Greetings, I am in need of assistance. I need help with the following questions for a case called the "The Timken Company" case. I need help with numbers 3&4.

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3. What is your with-synergies valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate.

4. Should Timken be concerned about losing its investment-grade rating? How do Timken?s financial ratios compare with those of other industrial firms in 2002? How would those ratios change if Timken borrowed $800 million, for example, to buy Torrington?

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We have to make a table showing how the company (Torrington) would be valued in an excel spread sheet, with-synergy effects. But it would have to be in a fundamental analysis (Value of Torrington*= [FCF(yr1)]/(1+WACC)+[FCF(yr2)]/(1+WACC)^2+...+[FCF(yr5)]/(1+WACC)^5 + (Terminal Value yr5)/(1-WACC)^5and a comparable analysis. In doing so we will need to calculate the WACC and the Terminal Value for last year (=[FCF(last year)*(1+g)]/(WACC-g).

*Note that year 1,2,3,4,5 are not actually years 1-5 but the calculated expected years 2003-2007.

The given factors (by the professor) for the case are: Taxes= 40%, Market Risk Premium= 6%, growth rate (for each estimated years)=6.5 **however I think they are given in the case, if that is so please use the case growth rate for each year**, perpetual growth rate for years to come after the last year (year 7) is= 5.5.

If this sound confusing please let me know, for I am also confused and in need of assistance.

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I have tired to answer #1&2 and I will be attaching the excel as an example, *note that this is for a Stand-alone valuation (no synergy)

1. How does Torrington fit with the Timken Company? What are the expected synergies?

2. What is your stand-alone valuation of Torrington? Be prepared to explain and justify all the major assumptions used in your estimate.

Torrington Valuation Analysis (without synergy) 1999 Revenue 2001 2002 $1,239.50 $1,161.00 $1,004.30 $1,204.00 $145.70 $172.60 $78.00 $85.20 $75.00 $77.00 $79.00 $80.00 $84.00 EBIT (Op Income) Less Taxes/% of EBIT 2000 $85.00 $45.00 $41.00 40% Earning after Taxes Plus Deprec EBITDA Less Capex Free Cash Flow (FCF) PV(FCF) Terminal Value PV(TV) 2003 $1,282.00 $90.70 $(36.28) $54.42 $84.20 $174.90 $(175.00) $(36.38) $(33.26) 2004 $1,365.30 $96.60 $(38.64) $57.96 $90.00 $186.60 $(130.00) $17.96 $15.01 Expected 2005 $1,454.10 $102.90 $(41.16) $61.74 $96.00 $198.90 $(140.00) $17.74 $13.56 2006 $1,548.60 $109.50 $(43.80) $65.70 $102.00 $211.50 $(150.00) $17.70 $12.37 2007 $1,649.20 $116.70 $(46.68) $70.02 $108.50 $225.20 $(160.00) $18.52 $11.83 $325.99 $208.22 PV(FCFyrs 1-5) PV(TVyr5) $19.50 $208.22 WACC Growth Rate 9.38% 3.50% In Conclusion the valuation for Torrington (w/o synergy): Valuation of Torrington (w/o synergy) $227.72 Avg (EV/EBITDA) 7.15% As you can see without synergy the company is under-valued. Using Fundamental Analysis: $ 227.72 Using Comparable Analysis: $1,250.54 Comparative Analysis (Avg (EV/EBITDA)) x EBITDA W(d): 0.6978 4.97% 6% 1.10 11.57% 7.23% 40.00% Sensitivity Analysis 0.3022 W(e): R(f) R(p) Avg Beta Cost of Equity (Ke) Cost of Debt (Kd) Taxes $1,250.54 $325.99 0% 1% 2% 3% 4% 5% 6% 8.0% 231.50 267.22 314.84 381.51 481.52 648.20 981.56 9.0% 205.78 233.82 269.86 317.93 385.22 486.15 654.37 10.0% 185.20 207.84 236.13 272.51 321.01 388.92 490.78 11.0% 168.36 187.05 209.89 238.45 275.15 324.10 392.62 12.0% 154.33 170.05 188.90 211.95 240.76 277.80 327.19 13.0% 142.46 155.88 171.73 190.76 214.01 243.08 280.45 Q3: With Syngergies Valuations Sales Sales growth Operating income Cost savings Cost of integrating businesses Operating income with synergies With-Synergies Valuation 2003E 2004E 2005E 2002 $1,204 $1,282 $1,365 $1,454 6.5% 6.5% 6.5% 91.0 96.9 103.2 0.0 20.0 40.0 (65.0) (65.0) 0.0 26.0 51.9 143.2 Discount Rate (WACC) 2006E $1,549 6.5% 109.9 60.0 0.0 169.9 2007E $1,649 6.5% 117.1 80.0 0.0 197.1 2008E $1,740 5.50% 123.5 80.0 0.0 203.5 9.38% NWC/Sales 13.50% Planning Growth 6.50% PPE/Sales Start 50.70% Perpetual Growth 5.50% Steady State Synergy Operating Margin 7.10% Intergration Costs 130 40% Timken V/EBITDA 5.9 Risk Premium 6% Industry V/EBITDA 6.6 Avg(EV/EBITDA) 7.15 TV Timken Multiple 1,810 TV Industry Multiple 2,021 Tax Rate Fundamental Analysis Taxes NOPAT + Depreciation Change in NWC Capital expenditures Total Terminal value Free cash flow Enterprise value (10.4) 15.6 84.2 (10.5) (175.0) (85.7) (20.8) 31.2 90.0 (11.2) (130.0) (20.1) (57.3) 85.9 96.0 (11.9) (140.0) 30.0 (68.0) 102.0 102.0 (12.7) (150.0) 41.2 (81.4) 122.1 $41.20 (78.8) 118.3 108.5 (13.6) (160.0) 53.2 1,578 $1,632 ($85.70) ($20.10) $30.00 Sensativity Analysis 9% 10% 11% 12% 13% 14% (12.2) (48.7) 61.2 $998.7 1578 0% 1% 2% 3% 4% 5% 6% 7% 8% $998.7 Comparable Analysis Err:508 80 Q3: With Syngergies Valuations Sales Sales growth Operating income Cost savings Cost of integrating businesses Operating income with synergies With-Synergies Valuation 2003E 2004E 2005E 2002 $1,204 $1,282 $1,365 $1,454 6.5% 6.5% 6.5% 91.0 96.9 103.2 0.0 20.0 40.0 (65.0) (65.0) 0.0 26.0 51.9 143.2 Discount Rate (WACC) 2006E $1,549 6.5% 109.9 60.0 0.0 169.9 2007E $1,649 6.5% 117.1 80.0 0.0 197.1 2008E $1,740 5.50% 123.5 80.0 0.0 203.5 9.38% NWC/Sales 13.50% Planning Growth 6.50% PPE/Sales Start 50.70% Perpetual Growth 5.50% Steady State Synergy Operating Margin 7.10% Intergration Costs 130 40% Timken V/EBITDA 5.9 Risk Premium 6% Industry V/EBITDA 6.6 Avg(EV/EBITDA) 7.15 TV Timken Multiple 1,810 TV Industry Multiple 2,021 Tax Rate Fundamental Analysis Taxes NOPAT + Depreciation Change in NWC Capital expenditures Total Terminal value Free cash flow Enterprise value (10.4) 15.6 84.2 (10.5) (175.0) (85.7) (20.8) 31.2 90.0 (11.2) (130.0) (20.1) (57.3) 85.9 96.0 (11.9) (140.0) 30.0 (68.0) 102.0 102.0 (12.7) (150.0) 41.2 (81.4) 122.1 $41.20 (78.8) 118.3 108.5 (13.6) (160.0) 53.2 1,578 $1,632 ($85.70) ($20.10) $30.00 Sensativity Analysis 9% 10% 11% 12% 13% 14% (12.2) (48.7) 61.2 $998.7 1578 0% 1% 2% 3% 4% 5% 6% 7% 8% $998.7 Comparable Analysis Err:508 80