,091)

Cash flows from financing activities   Net increase / decrease in commercial paper borrowings (150) (50) (5) (7) 3 2 1 (1) 425 (190)   Proceeds from borrowings 189 ‐‐ 0 0 248 496 (36) 3,511 150 3,565   Repayment of borrowings (544) 0 (17) (175) (101) (620) (2) (1,866) (1,105) (125)   Dividends paid to stockholders (142) (144) (147) (135) (128) (127) (136) (192) (140) (210)   Treasury stock purchases 0 0 (382) (501) (21) (280) (316) 0 (238) (410)   Proceeds from stock option exercises and other items, net 100 93 103 39 17 118 66 52 49 34Net cash used in / provided by financing activities (547) (101) (448) (779) 18 (411) (423) 1,504 (859) 2,664Effect of exchange rate changes on cash and cash equivalents (5) 1 0 1 (1) 1 1 2 7 (4)Net change in cash and cash equivalents 199 415 (51) (501) 406 (277) 61 (328) (12) (23)Cash and cash equivalents at beginning of period 325 524 939 888 387 793 516 577 249 237

Cash and cash equivalents at end of period 524 939 888 387 793 516 577 249 237 214

Eastman Chemical CompanyCash Flow Statement

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CVCash flows from operating activities    Net earnings / loss 482  517  554  593  632  663  694  727  760  794 Adjustments to reconcile net earnings to net cash provided by operating activities   Depreciation 464  477  492  506  522  537  553  570  587  605    Amortization of intangibles 169  169  169  169  169  169  169  169  169  169    Provision / benefit for deferred income taxes 32 (172) 104 (12) (27) 22 (6) (4) 4 (2)Changes in operating assets and liabilities, net of effect of acquisitions and divestitures   Increase / decrease in trade receivables (50) (35) (36) (37) (38) (34) (35) (36) (37) (38)   Increase / decrease in miscellanous receivables 17 (9) (9) (9) (10) (8) (9) (9) (9) (10)   Increase / decrease in inventories 30 (52) (54) (55) (57) (51) (52) (54) (56) (57)   Increase / decrease in other current assets 16 (3) (4) (4) (4) (4) (4) (4) (4) (4)   Increase / decrease in intangible assets   Increase / decrease in payables and other liability 52 53 55 56 58 60 62 63 65 67   Increase / decrease in short term borrowings (51) (250) 998 (829) 81 548 (548) 653 (903) 298   Increase / decrease in post‐employment obligations 53 53 53 53 53 53 53 53 53 53   Increase / decrease in other long‐term liabilities (194) 24 48 (40) 11 6 (8) 3 1 (1)

Net cash provided by / used in operating activities 1,019 775 2,372 391 1,391 1,961 871 2,132 631 1,874

Cash flows from investing activities   Additions to properties and equipment (350) (341) (352) (362) (373) (384) (396) (408) (420) (432)   Other noncurrent assets (6) (6) (6) (7) (7) (7) (7) (7) (7) (7)Net cash used in / provided by investing activities (356) (348) (358) (369) (380) (391) (402) (414) (427) (439)

Cash flows from financing activities   Proceeds from borrowings (145) (142) (139) (136) (134) (131) (128) (126) (123) (121)   Dividends paid to stockholders (216) (217) (218) (219) (220) (233) (246) (258) (268) (275)   Treasury stock purchases (258) (283) (312) (343) (377) (415) (457) (502) (552) (608)   Proceeds from stock option exercises and other items, net 5  5  5  5  6  6  6  6  6  6    Accumulated other comprehensive income/loss 144  5  (11) 22  30  38  (21) (22) (29) 17    Noncontrolling interest 6  0  0  0  0  0  0  0  0  0 Net cash used in / provided by financing activities (464) (633) (675) (672) (695) (735) (845) (901) (967) (980)Net change in cash and cash equivalents 199 (206) 1,339 (649) 316 836 (377) 817 (763) 455Cash and cash equivalents at beginning of period 214 413 207 1,546 897 1,213 2,049 1,672 2,489 1,726

Cash and cash equivalents at end of period 413 207 1,546 897 1,213 2,049 1,672 2,489 1,726 2,181

Eastman Chemical CompanyValue Driver Estimation

Fiscal Years Ending Dec. 31 2012  2013  2014  2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CV

NOPLAT ComputationEBITA:Sales 8102 9350 9527 9860  10206 10563 10932 11315 11655 12004 12364 12735 13117Less: Cost of sales (5980) (6141) (6856) (7198) (7450) (7711) (7981) (8260) (8508) (8763) (9026) (9297) (9576)Less: Depreciation (360) (433) (450) (464) (477) (492) (506) (522) (537) (553) (570) (587) (605)Less: Selling, general and administrative expense (644) (645) (755) (778) (801) (825) (850) (875) (902) (929) (956) (985) (1015)Less: Research and development expenses (198) (193) (227) (234) (241) (248) (255) (263) (271) (279) (288) (296) (305)Plus: Implied interest on PV of operating leases 12 14 22 15 14 13 13 14 15 16 17 17 18EBITA: 932 1952 1261 1202 1250 1301 1353 1409 1452 1496 1541 1587 1635

Less:Adjusted TaxesIncome Tax provision 206 507 235 259 279 299 319 340 357 374 391 409 427Plus: Tax shield on asset and impairments 42 27 27 27 28 28 29 29 29 30 30 31 31Plus: Tax shield on interest expense 50 63 65 129 126 124 121 119 116 114 112 110 107Plus: Tax shield on implied interest of operating l 4 5 8 5 5 5 5 5 5 6 6 6 6Less: Tax shield on other charges/income, net (3) (1) 5 0 0 0 0 0 0 0 0 0 0Adjusted Taxes 299 600 340 421 437 455 474 493 508 524 539 556 572

Plus: Net Deferred Tax 

Change in Deferred Taxes (119) 405 450 32 (172) 104 (12) (27) 22 (6) (4) 4 (2)

NOPLAT 514 1756 1371 814 641 949 868 889 965 967 998 1036 1061

Invested Capital ComputationCurrent Asset:Normal Cash (3% of Sales) 243 281 286 296 306 317 328 339 350 360 371 382 394Trade account receivables, net 846 880 936 986 1021 1056 1093 1132 1165 1200 1236 1274 1312Miscellaneous receivables 151 208 264 247 255 264 273 283 291 300 309 318 328Inventory 1260 1264 1509 1479 1531 1584 1640 1697 1748 1801 1855 1910 1968Other current assets 193 251 250 234 238 241 245 249 252 256 260 264 268Total Current Asset 2693  2884  3245  3242  3351  3463  3579  3700  3807  3917  4031  4148  4268 

Current Liabilities:    Payables and other current liabilities 1360 1470 1721 1773  1826  1881  1937  1995  2055  2117  2180  2246  2313 Total Current Liabilities 1360 1470 1721 1773 1826 1881 1937 1995 2055 2117 2180 2246 2313

Net Operating Working Capital 1333 1414 1524 1469 1525 1582 1642 1705 1752 1801 1851 1902 1955

Plus: Property, Plant, and Equiptment (PPE), net 4181 4290 5087 4974 4837 4697 4553 4404 4251 4093 3930 3763 3591

Plus: Non‐goodwill Intangible Assets 1849 1781 2905 2736 2567 2398 2229 2060 1891 1722 1553 1384 1215Plus: PV of Operating Leases 237 273 436 291 269 264 257 271 290 311 328 340 348

Invested Capital 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389 7109

NOPLAT 514 1756 1371 814 641 949 868 889 965 967 998 1036 1061Beginning Invested Capital 4152 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389ROIC 12.37% 23.11% 17.67% 8.18% 6.77% 10.32% 9.70% 10.24% 11.44% 11.81% 12.59% 13.52% 14.36%

NOPLAT 514 1756 1371 814 641 949 868 889 965 967 998 1036 1061Beginning Invested Capital 4152 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389EP 209 1200 803 85 (53) 275 213 253 347 367 418 475 520

NOPLAT 514 1756 1371 814 641 949 868 889 965 967 998 1036 1061Beginning Invested Capital 4152 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389Ending Invested Capital 7600 7758 9952 9470 9198 8942 8681 8439 8184 7927 7663 7389 7109FCF (2934) 1599 (823) 1296 913 1205 1129 1130 1221 1224 1262 1310 1341

Eastman Chemical Company

Weighted Average Cost of Capital (WACC) Estimation 7.32%

Risk Free Rate 2.99%

Equity Risk Premium 4.62%

Beta

5 Year - Daily 1.409

5 Year - Weekly 1.478

5 Year - Monthly 1.676

5 Year - Quarterly 1.666

1.557

Cost of Equity, Re (Re=Rf+Be(MRP)) 10.18%

Pre‐Tax Cost of Debt

Marginal Tax Rate 35%

Cost of Debt 5.08%

Equity= Price * Shares Outstanding

Equity= 10193.96

Market Value of Equity 10193.96

Debt = Long‐Term Debt + Current Portion of Debt + PV of Operating Leases

Debt= 7,248

Market Value of Debt 7,248

Market Value of the Firm 17,442

WACC 7.32%

Eastman Chemical CompanyEffects of ESOP Exercise and Share Repurchases on Common Stock Balance Sheet Account and Number of Shares Outstanding

Number of Options Outstanding (shares):  2,209,800Average Time to Maturity (years): 5.96Expected Annual Number of Options Exercised: 370,726

Current Average Strike Price: 45.94$             Cost of Equity: 10.18%Current Stock Price: $68.60

2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024EIncrease in Shares Outstanding: 103,905 103,905 103,905 103,905 128,746 134,957 137,018 139,079 139,079 139,079Average Strike Price: 45.94$              45.94$              45.94$              45.94$              45.94$              45.94$              45.94$              45.94$              45.94$              45.94$             Increase in Common Stock Account: 4,772,876       4,772,876       4,772,876       4,772,876       5,913,969       6,199,242       6,293,934       6,388,626       6,388,626       6,388,626      

Change in Treasury Stock 25,770 28,347 31,182 34,300 37,730 41,503 45,653 50,218 55,240 60,764Expected Price of Repurchased Shares: 68.60$              75.59$              83.28$              91.77$              101.11$           111.41$           122.76$           135.26$           149.03$           164.21$          Number of Shares Repurchased: in millions 376  375  374  374  373  373  372  371  371  370 

Shares Outstanding (beginning of the year) 148,600,000 148,703,529 148,807,059 148,910,589 149,014,120 149,142,493 149,277,077 149,413,723 149,552,431 149,691,140Plus: Shares Issued Through ESOP 103,905 103,905 103,905 103,905 128,746 134,957 137,018 139,079 139,079 139,079Less: Shares Repurchased in Treasury 376  375  374  374  373  373  372  371  371  370 Shares Outstanding (end of the year) 148,703,529 148,807,059 148,910,589 149,014,120 149,142,493 149,277,077 149,413,723 149,552,431 149,691,140 149,829,849

Eastman Chemical Company

Discounted Cash Flow (DCF) and Economic Profit (EP) Valuation Models

Key Inputs:

     CV Growth 5.00% Dividend Yield 1.70%

     CV ROIC 9.86%

     WACC 7.32%

     Cost of Equity 10.18%

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024CV

DCF Model

FCF 1,296 913 1,205 1,129 1,130 1,221 1,224 1,262 1,310 1,341

Continuing Value (CV) 22,504

WACC 7.32%

CF to Discount

Periods to Discount 1 2 3 4 5 6 7 8 9 9

Present Value of Cash Flows 1,208 792 975 851 794 799 746 717 693 11,912

Value of Operating Assets 19,487

Add: Excess Cash 0

Add: Other Non Current Assets 421

Less: Current Portion of Debt 301

Less: Long Term Debt 7,248

Less: PV of Operating Leases 436

Less: PV of Employees Stock Options 58

Less: Environmental Contingencies 345

Less: PV of Pension Plans Obligations 388

Value of Equity 11,132

Shares Outstanding 148.6

Intrinsic Value of Stock 74.91$        

 Fraction of Year Elapsed 0.8685

Adjusted Stock Price as of Today 80.40$        

Fiscal Years Ending  2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024CV

EP Model

Beginning Invested Capital 9,952

Economic Profit (EP) 85 ‐53 275 213 253 347 367 418 475 520

Continuing Value (CV) 15,115

WACC 7.32%

EP to Discount 85 ‐53 275 213 253 347 367 418 475 15,115

Periods to Discount 1 2 3 4 5 6 7 8 9 9

Present Value of EP 79 ‐46 223 160 178 227 224 237 251 8,001

Beginning Invested Capital 9,952

Value of Operating Assets 19,487

Add: Excess Cash 0

Add: Other Non Current Assets 421

Less: Current Portion of Debt 301

Less: Long Term Debt 7,248

Less: PV of Operating Leases 436

Less: PV of Employees Stock Options 58

Less: Environmental Contingencies 345

Less: PV of Pension Plans Obligations 388

Value of Equity 11,132

Shares Outstanding 149

Intrinsic Value of Stock 74.91$        

 Fraction of Year Elapsed 0.8685

Adjusted Stock Price as of Today 80.40$        

Today 11/13/2015

Next FYE 12/31/2015

Last FYE 12/31/2014

Days in FY 365.00

Days to FYE 317.00

Elapsed Fraction 0.8685

Eastman Chemical Company

Dividend Discount Model (DDM) or Fundamental P/E Valuation Model

Fiscal Years Ending Dec. 31 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E

EPS 3.24$        3.48$        3.72$        3.98$        4.24$        4.44$        4.65$        4.86$        5.08$        5.30$       

Key Assumptions   CV growth 5.00%

   CV ROE 20.86%

   Cost of Equity 10.18%

   Dividend yield 1.70%

Future Cash Flows     P/E Multiple (CV Year) 14.14

     EPS (CV Year) 5.30

     Future Stock Price $74.91

     Dividends Per Share $1.45 $1.46 $1.46 $1.47 $1.47 $1.56 $1.64 $1.73 $1.79 $1.83

Periods to discount 1 2 3 4 5 6 7 8 9 9

     Discounted Cash Flows $1.32 $1.20 $1.09 $1.00 $0.91 $0.87 $0.83 $0.79 $0.75 $31.29

Intrinsic Value 40.06$    

Fraction of year elapsed 0.8685

Adjusted stock price as of today 42.99$    

Eastman Chemical Company

Relative Valuation Models

EPS EPS Est. 5yr

Ticker Company Price 2015E 2016E P/E 15 P/E 16 EPS gr. PEG 15 PEG 16

ASH Ashland Inc. 109.20$        $         7.55   $         8.54  14.46           12.79           14.30 1.01             0.89            

CE Celanese Corp. 70.20$          $         6.04   $         6.36  11.62           11.04           8.15 1.43             1.35            

DOW Dow Chemical Company 51.14$          $         3.28   $         3.51  15.59           14.57           8.10 1.92             1.80            

DD E. I. du Pont de Nemours and Company 67.05$          $         2.76   $         3.28  24.29           20.44           2.07 11.74           9.88            

HUN Huntsman Corp. 12.41$          $         1.88   $         2.16  6.60             5.75             7.00 0.94             0.82            

Average 14.51           12.92           3.41             2.95            

EMN Eastman Chemical Company 68.60$          $         3.24   $         3.48  13.90           19.73           6.85 2.03             2.88            

Implied Value:

   Relative P/E (EPS15)  $       47.01 

   Relative P/E (EPS16) 44.92$        

   PEG Ratio (EPS15) 75.62$        

   PEG Ratio (EPS16) 70.24$        

Eastman Chemical Company

Key Management Ratios

Fiscal Years Ending Dec. 31 Formula 2011 2012 2013 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E CV

Liquidity RatiosCurrent Ratio Current asset/ Current liabilities 2.066 1.902 1.932 1.569 1.661 1.781 1.630 1.970 2.037 1.930 2.210 1.994 2.446 2.319

Quick Ratio (Cash and cash equivalents+A/R+Other receivables)/Current liabilities 0.180 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

Cash Ratio Cash and cash equivalents/Current liabilities 0.518 0.183 0.161 0.106 0.204 0.113 0.537 0.426 0.540 0.718 0.706 0.807 0.769 0.835

Activity or Asset‐Management RatiosTotal Asset Turnover Revenue/Total assets 1.161 0.697 0.789 0.593 0.617 0.655 0.632 0.689 0.708 0.702 0.750 0.745 0.816 0.828

Inventory Turnover Revenue/Inventory 7.694 5.866 4.866 4.945 4.818 4.950 4.950 4.950 4.950 4.939 4.939 4.939 4.939 4.939

Receivable Turnover Revenue/Average account receivable 15.776 15.732 14.701 12.408 11.519 10.930 10.825 10.735 10.700 10.659 10.629 10.609 10.600 10.600

Financial Leverage RatiosDebt Ratio Total debt/Total assets 0.703 0.767 0.660 0.817 0.765 0.757 0.773 0.757 0.754 0.760 0.752 0.764 0.755 0.762

Debt to Equity Ratio Total debt/Total equity 2.286 2.945 2.017 3.658 3.259 3.122 3.401 3.115 3.070 3.165 3.037 3.240 3.075 3.206

Interest Coverage Ratio EBIT/Interest expense 11.592 4.538 9.328 5.294 2.013 2.206 2.412 2.631 2.863 3.064 3.275 3.498 3.731 3.977

Profitability RatiosGross Profit Margin Net income/Revenue 21.858% 21.748% 29.690% 23.313% 22.299% 22.322% 22.345% 22.367% 22.390% 22.390% 22.390% 22.390% 22.390% 22.390%

Operating Margin Income from operations/Revenue 13.054% 9.874% 19.914% 12.197% 11.249% 11.337% 11.424% 11.510% 11.596% 11.606% 11.617% 11.627% 11.637% 11.647%

Return on Asset (ROA) Net income/Total assets 10.301% 3.761% 9.835% 4.660% 3.014% 3.322% 3.318% 3.736% 3.956% 3.995% 4.341% 4.380% 4.868% 5.011%

Return on Equity (ROE) Net income/Total equity 33.509% 14.432% 30.065% 20.864% 12.836% 13.695% 14.602% 15.375% 16.103% 16.636% 17.526% 18.569% 19.837% 21.079%

Payout Policy RatiosDividend Payout Ratio DPS/EPS 94.018% 72.921% 165.714% 31.024% 21.712% 35.959% 16.358% 28.768% 44.881% 41.921% 39.276% 36.900% 34.762% 35.132%

Present Value of Operating Lease Obligations (2004) Present Value of Operating Lease Obligations (2005) Present Value of Operating Lease Obligations (2006)

Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 64.2222077765347 Leases

2005 43 2006 44 2007 45

2006 34 2007 36 2008 30

2007 26 2008 23 2009 25

2008 15 2009 19 2010 20

2009 13 2010 16 2011 17

Thereafter 52 Thereafter 70 Thereafter 64

Total Minimum Payments 183 Total Minimum Payments 208 Total Minimum Payments 201

Less: Interest ‐77 Less: Interest ‐124 Less: Interest ‐88

PV of Minimum Payments 260 PV of Minimum Payments 332 PV of Minimum Payments 289

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

Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08%

Number Years Implied by Year 6 Payment 4.0 Number Years Implied by Year 6 Payment 4.4 Number Years Implied by Year 6 Payment 3.8

Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 43 40.9 1 44 41.9 1 45 42.8

2 34 30.8 2 36 32.6 2 30 27.2

3 26 22.4 3 23 19.8 3 25 21.5

4 15 12.3 4 19 15.6 4 20 16.4

5 13 10.1 5 16 12.5 5 17 13.3

6 & beyond 52 143.7 6 & beyond 70 209.6 6 & beyond 64 167.4

PV of Minimum Payments 260.2 PV of Minimum Payments 332.0 PV of Minimum Payments 288.6

Present Value of Operating Lease Obligations (2007) Present Value of Operating Lease Obligations (2008) Present Value of Operating Lease Obligations (2009) Present Value of Operating Lease Obligations (2010)

Operating Operating Operating Operating

Fiscal Years Ending 160.609316715172 Leases Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 64.2222077765347 Leases Fiscal Years Ending 160.609316715172 Leases

2008 32 2009 30 2010 25 2011 24

2009 26 2010 26 2011 25 2012 24

2010 22 2011 22 2012 17 2013 13

2011 20 2012 14 2013 12 2014 6

2012 12 2013 9 2014 10 2015 4

Thereafter 65 Thereafter 14 Thereafter 15 Thereafter 15

Total Minimum Payments 177 Total Minimum Payments 115 Total Minimum Payments 104 Total Minimum Payments 86

Less: Interest ‐157 Less: Interest 9 Less: Interest 9 Less: Interest ‐17

PV of Minimum Payments 334 PV of Minimum Payments 106 PV of Minimum Payments 95 PV of Minimum Payments 103

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

Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08%

Number Years Implied by Year 6 Payment 5.4 Number Years Implied by Year 6 Payment 1.6 Number Years Implied by Year 6 Payment 1.5 Number Years Implied by Year 6 Payment 3.8

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 32 30.5 1 30 28.5 1 25 23.8 1 24 22.8

2 26 23.5 2 26 23.5 2 25 22.6 2 24 21.7

3 22 19.0 3 22 19.0 3 17 14.7 3 13 11.2

4 20 16.4 4 14 11.5 4 12 9.8 4 6 4.9

5 12 9.4 5 9 7.0 5 10 7.8 5 4 3.1

6 & beyond 65 235.1 6 & beyond 14 16.0 6 & beyond 15 16.5 6 & beyond 15 39.1

PV of Minimum Payments 333.8 PV of Minimum Payments 105.5 PV of Minimum Payments 95.2 PV of Minimum Payments 102.9

Present Value of Operating Lease Obligations (2011) Present Value of Operating Lease Obligations (2012) Present Value of Operating Lease Obligations (2013) Present Value of Operating Lease Obligations (2014)

Operating Operating Operating Operating

Fiscal Years Ending Dec. 31 Leases Fiscal Years Ending 64.2222077765347 Leases Fiscal Years Ending 160.609316715172 Leases Fiscal Years Ending Dec. 31 Leases

2012 27 2013 47 2014 44 2015 71

2013 20 2014 34 2015 38 2016 57

2014 11 2015 27 2016 35 2017 43

2015 8 2016 23 2017 24 2018 32

2016 7 2017 21 2018 15 2019 21

Thereafter 32 Thereafter 55 Thereafter 54 Thereafter 85

Total Minimum Payments 105 Total Minimum Payments 207 Total Minimum Payments 210 Total Minimum Payments 309

Less: Interest ‐60 Less: Interest ‐30 Less: Interest ‐63 Less: Interest ‐127

PV of Minimum Payments 165 PV of Minimum Payments 237 PV of Minimum Payments 273 PV of Minimum Payments 436

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

Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08% Pre‐Tax Cost of Debt 5.08%

Number Years Implied by Year 6 Payment 4.6 Number Years Implied by Year 6 Payment 2.6 Number Years Implied by Year 6 Payment 3.6 Number Years Implied by Year 6 Payment 4.0

Lease PV Lease Lease PV Lease Lease PV Lease Lease PV Lease

Year Commitment Payment Year Commitment Payment Year Commitment Payment Year Commitment Payment

1 27 25.7 1 47 44.7 1 44 41.9 1 71 67.6

2 20 18.1 2 34 30.8 2 38 34.4 2 57 51.6

3 11 9.5 3 27 23.3 3 35 30.2 3 43 37.1

4 8 6.6 4 23 18.9 4 24 19.7 4 32 26.2

5 7 5.5 5 21 16.4 5 15 11.7 5 21 16.4

6 & beyond 32 99.7 6 & beyond 55 102.9 6 & beyond 54 135.6 6 & beyond 85 237.3

PV of Minimum Payments 165.0 PV of Minimum Payments 236.9 PV of Minimum Payments 273.4 PV of Minimum Payments 436.2