TOUCHE ROSS & CO.

6

To compute our estimates of the cost of capital required to finance the survey members' revolving credit receivables, we first computed the average revolving credit balances for Arizona customers for each participant for the year.

For the four retailers that did not have financing subsidiaries in operation for the full year, we applied the 8.9% overall weighted average percentage cost incurred by the four retailers that had financing subsidiaries in operation for all of 1970.

For the four retailers whose financing subsidiaries were analyzed, we analyzed the capital structures at the beginning and end of their fiscal years. We then calculated a percentage rate cost of capital for each financing subsidiary using book weights as follows:

- Short-term bank borrowings at the average prime
interest rate for the year ended December 31, 1970

- Commercial paper (if any) of the subsidiary at the
actual average rate paid

- Long-term debt at a rate equal to the average stated
interest rate of debt instruments of like quality
and maturity issued in 1970

- Equity at a rate equal to the weighted average
cost of capital of the parent.

We calculated each parent's weighted average cost of capital

using book weights as follows:

Long-term debt at a rate equal to the average
stated interest rate of debt instruments of like
quality and maturity issued in 1970

- Convertible debt using the Gordon-Shapiro Dividend
Growth Model, the application of which yields a
rate based on the conversion price

Preferred stock cost at a rate equal to the average
1970 dividend yield adjusted to a pretax basis
using the 1970 effective corporate income tax rate

Equity (paid-in capital plus retained earnings) at
cost computed using the Gordan-Shapiro Dividend
Growth Model. The cost of equity thus computed was
adjusted to a pretax basis using the 1970 effective
corporate income tax rate.

TOUCHE ROSS & CO.

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DEFINITIONS

The following are the major cost items (as they apply to revolving credit), included in the captions used in Exhibits II, III, and IV:

Salaries and fringe benefits of
personnel involved in credit

application processing and credit
checking and granting.

Salaries and fringe benefits of
personnel engaged in customer
credit service, authorization,
sales audit, data processing,
and payment handling.

Salaries and fringe benefits of
personnel engaged in the collec-
tion function.

Salaries and fringe benefits of sales
personnel that could be eliminated if
all credit sales (which require more
processing time on the selling floor
than cash sales) were replaced by cash
sales. This cost element was included
only for those two sample members
where both Touche Ross & Co. and store
management were satisfied that the costs
could be eliminated.

Salaries and fringe benefits of per-
sonnel who provide accounting services,
maintenance and housekeeping, and per-
form the personnel functions for
credit activities.

Salaries and fringe benefits for cor-
porate credit management personnel,
where applicable.

Salaries and fringe benefits of personnel involved with credit-related keypunching, computer operations, and systems and programming.

Data Processing Equipment:

Rental and depreciation associated with credit-related data processing equipment.

Credit Investigation Fees:

Fees paid to credit bureaus.

TOUCHE ROSS & CO.

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Bad Debt Losses:

Actual bad debts written off net of bad debts recovered.

Collection Agency Fees:

Fees paid to outside collection agencies.

Credit Space and Equipment:

Rent, real property taxes, and depreciation on actual credit space and equipment used.

Supplies, Postage and Other:

Purchased supplies and services, postage and communications costs for revolving credit activities.

Cost of Capital:

Cost to finance revolving accounts receivable balances.

FISCAL YEAR 1970

Exhibit II