Discussion Materials on Beta Prepared for Mohawk Industries, Inc.

1. Discussion Materials on Beta Prepared for Mohawk Industries, Inc. 1 August 2003

2. Mohawk’s Beta | Wachovia Securities Consumer & Retail Investment Banking

3. Beta Methodology

4. Beta Methodology Overview • Although the formula for calculating beta is well-defined, 1 there are several issues to consider in calculating beta. 1 Beta is equal to the covariance of the security and the market divided by the variance of the market. | Wachovia Securities Consumer & Retail Investment Banking

5. Beta Methodology Methodology of Various Sources 1 BARRA uses the current characteristics of a firm and a risk model that is based on monthly data from January 1973 onward to calculate its betas. | Wachovia Securities Consumer & Retail Investment Banking

6. Beta Methodology Considerations of Using Historical Betas • Issues with Historical Betas • The historical beta is not the "true" beta for two important reasons. • Beta measures the relationship between the stock return and the market return over one specific time interval. Because of the changing nature of the company, the changing nature of the market, and the changing nature of the risks that exist in the market, there is every reason to believe that beta changes over time. No stock's beta is likely to be constant over 60 months. • The 60-month historical regression estimates the 60-month historical average of the changing value of beta rather than the true fixed value of beta. Second, the residual return of the stock causes the estimated regression coefficient to differ from the underlying value by an estimation error. • Historical beta differs from the average true beta by the amount of this estimation error. | Wachovia Securities Consumer & Retail Investment Banking

7. Beta Methodology Overview of BARRA Methodology • BARRA provides a historical beta using a 60 month time series of returns, and a predicted (or fundamental) beta, which uses data that ranges from one day to 60 months of history. • Historical vs. Predicted Beta • Historical Beta • A historical beta is calculated by regressing stock excess return (the return above the risk-free rate) against market index excess return. Typically, 60 months of returns are used, weighted equally. • There are two problems with this simple historical approach: • 1.       It does not recognize fundamental changes in the company's operations. The historical beta would reflect this change only slowly, over time. • 2.       It is influenced by events specific to the company that are unlikely to be repeated. • Predicted Beta • The beta BARRA derives from its risk models, forecasts a stock's sensitivity to the market before the fact. Predicted beta is also known as fundamental beta, because BARRA's risk models depend on fundamental risk factors. These risk factors include industry exposures as well as various style attributes, such as size, volatility, momentum, and value factors. Because BARRA re-estimates a company's exposure to these risk factors monthly, the predicted beta reflects changes in the company's underlying risk structure immediately. • The sensitivity of the factors themselves to the market is based on historical observation. For the U.S. model, BARRA uses data back to 1973, but the observations are weighted exponentially with a half-life of 90 months. That is, observations 90 months ago are given half the weight of last month's observation. This weights recent observations much more heavily than distant observations. As many studies have demonstrated, predicted betas significantly outperform historical betas as predictors of future stock behavior. | Wachovia Securities Consumer & Retail Investment Banking

8. Beta Methodology Overview of Bloomberg Methodology • Beta is designed for the analysis of equity securities versus an index. • The range of the analysis determines the dates between which the analysis is taken. • The beta is leveraged if the firm has had long-term debt on its balance sheet for the selected date range. • The adjusted beta is an estimate of the security’s future beta. It is derived from historical data, but modified by the assumption that the security’s beta moves toward the market average over time. • In addition, the adjusted beta adjusts for stock splits and dividends. • The raw beta is a volatility measure that estimates the percentage price change of a security given a 1% change in the representative market index. • Raw beta is a price regression with no adjustments for dividends, stock splits, etc. It measures the risk of a security relative to the market. | Wachovia Securities Consumer & Retail Investment Banking

9. Beta Methodology Overview of Value Line Methodology • The return on security I is regressed against the return on the New York Stock Exchange • Composite Index in the following form:  Ln (p I t / p It-1 ) = a I + B I * Ln (p m t / p mt-1 ) Where: p I t - The price of security I at time t p It-1 - The price of security I one week before time t p m t and p mt-1 are the corresponding values of the NYSE Composite Index. • The natural log of the price ratio is used as an approximation of the return and no adjustment is made for dividends paid during the week. • The regression estimate of beta, B I , is computed from data over the past five years, so that 259 observations of weekly price changes are used. • Value Line adjusts its estimate of beta for regression bind described by Blume (1971). The reported beta is the adjusted beta computed as:  Adjusted B I = 0.35 + .67 * B I | Wachovia Securities Consumer & Retail Investment Banking