EATON CORPORATION

1. Why is Arnold considering the sale of Eatons Hydraulics Business? Does it make sense financially and strategically to sell the business?

2. Review Eatons forecast for the Hydraulics Business in exhibit 5. Critique the assumptions underlying the forecast. Are the assumptions realistic?

3. Use the Excel Valuation model provided in exhibit 5 to test the sensitivity of the business value to changes in the assumptions in the model.

4. What factors affect Eatons WACC? Use the data provided in the case to estimate an appropriate WACC for Eaton.

5. Review the data and descriptions of the firms that manufacture or purchase Hydraulic equipment, provided in Exhibits 8A and 8B. Which firms are most comparable to Eaton Hydraulics? Based on your analysis of these firms estimate an appropriate WACC for Eatons Hydraulics Business. How does this estimate compare to Eatons Corporate WACC?

6. Should Arnold agree to sell the Hydraulics business to Danfoss for $3.3 billion? If not, what should he do?