Timken Case Study

I. Statement of the Problem

Timken Company has been a leader in the bearing company since the early 1900s began to seek ways to expand in 2002. They came up with the decision to acquire a subsidiary of Ingeroll-Rand called Torrington Company, another producer of metal bearings. The acquisition seems to be the right move since the two companies share 80% of the same customers and have a 5% overlap in products they offer. The problem arises when it comes to how to finance the acquisition. Timken is afraid that if they take on anymore debt they will cause credit agencies to downgrade their investment-grade rating. The challenge now lies in developing a financial plan that will allow Timken Company to acquire Torrington without dropping its investment grade.

II Alternative Choices

1. Finance with all equity

2. Finance with all debt

3. Finance with mixture of debt and equity

Calculations to Use

1. NPV

2. WACC

3. Debt to Capital Ratio

4. EBIT Interest Coverage

III. Analysis of Alternatives

We first begin by accessing if the company is worth acquiring by calculating NPV using the estimated cash flows of Torrington from Exhibit 5. To use NPV we must first calculate our required rate of return. This can be done by finding the CAPM and WACC for Timken.

We begin by finding the cost of debt which can be seen in Exhibit 9. Timken is rated BBB, so we can assume our cost of debt is 7.23%. Then we find CAPM to get the cost of equity. We find that the risk free rate is 5% from the treasury yield from 2002, the market rate is 10%, and the beta is 1.1 giving us a CAPM of 10.5%. We then use CAPM as the cost of equity to find our WACC.

The balance sheet in Exhibit 2 shows us that we currently have 2.139 billion dollars in debt and 609 million in equity. Assuming a tax rate of 40%, our WACC is 5.7%. With this cost of Capital we can now find NPV, by discounting the projected cash flows. We get a positive NPV, which shows us that the business is...